S P E C I A L R E P O R T

Russian crude oil exports to the Far East – ESPO starts fl owing December 2009

OIL

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SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWINGSPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWING

Platts, the energy information division of The McGraw-Hill Companies, will launch a price assessment on December 16 for ESPO, the new Russian crude oil which is slated to start flowing to Asian markets. Platts new price assessment provides transparent prices covering for this new oil stream, which will be exported from the port of Kozmino near Vladivostok in Russia’s Far East at an initial rate of 300,000 barrels/day.

Platts, a leading global oil information provider with a 100-year history of assessing physical energy, has been working closely with Russian energy ministry officials and producers, as well as Asian consumers and others, in the planning of this new crude assessment.

Initially, Platts expects ESPO pricing to be a differential to commonly used benchmarks such as Platts Dubai and Platts Dated Brent, but due to its location, ample production levels and wide equity ownership, it has the elements that could, over time, help it become a major price indicator of spot oil volumes in Asia.

The Asian markets are heavily dependent on imported oil and the role of Russian oil has been growing in recent years.

The Eastern Siberian Pacific Ocean pipeline will enable supplies from the Eastern Siberian fields to supply some of the rapidly growing energy needs in Asia.

Russia’s crude oil production rose to 10.02 million barrels/day in November, gaining 2.6% year on year and, according to the president of Russia’s national oil pipeline operator Transneft, Nikolai Tokarev, is expected to grow to 11 million b/d after 2012.

The start of the ESPO crude exports will be a major step for Russia’s oil export infrastructure, which is currently heavily focused on moving oil west toward Europe.

The initial stage of the ESPO pipeline, which runs for 2,757 km from Taishet in East Siberia to Skovorodino in the Amur region Russia’s Far East, near the border with China, has a capacity of 600,000 b/d. Capacity is slated to grow to 1 million b/d by 2012 in the second stage of the project, and potentially to as much as 1.6 million b/d at a later date.

From Skovorodino, 300,000 b/d will be transported by rail to a new export terminal at Kozmino on the Pacific coast, and eventually another 300,000 b/d will be delivered to

Sea ofOkhotsk

LakeBalkhash

LakeBaikal

Sea ofJapan

West Siberianoil & gas �elds

Kozmino

ESPO Phase 1

Taishet-Skovorodino

ESPO Phase 2

Skovorodino-Kozmino

East Siberian oil and gas fields

Omsk

Angarsk

Tomsk

PavlodarPavlodar

NakhodkaDaqing

Khabarovsk

VaninoTaishet Skovorodino

Tynda

JAPAN NORTHKOREANORTHKOREA

MONGOLIA

KAZAKHSTAN

RUSSIA

CHINA

Oil pipeline

Oil pipeline under construction

Tanker terminal

Eastern Siberian Pacific Ocean Pipeline

Source: Platts, ERINA

SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWING

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SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWING SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWING

China, after an offshoot from Skovorodino to the Asian country is completed at the end of 2010. The offshoot from Skovorodino to Daqing will be built by CNPC, with only 64 km to the border to be constructed by Transneft.

Rosneft has signed a 20-year contract with CNPC for the delivery of 300,000 b/d from Skovorodino, and supplies to China through the pipeline could increase beyond this in the future, according to Rosneft. The price at Skovorodino for deliveries into China will be equal to the FOB Kozmino price, with no premiums or discounts being applied, sources involved in negotiations told Platts.

Russia’s deputy prime minister Igor Sechin estimated the contract signed between Rosneft and CNPC to be worth at least $100 billion. The contract envisages total oil deliveries of 300 million mt (close to 2.26 billion barrels) over 20 years.

Equipment testing at Kozmino, the final point and the loading terminal of the Eastern Siberia Pacific Ocean crude pipeline, was completed November 24.

The Kozmino testing was done following the filling of the port installations with technical crude oil. The port has received 102,500 mt of the crude, equating to more than 750,000 barrels. The technical oil, oil which remains within the system for operational purposes, belongs to Transneft and will not be sold in the market, remaining on the company’s balance sheet, the port authority said.

The terminal at Kozmino will have initially a tank farm with capacity of 350,000 cubic meters (close to 2.6 million barrels) and a loading capacity of 300,000 b/d.

The first rail tanks with crude oil for export left Skovorodino pipeline delivery station in Russia’s Amur

region November 30 for the port of Kozmino, carrying 4,890 mt of crude oil in 82 carriages, according to Vostoknefteprovod.

Vostoknefteprovod, a company affiliated with Transneft, was created to operate the new Eastern Siberia Pacific Ocean oil pipeline.

