Nikolay Gorban: “Surplus Capacity Created in CPC System”

Interview with General Director of Caspian Pipeline Consortium

The multi-year Project to expand the capacity of Caspian Pipeline Consortium pipeline system (CPC) from 28.2 M to 67 M tons per year has been completed. The ceremony to commission PS-2 - the Project last pump station - was held in Kalmykia on April 18th. CPC General Director Nikolay Gorban tells Victor Prusakov, the Neft i Kapital (Oil and Capital, NiK) correspondent, about today and prospects of the export route connecting the Western Kazakhstan fields and the Russian Caspian sector with the Marine Terminal near Novorossiysk.

- In a nutshell, we are pleased with the results. The main result is that surplus capacity has been created in the pipeline system enabling the producers to concentrate on development and not to worry about transportation.

The process was, of course, difficult. It took more than two years to have the Project, its funding scheme and implementation algorithm approved by the Shareholders. There were delays in construction schedule: in some cases the existing contracts had to be terminated and contractors had to be replaced, problems arose with expert review and land allocation.

Equipment deliveries did not experience serious complexity, we met the set target dates. Though some complaints were made to Suppliers - not only the Russian but foreign ones, as well. But similar problems, surely, accompany any project, and large-scale ones in particular.

To ensure the safety of a huge scope of work was, perhaps, the most difficult thing. Up to eight thousand persons and about a thousand units of equipment were simultaneously on construction sites. For the record, our injury and MVA rates were below the average ones in the industry.

- There were several complicated stages. Firstly, the expansion of the Marine Terminal in Yuzhnaya Ozereevka. The project provided for installation of a third single point mooring (SPM) at five kilometers from the shore. It is hi-tech equipment, which in Russia is only used in very few projects. In the course of the work, our Shareholders’ know-how and experience were strongly sought-for, and the access to them was granted thanks to CPC status as an international company. For the record, the Marine Terminal has been in operation for many years, and its performance does not give rise to unfavorable criticism.

Another hi-tech stage was related to the work at pump stations. All our PSs are standard, universal, and the main complexity consisted in the necessity of adapting them to diverse conditions in different regions crossed by the pipeline. Broad geography created logistic difficulties. For example, when materials and equipment were to be delivered to quite a remote PS-2 in Kalmykia, the transportation leg there reached up to 500 km.

- We were, it may be said, lucky: all key contracts for supply had been signed before the sanctions, so the sanctions did not affect CPC. Our advantage also consists in that we do not use third-party loans. The Expansion Project was financed by the funds received from the core business - oil pumping.

CPC Shareholders
Russian Federation, with: 31%
in trust management of Transneft 24%
CPC Company 7%
Republic of Kazakhstan, with: 20.75%
KazMunayGaz 19%
Kazakhstan Pipeline Ventures LLC 1.75%
Chevron Caspian Pipeline Consortium Company 15%
LUKARCO B.V. 12.5%
Mobil Caspian Pipeline Company 7.5%
Rosneft-Shell Caspian Ventures Limited 7.5%
BG Overseas Holding Limited 2%
Eni International N.A. N.V. 2%
OryxCaspianPipeline LLC 1.75%

- We stayed within that amount.

- The main volume of 49.6 M tons came from the territory of Kazakhstan, 28.8 M tons of those came from Tengiz, 10.6 M from Karachaganak, 7.4 M from Kashagan.

The pumped Russian oil amounted to 5.5 M tons, with 3.4 M being from LUKOIL’s Caspian fields (mostly from Filanovsky field), another 2.1 M - Rosneft’s crude oil.

- In April, 5.068 million tons were lifted (about half of it from Tengiz). It is 220 thousand tons more than planned and 7% more year-on-year.  During the first four months, about 20 M tons were lifted.

Our progress is dynamic, and we expect to pump about 60 M by the end of the year, but, certainly, everything depends on the oil producers.

CPC is the largest international oil transportation project with participation of Russia, Kazakhstan and the leading global producer companies established to construct and operate a 1,511-km trunk pipeline. The oil that comes into the system is mainly from the Western Kazakhstan fields and also crude oil of Russian producers.

CPC construction commenced on May 12, 1999, and on October 13, 2001, the first tanker with oil was loaded at the Marine Terminal near Novorossiysk. By mid-2004, the pipeline achieved the initial construction phase full throughput capacity of 28.2 M tons. Since 2005, by injecting drag reducing agent, CPC has been gradually increasing the transportation volumes, which reached 25 M tons per year in 2010.

CPC system post-Expansion technical specifications:
The total number of PSs in the RF and Kazakhstan - 15.
The total capacity of the Tank Farm is over 1.3 M cu. m, including:
- Ten 100,000 cu. m tanks at the Marine Terminal;
- Two 20,000 cu. m tanks and two 50,000 cu. m tanks at Kropotkin PS;
- Three 4800 cu. m tanks at Komsomolskaya PS;
- Four 20,000 cu. m tanks at Atyrau PS;
- Four 20,000 cu. m tanks at Tengiz PS.
Single Point Moorings: Three SPM at the Marine Terminal.
Water bodies’ crossings: 12.

