Russia's new oil export route forces hard choices

MOSCOW (Reuters) - Russia is not producing enough oil to fill a new $4 billion pipeline to the Baltic, which is meant to cut reliance on export routes via neighboring states, without making hard choices about flows through other outlets.

Diverting exports from other routes would risk losing market share to rival OPEC producers or harming ties with key energy partner Germany.

Russia decided on the BTS-2 pipeline to its own Baltic ports after a pricing spat with Minsk disrupted flows via the Druzhba link through Belarus in early 2007. Construction began in June.

The aim is to keep exporting even if future disputes block links across transit states.

Critics of the project argue it is badly thought out, as Germany and Poland still want to get oil via Belarus because it is cheaper, China is asking Moscow for bigger supplies and Russia still depends on its southern export route through Ukraine, which poses the same risks as Belarus.

A big problem is that Russia now produces 9.8 million barrels per day of oil, little changed over the last two years, and output is likely to stagnate or edge down in years to come.

Exports have averaged over 4 million bpd in the past years while pipeline export capacity already exceeds this figure by over 1 million bpd and this surplus will at least double with new routes opening to China and the construction of the BTS-2.

Traders and analysts say the most viable option to fill the new pipeline is to re-route oil from Ukraine's Yuzhny and Odessa -- Black Sea ports that ship Russian oil to the Mediterranean.

This would mean limiting supply of Russia's Urals crude oil to Mediterranean consumers by 250,000-370,000 barrels per day, a gap Russia's Middle Eastern rivals from the Organization of the Petroleum Exporting Countries (OPEC) have been eager to fill.

Exports from Iraq are expected to be first in line should the country emerge stronger from its post-war reconstruction.

"Exports of Iraqi Kurkuk crude, which is similar in quality to Russia's Urals blend, will grow," said Valery Nesterov, senior energy analyst at investment bank Troika Dialog.

"This will escalate competition and pressure prices," he added. "So Russia is in jeopardy of losing market share in the Mediterranean."

Russia, the second-largest oil exporter after Saudi Arabia, sends over a quarter of its oil exports via the Black Sea ports Novorossiisk, Odessa and Yuzhny. Most of the rest goes via the Druzhba pipeline to central Europe and the Baltic port of Primorsk.

FRIENDSHIP WITH GERMANY

With newer, more robust oilfields in Eastern Siberia heavily committed to supplying China, the only other viable alternative is to divert oil from the Druzhba pipeline to BTS-2, which is meant to ship a fifth of Russian exports or up to 1 million bpd.

But Druzhba, a Soviet-era route whose name means Friendship, transports oil to much of Eastern Europe and Germany.

Refinery operators in Germany, such as BP (BP.L) and Total (TOTF.PA) will face a jump in costs should they have to import Russian crude by sea rather than by inland pipelines.

"The reduction of supplies via Druzhba emphasizes very serious political risks, especially with respect to Germany, a partner for Russia in the North Stream (gas) pipeline," one industry source said.

The North Stream route -- being built to transport gas to northern Europe under the Baltic Sea -- is a lynchpin of Russia's strategy of diversifying gas exports away from transit states such as Belarus and Ukraine.

German firms are Moscow's most important partners in the gas project, so Russia would need to think hard before increasing Germany's energy bill by diverting oil supplies from Druzhba.

"I don't see resources for BTS-2, considering that supplies to Druzhba have to remain unchanged," a Urals oil trader said.

CHINESE DEMAND

Russia's oil pipeline monopoly, state-run Transneft (TRNF_p.RTS), has said it will have no problem securing enough oil to fill all its export routes as it hopes to increase transit of Kazakh crude via the Atyrau-Samara route by 8 million tons per year.

But oil traders take Transneft's comments with a pinch of salt as talks with Kazakhstan have dragged on for 10 years.

The situation could be aggravated by Asia's hunger for Russian oil. Most of the new fields in eastern Siberia, Russia's hope for boosting production, will go to China via a new 15 million tons (300,000 bpd) link to be finished this year.

Transneft is even expected to re-route some oil flows further east to full the East Siberian-Pacific Ocean pipeline, capable of moving between 300,000 bpd and 1 million bpd.

Transneft and Russia's largest oil producer, state-controlled Rosneft (ROSN.MM), signed a $25 billion loan-for-oil deal with China this year that committed them to supplying Chinese consumers for 20 years, with total volumes expected to reach some 300 million tons in that period.

(Writing by Gleb Gorodyankin and Simon Shuster, editing by Anthony Barker)