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. Last Updated: 07/27/2016

Surgut Fears Baltic Project Will Erode Bottom Line

While the state trumpets its $2.5 billion Baltic pipeline project, oil major Surgutneftegaz is fretting that the pipeline to Primorsk on the Gulf of Finland will cost it a bundle by diverting shipments of crude from its Kirishi refinery.

The Kirishi refinery, with a nominal processing capacity of 17.3 million tons of oil per annum, receives crude from an incoming Transneft oil pipeline with a maximal throughput capacity of about 20 million tons per year. Transneft is the national pipeline monopoly.

The refinery exclusively uses that segment of the pipeline, through which it ran roughly 16 million tons of crude in 1998, according to Surgutneftegaz.

But this Kirishi advantage could end in the upcoming years under the Baltic Pipeline System, which the state has been pushing for with renewed vigor as it seeks an export port in the Baltic region. Under the draft pipeline blueprint, crude export from the Timan-Pechora region and Western Siberia will be channeled via the future port of Primorsk.

Surgutneftegaz, while holding some doubts that the project will be completed any time soon, still intends to fight for the space in the pipeline, Vice President Anatoly Nuryayev said in an interview this week.

"We're the second biggest oil producer in Russia, so we're going to use our weight," Nuryayev said.

Surgut has already pledged to ship about 3 million tons of oil a year via the Baltic Pipeline System when it comes on line, said Surgut President Vladimir Bogdanov. The crude will be sourced from an increase in oil production.

The 2,718-kilometer Baltic pipeline project will require up to $2.5 billion of investments, depending on its throughput capacity, analysts estimate. The undertaking originally united Transneft, Komitek, Rosneft, Slavneft, Conoco, British Gas, Elf Neftegas, Neste and Total, which were later joined by Yukos. LUKoil has also expressed interest.

But since the government is pressing for the project to be implemented as quickly as possible, the pipeline will probably be built with minimal infrastructure development, Fleming UCB analyst Vladimir Nosov said. The Primorsk port will be built for $400 million and a 275-kilometer pipeline from the Kirishi refinery to the future oil terminal for $200 million, according to project estimations. The terminal will be able to rehandle about 12 million metric tons of oil per year with its further expansion up to 18 million tons.

Meanwhile, Surgutneftegaz is taking steps to maximize the use of the existing Transneft pipeline. The company recently awarded French construction firm FMC a contract to build a railway loading terminal next to the Kirishi refinery that will be able to handle up to 360 train wagons of crude and oil products every day, refinery officials said. The terminal, which will cost roughly $6 million, is expected to come on-line in May 2000.

Also, the refinery has started to ship crude to the Estonian port of Muuga. Roughly 240,000 tons of crude were exported from the Kirishi refinery in April-March, said a refinery source.

Surgutneftegaz exports a 33 percent share of its crude production and 40 percent to 50 percent of its oil products output. The refinery ran only 1.3 million tons of crude in April because one of its installations was under maintenance, according to the Kortes information agency. The works were finished and the Kirishi refinery plans to catch up with its daily average of roughly 1.5 million tons.

Last year the oil company produced about 35.2 million tons of oil.