- It is purely technical phenomenon. Filing their pumping nominations in the beginning of the year, the Shareholders account for all available capacities of the system. In actual situation, the volumes happen to be less - due to unscheduled repairs, unfavorable weather conditions in Novorossiysk, other contingencies. This year nomination campaign’s target is indeed 67 M tons. We are, however, practical persons and understand that the maximum level will hardly be achieved. At the same time, we are in permanent, one can say, daily contact with the producers. We keep monthly and quarterly planning, which enable us to adjust the delivery schedule based on all updates.

- “Ship-or-Pay” comes into effect if the producers fail to provide the established minimum level of deliveries. There has not yet been a case of a producer failing to reach this minimum. Therefore, the mentioned principle has not yet been applied.

- Let’s proceed from the official data. About 240 thousand barrels have been produced lately there, and those volumes are met so far. We know that there will be a minor decrease of production from Kashagan this summer due to repair work, but then the production is to get back to normal. I do not, hence, see any serious threats to the Consortium’s routine operation.

- To be more specific, at least 70% of Kashagan volumes go to CPC. Given the existing arrangements, this situation will remain in the future. Kashagan operators can, of course, increase deliveries to other export routes. We are a transportation company and have no right to make comments on the producers’ plans.

- It has been reported that after the reconstruction of Tengiz capacities by autumn 2022, the field production might grow by 12 M tons per year. We have not yet received any official confirmation of those volumes. However, if a respective nomination appears, we are ready to implement a number of technical actions, which will allow for additional volumes coming into the pipe.

Those will include laying of redundant pipelines crossing the major rivers, expansion of the tank farm at a number of PSs, construction of a third meter at the Marine Terminal.  The work can be financed by the funds received from operation business.

In any event, no new global expansion project will be required. CPC system is flexible as it was initially constructed with a view to the future.

- The Quality Bank uses two key indicators - API gravity and sulfur content - in its calculations. These are the key factors for the refinery economics and market pricing. The BTC crude pipeline is, for example, operated on a basis of a more intricate scheme, which takes into account the fractional oil content. The quality-based value of oil delivered to CPC system and unloaded from it is evaluated every two weeks.

The information about who specifically receives a bonus for the quality or is penalized is, however, confidential.  Suffice it to say that the Shareholders are quite happy with the existing rules and we do not intend to change them.

- In recent years, the oil from Kashagan and LUKOIL’s Caspian fields has started coming into the system, but the quality of the CPC Blend transported through CPC has not suffered noticeable changes.

The average quality indicators of the Blend lifted from the Marine Terminal in 2017: gravity – 46.2°АPI, sulfur content - 0.54% mass. In the previous year the indicators were: 46.5°АPI, sulfur content - 0.52% mass, respectively.

The limited list of fields and producers gives us confidence that the quality will remain in the future, as well. Qualitative composition of oil from LUKOIL’s fields has been stable for a long time already. As for the Kazakhstani fields, we know how seriously they treat the sulfur issue today.

- CPC Blend was initially intended to go to the Mediterranean region, but it is safe to say today that this grade sells out all over the world. The pool of consumers is so extensive that it is useless to make one stand out specifically. Better not question me of whether new companies or regions might appear in this list. Our task is to pump oil to the Black Sea coast, and it is other people who decide where to ship it further.

- The low tariff became feasible due to a shorter transportation leg compared to the BTC, and also thanks to our own Single Point Moorings at the Marine Terminal. The tariff was set before the CPC Expansion with allowance for the necessity of funding that large-scale project and ability to repay the Shareholders’ loans, provided by them for construction of the system at the initial stage. The tariff has not been changed since then, and its revision is not currently being negotiated.

CPC is, actually, the most cost-efficient delivery route for producers. The Consortium’s Management is also fully satisfied with the existing tariff - it allows the Company to pay its operating expenses and concurrently repay the debt to the Shareholders.

- Last year, $1.2 B were paid to the Shareholders, and $310 M were paid in the first quarter of 2018. By the end of the year, we plan to allocate up to $1.3 B towards these purposes, and about $1.5 B in 2019.

We hope to fully repay the debt by late 2020 and go ahead with payment of dividends to the Shareholders.

- We are striving to keep the system reliability factor of not going below 95%. Last year, for example, it was 98%. This year, we allocate 3.9 B Rubles to implement the investment program - reconstruction, major overhaul and maintenance of the facilities.

There are no trivial matters. Even such a minor, seemingly, thing as reduction of SPM hose replacement timeline at the Marine Terminal gives a sizable economic effect.

CPC Project was initially designed with allowance for an increase of the initial throughput capacity in two and a half times. The project to expand the capacities to 67 M tons per year was launched in 2011. As part of the Project, 5 existing PSs were upgraded and 10 new constructed (2 in Kazakhstan and 8 in Russia), 6 new tanks of 100,000 cu. m each were built near Novorossiysk, a third single point mooring (SPM-3) was constructed at the Marine Terminal, an 88-km pipeline section in Kazakhstan was replaced with a larger diameter pipe.

After SPM-3 was put into service, the Terminal can provide for lifting of 67 M tons of oil per year. The Consortium has received an opportunity of simultaneous loading of two tankers at a rate of 24 thousand tons per hour.