Page 17 - RusRPTOct22

No plans for an oil pipeline via Mongolia have yet been formally proposed, but the comment indicates that it is something the three parties are considering.
Benefits
Russia is scrambling to find new destinations for its energy exports as EU imports continue to fall. The country already pumps 1.6mn barrels per day (bpd) to China and other Asian markets via the Eastern Siberia-Pacific Ocean (ESPO) pipeline system. Its other option is sending crude through Kazakhstan, but along both routes oil flow is now close to nearing maximum capacity, creating a bottleneck at a time when Russia is eager to divert as much oil to Asia and away from Europe as possible.
Running an oil pipeline through Mongolia would solve this problem. Its most logical starting point would be the Tayshet hub in the west of the Irkutsk region, where ESPO connects with the rest of the Russian oil transport system. First of all, this would provide a fairly direct route across Mongolia to the Chinese east coast, running past the Mongolian capital of Ulaanbaatar. Secondly, there is the issue of Russia’s differing blends of oil. ESPO carries sweet crude from Eastern Siberian fields that typically sells at a premium to the sour Urals crude produced in Western Siberia. The pipeline through Mongolia could carry Western Siberian sour oil to China that is currently sold to Europe, whereas ESPO could continue pumping sweet crude. Keeping the flows separate would enable Russia to continue fetching a premium for ESPO blend oil, and separately offer sour grade to those Chinese refineries designed for it.
For China, an additional oil pipeline from Russia would help ease its reliance on supplies shipped through the Straits of Malacca, seen as a geopolitical vulnerability. China could also barter for interests in the upstream Russian fields that supply that oil, strengthening its position in the country’s energy sector.
Mongolia, meanwhile, would gain lucrative transit revenues, but also, more importantly, access to oil supplies itself. This would allow the country to accelerate plans for its first oil refinery, tentatively scheduled for launch in 2025. The country currently relies completely on imported petroleum products. Hosting an oil pipeline, in addition to a gas pipeline, would also increase Mongolia’s role as a facilitator of energy trade between China and Russia, giving it some leverage over its two more powerful neighbours.
Obstacles
On the Russian side, an oil pipeline project would face similar obstacles to those that Power of Siberia 2 is facing. Cut off from Western financial systems, Russia could struggle to secure funding. China could in theory step in with support, but Beijing is likely to be less enthusiastic about such a project than Moscow, which is desperate to find new markets to replace those it is losing in Europe.
Exploiting Russia’s desperation, China could drive a hard bargain on prices, and demand increased access to Russia’s upstream industry in return for backing the project. Moscow has tried to put a positive spin on the exit of Western majors from its oil sector in response to the war in Ukraine, claiming it
17 RUSSIA Country Report October 2022 www.intellinews.com