Russia Pipeline Sets New Course in Oil Market

Russian President Vladimir Putin
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LONDON (THE WALL STREET JOURNAL via Dow Jones), Jan. 18, 2010

Russia, the world's top oil producer, is set to make deep inroads into Asian energy markets at the expense of Mideast rivals thanks to a new pipeline that pumps crude from the oil fields of Siberia to a new terminal on the Pacific Ocean.

The pipeline, a pet project of Prime Minister Vladimir Putin, is key to Russia's efforts to diversify its export routes away from Europe and tap growing energy demand in Asia. It is also important to countries such as China that want to reduce their dependence on Middle East oil.

Mr. Putin inaugurated the first stage of the $12 billion East Siberia-Pacific Ocean pipeline, or ESPO, last month. The crude it carries, also referred to as ESPO, is already proving a hit with Asian customers. ESPO "will likely displace some similar quality Middle East crudes," the International Energy Agency said in its monthly oil market report Friday.

ESPO heralds an "important step change in world crude markets," J.P. Morgan oil analyst Lawrence Eagles wrote in a research note Friday. "It provides Russia with the infrastructure necessary to act as a swing producer between Western and Eastern markets."

In recent years, as relations between Russia and Europe deteriorated, Russia has repeatedly threatened to divert its energy exports to Asia. But with nearly all its oil and gas pipelines flowing east to west, the threat has rung hollow. That is changing.

"Europe will now have to compete with Asia for Russian crude," said Dianne Munro, the IEA's senior oil market analyst.

ESPO crude's advantage over competing blends is its proximity to the oil refineries of northeastern Asia. The new $2 billion terminal, at the Pacific coast port of Kozmino, is five days' sailing time from markets in China, South Korea and Japan. Producers in the Middle East, Africa and Latin America face journeys of at least two weeks.

The launch of ESPO, which will be fed by a new generation of oil fields being developed in the wilderness of Eastern Siberia, comes amid surging oil demand from China.

Copyright (c) 2010 Dow Jones & Company, Inc.


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