2nd July 2010 - ESPO Pipeline - What It Means For Tanker Markets

The completion of the 1^st stage of the East Siberia Pacific Ocean (ESPO) pipeline in late 2009 coupled with the launch of the Kozmino port on the Sea of Japan marked the opening of the new, strategically important Russian crude export route to the Pacific Ocean. Shipments started in late December last year, with crude being pumped through the 1^st leg of the ESPO pipeline from Taishet in East Siberia to Skovorodino and then moved by rail to Kozmino terminal. In the 1st five months of this year, exports of the ESPO blend averaged around 275,000 b/d, rising sharply during January and February, and then stabilising around 300,000 b/d. Interestingly, during the same period of time, total FSU crude exports increased by just 200,000 b/d year-on-year, with rising crude exports to Kozmino being at least partially offset by the decline in shipments to Black Sea ports. FSU crude exports via the Black Sea averaged 2.15 million b/d between January and May 2010, down by 100,000 b/d compared to the same period last year.

Although the factors driving the FSU crude export flows are far more complex, the above developments highlight the rising pressure on the existing westbound export volumes due to the opening of the new route in the East. In the short term, export shipments to the West will be further tested, when the 300,000 b/d pipeline spur from Skovorodino (the end point of the 1st stage of the ESPO line) to Daqing, China comes on stream next year. The risks are even greater in the longer term, as the capacity of the ESPO is planned to reach 1.6 million b/d, when the 2^nd stage of the project is completed in 2014. With FSU crude exports expected to rise by only 0.2-0.3 million b/d by 2015, large-scale increases in crude exports to Asia Pacific would significantly reduce export flows to Western customers. According to the IEA, FSU crude exports to OECD Europe may decline by around 0.6 million b/d to 4.4 million b/d by 2015.

Keeping all things equal, the forecast increases in eastbound FSU crude exports will boost Aframax demand in the northern Pacific, but will pose a significant threat to short haul tanker demand in the Baltic/NW Europe and the Black Sea/Med.  Yet, at the same time any drop in FSU crude exports to Western markets will have to be replaced by shipments from further away, supporting growth in larger crude tanker segments.