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. Last Updated: 07/27/2016

Asian Oil Pipeline Cost Soars to $11Bln

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.

"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 on Tuesday.

The prospectus is for a seven-year benchmark eurobond in dollars.

Phase 1 of the project envisions shipments of 600,000 barrels per day 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 2 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 1.

"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 a research note.

Valery Nesterov from Troika Dialog said the project could turn out to be one of the most expensive ever, with planned capital expenditures of around $3.9 million to $4 million per kilometer of pipeline.

By comparison, the BP-led Baku-Ceyhan pipeline from Azerbaijan to Turkey cost $2.2 million per kilometer, while the Chevron-led CPC pipeline from Kazakhstan to Novorossiisk port cost $1.7 million per kilometer.

"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.

In a separate development, Russia will decide within a month whether to build a new oil-export link to Primorsk, bypassing Belarus, after a dispute between the neighbors disrupted supplies to some European refineries.

The new link will have to be built "very quickly" following a government decision on the project, which is expected "within a month," Transneft CEO Semyon Vainshtok said Tuesday.

Transneft will cut oil-shipping prices to Primorsk, making the route competitive with the Druzhba pipeline, which crosses Belarus, Vainshtok said. Oil companies will be allowed to choose which export route to use, he said.

Vainshtok also said Transneft might opt not to reopen its Lithuanian route if the technical standards agency demands repairs that make the link not viable.

Transneft suspended supplies to Lithuania's Mazeikiu refinery and Butinge export terminal in August, citing a leak, forcing the refinery to rely on expensive crude supplied by sea.

Analysts have said the stoppage of the 250,000 bpd pipeline was the Kremlin's response to Vilnius allowing Polish company PKN Orlen to buy the refinery, which had been a takeover target of several Russian oil firms.

(Reuters, Bloomberg)