Russia’s Asian oil pipeline costs soar to $11 bln

MOSCOW - Russia will spend at least $11 billion to build the first leg of its oil pipeline to Asia, up from initial estimates of $6.6 billion, pipeline monopoly Transneft said in its Eurobond prospectus.

By (Reuters)

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Published: Tue 13 Feb 2007, 4:59 PM

Last updated: Sat 4 Apr 2015, 9:54 PM

‘Phase 1 of the project is scheduled for completion in late 2008 and the total cost to Transneft is expected to be approximately $11 billion. The cost of Phase 2 has not yet been evaluated,’ said the prospectus, obtained by Reuters on Tuesday.

The prospectus is for a seven-year benchmark Eurobond in US dollars. Phase One of the scheme envisages shipments of 600,000 barrels per day (bpd) to China.

Transneft had to revise the project last year as the route was passing too close to the ecologically sensitive Lake Baikal. Transneft has said the new route would cost more. Phase Two foresees expansion of the link to 1.6 million bpd and construction of a second leg to the Pacific coast, where a terminal would be already built as part of Phase One.

‘We estimate that the pipeline monopoly may spend as much as $20 billion on the entire project calculated at 2006 prices,’ Deutsche UFG said in written research.

Valery Nesterov from Troika Dialog brokerage said the project could turn out to be one of the most expensive ever, with planned capital expenditures of around $3.9-4.0 million per km of pipeline.

By comparison, the BP-led Baku-Ceyhan pipeline from Azerbaijan to Turkey cost $2.2 million per km, while the Chevron-led CPC pipeline from Kazakhstan to Russia’s Black Sea port of Novorossiisk cost $1.7 million per km.

‘The difference is easy to explain by escalating costs and much harsher environmental and infrastructural problems associated with the Asian pipeline’s construction,’ he said.

Artyom Konchin from Aton brokerage said he expected Transneft to recover costs via a state-approved rise in transit fees, which may worsen the economics of East Siberian fields’ development for Russian oil majors.

Alfa Bank said it expected the government to offer more tax breaks for firms in East Siberia to soften the fee rise.

Deutsche UFG said the cost overruns would lead to further deterioration in the already poor dividend outlook for Transneft’s preferred shares.

A banking source said last week that Transneft’s Eurobond would be organised by Credit Suisse and Goldman Sachs.

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