The Skovorodino delivery station has a storage capacity of 80,000 mt and a loading installation for 82 rail tanks, with a current loading capacity of 35,000 mt/day, which is expected to increase to 43,000 mt/day (close to 323,000 barrels/day) in the near future.

Physical exports along the ESPO route are set to start in late December.

Russia’s Rosneft sold on November 23 the first ESPO cargo through a tender auction, with the buyer emerging as International Petroleum Products OY at a 50 cents premium to average Platts Dubai prices published for December. Rosneft awarded the tender to IPP OY for 100,000 mt of ESPO crude for December 27-29 loading FOB Kozmino basis. A total of 15 companies participated in the tender, with two companies bidding at positive differentials, according to industry sources.

Transneft estimates the cost for the first stage of the ESPO pipeline at Rb420 billion, or $14.4 billion. The company expects the second stage of the pipeline, which would expand capacity from the initial 600,000 b/d to 1 million b/d, to cost around Rb350 billion, or $11.97 billion.

Beyond the second stage, capacity could be extended further to 1.6 million b/d.

When the route is expanded to the planned maximum capacity, 300,000 b/d will go to China, 400,000 b/d will be sent to a new refinery Rosneft plans to build near Kozmino, and around 200,000-300,000 b/d will be sent through the route to existing Far Eastern refineries in

Quality specificationsESPO and other key crudes API SulphurESPO 34.8 0.62%Brent 37.5 0.46%Forties 40.6 0.59%Dubai 30.4 2.13%Oman 32.95 1.14%Urals 31.55 1.30%Sokol 39.7 0.17%Vityaz 34.4 0.22%

9.5

9.6

9.7

9.8

9.9

10.0

10.1

Nov-09

Sep-09

Jul-0

9

May-09

Mar-09

Jan-0

9

Nov-08

Sep-08

Jul-0

8

May-08

Mar-08

Jan-0

8

Million b/d

Russian crude oil production

Source: Russia’s Ministry of Energy

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SPECIAL REPORT: RUSSIAN CRUDE OIL EXPORTS TO THE FAR EAST – ESPO STARTS FLOWING

Komsomolsk-on-Amur and Khabarovsk, according to Transneft. This implies that the remaining 600,000-700,000 b/d will be exported from the terminal at the Pacific Coast, although it is not currently clear when the route might be expanded to this maximum capacity.

For 2010, Transneft’s transportation schedule projects deliveries of 15 million mt or 300,000 b/d via the route. However, Transneft has not ruled out some changes at the initial stage when the new transportation system is tested.

Rosneft has said it expects to export some 4-6 million mt of oil from Kozmino in 2010, while TNK-BP expects to export a total of 2.0-2.2 million mt.

Russia has also not ruled out sending additional volumes of West Siberian crude to the ESPO pipeline if there is not enough crude produced in East Siberia to fill the line. Russia’s energy minister Sergei Shmatko, however, said that he believes that 100% of East Siberian crude would be exported.

The Russian government announced late November an exemption from crude export duty for East Siberian crude, to be implemented from December 1. The exemption is designed to stimulate development in the remote oil province.

The long-awaited zero rate will be applied to crude with a density of between 694.7-872.4 kg/cubic meters at 20 degree Celsius (equivalent approximately to API gravity

of 30-70 at 15.5 degrees Celsius) and with a sulfur content of between 0.1% and 1%, according to the document signed by prime minister Vladimir Putin.

A total of 13 separate fields in East Siberia are currently eligible for the zero rate. They are Vankor, Yurubcheno-Tokhomskoye, Talakan – including the East Block, Alinskoye, Srednebotuobinskoye, Dulisminskoye, Verkhnechonskoye, Kuyumbinskoye, North Talakan, East Alinskoye, Verkhnepeleduyskoye, Pilyudinskoye, and Stanakhskoye. The fields are owned by several entities including Rosneft, Surgutneftegaz, TNK-BP and Gazprom Neft.

Russia is said to be considering expanding the number of East Siberian fields eligible for the zero rate to eighteen. In late October, energy minister Shmatko said the zero rate was likely to last a minimum of five to seven years, but the government has yet to make a firm decision on this.

Russia’s Federal Tariffs Service has proposed a through transportation fee for crude deliveries via the new export oil pipeline across East Siberia towards the Pacific Ocean of Rb 1,600/mt ($52.630/mt or $7.20/barrel). The fee is yet to be approved by the service’s board, but this is widely expected to happen before the official launch of the pipeline on December 25.

The fee will include services for crude deliveries via the pipeline, by railroad, and for crude re-loading at terminals including at the Kozmino sea port for onward exports.

© 2009 Platts, a Division of The McGraw-Hill Companies, Inc.

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