Summary of Working Paper No. 8-1995

III.01.3: Oil Product Export from North West Russia.

By Trond R. Ramsland, Norwegian School of Economics and Business Administration, Bergen Norway.

Oil Products Export

The original plan for the project was to analyze the potential for oil and oil products shipments from the Murmansk and Archangel area. The report "Oil product export from North West Russia" evaluates the overall production of residual fuel oil in Russia, its geographical distribution, transport capacity on railways and storage capacity in ports.

Due to low technology employed at Russian refineries the output of low grade products is high versus western refineries. Additional to falling domestic demand from the heavy industry, logistic problems at railways and shortfall of port capacity in the Russian Baltic, large surpluses of residual fuel oil exist. The West European markets find the residual fuel oil attractive both for refinery rerun purposes and as marine fuel oil.

To increase the export of residual fuel oil from North West Russia, there exists spare transport capacity of 3,75 million tonnes on the Northern Railroad from Yaroslav, subject to enough rolling stock, for which a reasonable port infrastructure exists for 2,09 million tonnes in Archangel. The October railway from Kirishi to Murmansk can accommodate an extra 2 million tonnes for which a seafront infrastructure already exists.

The concept of a floating storage tanker to increase through-put volumes is evaluated, and domestic Russian commercial structures have tried to put one into operation, though unsuccessfully.

The aggregated West & North Norwegian market for marine fuel oil is evaluated as optimal in terms of proximity, and compromises about 2,5 million tonnes.

Conclusions

The report concludes that there will be a northbound shift of the Russian petroleum industry in the decade ahead, and that the relative importance of the energy sector in the region will increase. However, to generate foreign exchange earning in the short term, oil products offer the best potential. Export terminal facilities exist, but to significantly increase capacity for residual fuel oil export, investments must be sunk in heating equipment and upgrading of storage tanks.

The infrastructure in the Murmansk area with its deep and icefree fjord, railway connection, and existing civilian and naval storage facilities offers the best potential for a western investor. However, also Archangel has facilities with potential for upgrading, but suffers from shallow depth at the seafront which limits economies of scale. Lack of control over railway tariffs which currently exceed 50 percent of total transportation cost, is a major risk factor for the commercial viability of export terminals.

The downstream integration by Lukoil, the Russian oil major, into export terminals in the Baltic ports, points to other ways found to increase export volumes. However, capacity in the Northern ports is sufficient to meet the current and medium term demand from the Arctic North.