Russia-To-Asia Pipeline Takes Detour to U.S.
By NAUREEN S. MALIK And ANGELA HENSHALL
Reuters
A ship passes by Kozmino oil-loading port in the bay of Kozmino, about 62 miles east of Russia's far eastern city of Vladivostok, Oct. 22, 2009.
.Russian oil has taken an unexpected turn to the U.S., where it is making inroads on the West Coast.
Oil refineries spanning the area between the Puget Sound in the Pacific Northwest and greater Los Angeles have been quick to try out oil that is landing in tankers sent from Russia's eastern coast. Imports have gone from zero to an estimated 100,000 barrels a day in a matter of months since a pipeline bringing crude from deep inside Eastern Siberia came online.
The influx has held down fuel prices in places like California, which often has the highest gasoline prices in the U.S. Traders have been caught off guard because the oil pipeline was built to target fast-growing Asian markets. Few people expected to see so many tankerloads reach U.S. shores.
Russia, which only recently joined the list of the top oil exporters to the U.S., is set to climb those rankings thanks to the Eastern Siberia-Pacific Ocean pipeline, or ESPO.
"Russian crude will be important," said Amrita Sen, a commodities analyst for Barclays Capital in London.
Ms. Sen said members of the Organization of Petroleum Exporting Countries, which historically have been key suppliers to the U.S., are sending more of their oil to Asia. "The U.S., on its part, is also diversifying its sources," she said.
At the same time, production from other U.S. suppliers, such as Mexico, is declining at "hefty" rates, Ms. Sen said.
Russia is the world's No. 1 crude-oil producer and No. 2 exporter after Saudi Arabia. The Russian oil industry has been fraught with scandal for decades, which has raised questions about its ability to be a reliable supplier over the long term.
Mikhail Khodorkovsky, at the helm of the Yukos oil company, was an outspoken supporter of a direct oil route to Asia before he was jailed and stripped of his oil assets, which went to a state-owned oil company. It was Yukos that in 2002 arranged the first direct shipments of Russian crude to the U.S., across the Atlantic Ocean.
Today, Tesoro Corp., one of the largest refiners on the U.S. West Coast, is testing the ESPO oil to see if it can be added to the mix of blends that are processed into products such as gasoline, diesel and jet fuel.
"This is one that potentially has some more positive benefits," Tesoro Chief Executive Bruce Smith said in April, referring to the quality and attractive pricing of the ESPO crude-oil blend.
After shaking up Asian energy markets since its opening last year, the ESPO pipeline is challenging Alaskan oil, underscoring once again Russia's potential to throw established trading patterns into disarray. The pipeline is expected to revive Russian production growth, giving the nation a way to ship Eastern Siberian oil overseas.
Its $14.4 billion first phase is due to reach capacity of 600,000 barrels a day by the end of the year. A 300,000 barrels-a-day spur that will carry crude to China is scheduled for completion at the end of the third quarter. One million barrels a day could be flowing by 2013, an amount that is comparable to Saudi Arabia's current exports to China.
U.S. refiners were initially offered ESPO oil at a reduced price. Many leapt at the opportunity, choosing to use the ESPO blend instead of Alaskan crude. Oil from Alaska has typically accounted for 35% to 40% of the crude BP PLC runs through its West Coast refineries and about 20% of the crude at Chevron Corp.'s plants in the region, but some of this oil will be displaced as more Russian crude hits the coast, experts say.
The switch has gained speed in recent months as the supply of oil from the Arctic drops due to seasonal maintenance from March to September.
The availability of this discounted oil has combined with weak demand and high inventories of both crude and gasoline to keep prices at the pump from rising as much as they usually do ahead of the summer driving season.
Retail gasoline prices on the U.S. West Coast rose just 5.3% in the first six months of 2010. They averaged $3.055 a gallon in th e week ended June 28. Prices typically increase by double-digit percentages during this period.
—Ken Clark contributed to this article.
Write to Naureen S. Malik at naureen.malik@wsj.com and Angela Henshall at angela.henshall@dowjones.com
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
www.djreprints.com
