FIVE PRIORITIES OF TRANSNEFT

First of all I would like to present to the readers' attention the questions of increase of the Russian export potential, and to speak about the tasks standing today before the joint-stock company Transneft. In his announcement to the Federal Assembly in May 26, 2004 president of the Russian Federation V. Putin defined priority directions of diversification of Russian oil deliveries: expansion of the Baltic pipeline system's throughput, commissioning of the Western Siberia-Barents Sea oil line, definition of transportation routes from East Siberian fields, bypass of the Bosphorus and Dardanelles channels and integration of the Druzhba and Adriya oil lines. These are the five tasks put before Transneft by the president of the country. Well, I would like to elucidate these questions in the corresponding order.

BPS

In December 2001 the new North Baltic direction of the Baltic Pipeline System (BPS) was created. BPS is a unique complex of structures including both pipeline capacities and the bulk-oil port in Primorsk. BPS achieved the design capacity of 12 mln tons of oil per year at the launch moment, i.e. by the end of 2002 we transferred a bit more than 12 mln tons. With launch of the project's first turn Russia's need for exporting petroleum via the Latvian ports disappeared. In November 2003 the company put into operation the Baltic-Primorsk oil line of 1020 mm diameter, 709 km extent, terminal of 95,000 c.m. volume and other structures. This increased BPS capacity up to 30 mln tons per year. This February input of new oil refineries and expansion of the Primorsk port facilities increased BPS capacity to 42 mln tons per year. According to the decision of the Russian Federation government the company is currently realizing the project on bringing BPS productivity up to 50 mln tons of oil per year. The project stipulates construction of additional 231 km of the pipeline's linear part, expansion of the Primorsk port, construction of the tank farm of 200,000 c.m. total capacity. Expansion of the Yaroslavl system oil main, reconstruction of 13 oil refineries, construction of 240 km linear part, building of 50,000 c.m. total capacity tanks will as well require increase of the BPS throughput capacity up to 50 mln t/y. Taking into account the oil companies' need for new directions, as well as the growth of oil consumption in the Northwest European market, the company regards it expedient to start further BPS expansion and raise the Primorsk export port capacity to 52 mln tons of oil per year in order to transport oil from the Timano-Pechora region and West Siberia. The BPS project and maintenance of annually 9 mln tons of oil and product delivery to Primorsk by rail will require reconstruction of four pump transfer stations, building of one new station, 500,000 c.m. of tank capacities, one two-sided oil loading terminal and three railway overpass. If the RF government adopts the appropriate decision, BPS expansion up to 62 mln tons of oil per year will be finished in 2006.

Western Siberia - Barents Sea

Next project: West Siberia - Barents Sea. The project is focused on export of petroleum both from the Western Siberia and the Timano-Pechora region, and enables diversifying Russian oil export deliveries. Russian petroleum companies have suggested building a new oil-loading terminal in the Kola peninsula, Murmansk district providing two options on passing the line with underwater transition through the White Sea and bypass of the White Sea. On tentative estimations the route's length at bypass of the White Sea will be about 4,000 km., and through the White Sea - 2.8 thousand km. At different estimations investment expenditures vary from $9 to $15 bn depending on construction options. At the same time we consider as well other options of developing oil transportation in northwest direction. So this April a group of experts of the company, Transport Ministry and the leading scientific-research institutes carried out pilot survey in the Kamensk peninsula with the purpose of possible building of the oil terminal there. The results showed that the presumable preferable option may be placing the transshipment in the Nizini district. The terminal's placing in Nizini will allow considerable cut of the route extent to equal to approximately 1700 km, which will cheapen the project to $6 bn. The weather conditions in the given area are comparable to those of the Finnish gulf and allow organizing all-the-year-round oil shipment. The final choice of the Northern route is quite difficult, because such factors as ice conditions, depths, wind-wave mode and many other factors affecting the terminal sites must be taken into account.

In fulfillment of the RF government and Transneft JSC Board of Directors decisions, as well as the Russian Federation energy strategy provisions till 2020, the company has started development of the Tayshev - Pacific Ocean (conditional name) oil line system project to transport Russian oil to the Asian-Pacific countries via the terminal on coast of the Japanese sea. In February 2003 the company worked out the declaration on intention of building the oil line system coordinated with the Russian Federation subjects, through the territory of which the line will pass. The project provides construction of the Tayshev-Kazakinskoye-Kovorodino-Khabarovsk-Bukhta Perevoznaya oil line. The pipeline system's capacity is presumably 80 mln tons of oil per year. The facilities' structure includes an oil line of 1220 mm diameter and 4200 km extent, 44 transit pumps, terminal in the Bukhta Perevoznaya with moorings and coastal structures, as well as a tank farm of 4.3 mln c.m. total capacity. The estimated expenditures will total about $16 bn in the forecasted prices in view of the price rise of the sold production. We suppose that in the foreseeable future prices for the sold output will increase. Estimated cost in the current prices is $13 bn. Delivery of 24 mln tons of oil from West Siberia is accepted as the project's crude base, the rest 56 mln tons - from the fields of East Siberia, Sakha-Yakutia Republic.

