The CPC crude pipeline system is the largest operating investment project with foreign participation on the territory of the former USSR. The cost of the first phase of construction amounted to $2.6 billion. The length of the main pipeline that connects the oil fields in Western Kazakhstan with the new Marine Terminal in Russia is 1,510 km..
On October 13, 2001, CPC for the first time loaded crude oil onto a tanker at its Marine Terminal near the Russian city of Novorossiysk on the Black Sea. This event inaugurated not only the start of shipping crude oil to the international markets but also the beginning of a comprehensive testing and commissioning program for the Marine Terminal. On September 13, 2002 the oil quality bank went into effect after the second shipper started transporting crude oil through the CPC pipeline. By introducing the oil quality bank, CPC has established in the region a true free market mechanism, which will allow every shipper to realize the real market value of its oil, and ultimately greater returns for all of CPC’s public and private shareholders.
In April 2003 the first phase of the CPC pipeline system was introduced into regular operations. The State Acceptance Commission signed the Acts of Acceptance, which verify that all requirements for construction, safety and environmental protection have been met successfully. By this time CPC had shipped over 16 M tones of oil. By mid of the year 2004, CPC pipeline has reached its full initial capacity of 22 M tons a year, so far as oil from the Caspian region is concerned.
The development process for CPC to reach its full projected capacity is, however, not completed. CPC was designed from the outset to be expanded to 2.5 times its initial capacity.
The expansion of the pipeline will involve the construction of new pump stations, storage facilities and a third loading buoy at CPC's Marine terminal at Novorossiysk. Ultimately, CPC will be able to transport 67 M tons per year. In fact, expansion is integral to CPC realizing its full economic potential for the host governments and shareholder companies.
CPC has a complex organizational structure. Three Governments and ten companies representing seven countries participate in the project. Two joint stock companies – CPC-R (Russia) and CPC-K (Kazakhstan) - have been created to implement the project. CPC Managers and specialists are secondees from shareholder companies. The initial construction of the pipeline was funded by oil producing shareholder companies, combined with the assets provided by the host governments. Future pipeline capacity expansions will be financed from the CPC’s revenues.
CPC is unique to the region, in that it is a shipper owned pipeline – financed and constructed on behalf of a group of shareholders who have or expect to have oil to transport. This is a radical difference from the existing regional pipeline systems that are common-use transporters and transport third-party crude oil.
CPC tariffs are defined on the basis of the agreement between the Shareholders, and not by way of regulation. CPC is governed by a comprehensive shareholder agreement, which defines the contractual obligations of all parties.
CPC has had a substantial beneficial impact on our host Governments. For Kazakhstan, CPC has allowed major oil field developments to proceed bringing with them substantially increased royalties and taxes, ensuring through a Quality Bank that Kazakhstan receives full value for its light oil, and reducing the cost of transportation relative to the alternative of rail transportation.
For Russia the benefits have also been substantial:
- $525 million was paid to Russia in taxes, duties, fees and charity donations from 1998 to Q3 of 2004. Additional financial benefits have been paid through payroll taxes as well as payments to Russian contractors (and, in turn, their taxes to Russia)
- Russian assets in the CPC system previously were mothballed until acquired by CPC in 1997 and subsequently rehabilitated and substantially upgraded. These assets were assigned a value which in turn was converted into a loan from Russia to CPC.
- Eighty-five percent of all of CPC’s expenditures in Russia goes to Russian suppliers and the Russian government – around $90 million per year.
- Each dollar spent by CPC on goods and services provided by Russia can generate an additional $2 of incremental GDP, i.e. the total positive impact is three times larger than the direct one.
- In November 2004, CPC commenced the injection of Russian oil into the system at Kropotkin in Krasnodar Krai. Injected Russian volumes here will rise to 6 million tons in 2005 providing an additional and valuable export outlet for Russian crude, with taxes and export duties to the Government.
The benefits to both countries will increase considerably after expansion. 67 million tons a year at present tariff rates will generate well over $1.5 billion a year in tariff revenue providing both host Governments with a high level of secure income for the next 35 years.
CPC's economics were always based on full build out of the system with the assumption that the final stage of the project would be complete in the year 2014. In fact, volume forecasts for the next 5 years require individual expansion stages to be compressed and that full system build out must take place much earlier than predicted. This means that the predicted rate of return for CPC remains robust and may well exceed the original assumptions made by CPC's shareholders.
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