The oil is supposed to transfer from the fields to the oil main via the existing oil lines from the Yaruchino-Takhom and Kuvilin fields to the Tayshev OR. Taking into account the big amount of construction and investment expenditures, as well as uncertainty of development of the new East Siberian fields, the company is working out options on the project's stage-by-stage realization. They provide particularly building of the oil-loading terminal, linear part in three stages and organization of temporary rail transportation from the ends of the oil line's built sites to the Bukhta Perevoznaya terminal.

Bypass of Bosphorus and Dardanelles

The company pays big attention to increase of oil export reliability, as well bypassing the Black Sea channels. I would like to speak about a new rather interesting project of construction of the Phoenicia-Ibrisava oil line passing through the Turkish Fragiya. Recently, in view of the restrictions on passage through the Bosphorus and Dardanelles at night introduced by the Turkish authorities, the oilmen's losses for tanker delays total about $12 per ton of petroleum. Taking into account the situation, Transneft and a group of Anadolu (Turkey) companies signed the memorandum on mutual understanding in December 2003. Presently our company studies the opportunities of realization of this project. The new oil line's yield will be about 50-60 mln tons of oil per year. The project's realization provides construction of a new oil line of 1220 mm diameter and 193 km extent, a terminal with 700,000 c.m. tank farm and four oil-loading mooring tankers of 150,000 tons capacity. Besides it is supposed to build a terminal on coast of the Aegean Sea with tank farm of 900,000 c.m. capacity and three tanker-loading moorings of 300,000 tons deadweight and a number of other assets. We assume to invest about $900 mln. According to the company's experts, economic efficiency of oil transportation via the oil line can be compared to transportation via the Turkish channels. Technologically the project's realization does not present difficulties. The conditions of placing the terminal both in the Aegean Sea and at the Black Sea coast are actually perfect.

Integration of Druzhba and Adriya oil lines

Transneft is the initiator of the project on integration of the Druzhba and Adriya oil line systems. The company aims at ensuring of Russian oil export to the world markets through the Croatian port Omishal. The project's participants are petroleum and oil transportation companies of the Russian Federation, Ukraine, Belorussia, Hungary, Slovakia and Croatia. In December 2002 the agreement on cooperation was signed at minimization of expenditures on this project. At the first stage of the project's organization it is supposed to transport 5 mln tons of oil per year to Omishal with possible further increase of productivity up to 10 mln tons of oil per year (stage-by-stage growth) and 15 mln tons of oil per year.

The outlooks of development of Transneft JSC oil mains are based on the analysis of predicted balances of oil production and consumption, tendency of oil consumption in the world markets, as well as the actual condition of the oil main system.

Under the optimistic scenario in 2010 the country will produce about 490 mln tons per year, and in 2020 - 520 mln tons. However the actual data on recent oil receipt via the Transneft system shows that these forecasts can be considerably exceeded. Recently oil production in the Russian Federation steadily rises. If in 2002 RF produced 378 mln tons of oil, in 2003 this figure reached 421 mln tons of oil. Thus, the annual growth is about 11%. These percents have not changed as well this year. Therefore in accordance with our estimations, if these growth rates are kept, 500 mln tons of oil will be produced in 2005. In this connection, Transneft JSC plans for 2004 stipulate the necessity of receiving 478 mln tons of oil.

Bank of quality

The rapid development of oil production requires constant analysis of formation of different quality oil flow systems and search for the most rational options of influence on the flow management. There appears a task to intervene continuously in the freight flow system, i.e. quality management. For settlement of this task the company arranged experimental-industrial accounts of the so-called oil quality bank in 2003. The company estimated the sums of mutual payments by the method of the bank of quality for all the petroleum consignors without exception. Further the reception documents taking into account the adjoining states' transit transportation were prepared. The sums of payments on the bank of quality were estimated for each consignor, though no actual financial account was made between consignors. The carried out experiments confirmed the company's technical readiness to work with the oil quality bank.

We pay big attention as well to ecological safety. This April the German certification center Dityues carried out certified audit. This lead to adoption of the decision on issuing to the company the certificate of conformity to international ecological standards ISO 14001 in the field of main pipeline transport operation, transportation via pipeline mains, storage and sale of oil and its derivatives.

Today Transneft is included in the ten of the most effective Russian companies. We regularly publish financial reports, as well on international standards. The principle of open transparency underlies the whole activity of our company. As it is known, at the present stage the international agency Standard & Poor's certifies our company's solvency, the rating equals to sovereign B+ and forecast is stable.

Transneft is the only company in the country, which has this rating coinciding with the sovereign rating. The company is interested in all-round cooperation with foreign energy, financial and industrial companies. We regard creation of the open Eurasian market as an integral part of all the efforts on formation of the global energy space, as an important factor in preservation of stability and increase of the world safety in general.