1. Company LOGO OIL TRANSPORTATION: TRENDS AND OPPORTUNITIES FOR ESTONIA Anna Murulauk Estonian Institute for Futures Studies March 6 th 2008

2. Company LOGO Aims of this report Modeling and making short-term and mid-term prognoses expects taking context/contexts of the posed problem into consideration It is necessary to choose certain assumptions by the principle: it is unlikely to happen, it might happen; we reckon with this factor, we do not reckon with this factor To provide realistic valuation, the problem should be observed widely and in the longer perspective (if the used model allows that) It is also needful to consider the context during interpretation of the modeling results

3. Company LOGO Oil transit in Estonia In the period after regaining independence, Estonian transport has been mainly transit-centered. Estonian biggest ports are transit ports Estonian transit has been mainly oil-centered (crude oil and oil products) Oil transport business as one of “big businesses” in Estonia Even if we do not believe some over-estimated figures from Russian press

4. Company LOGO Flow of liquid cargo and total transit cargo in Port of Tallinn from 1996-2006

5. Company LOGO Gulf of Finland

6. Company LOGO Oil transit in Estonia In the peak moment cluster connected to oil transit gave ~ 9% of Estonian GDP During the last 5 years this tenedency has decreased as other fields of Estonian economy have shown fast growth Drastic decrease in 2007

7. Company LOGO Oil and oil products transported through Estonian harbours

8. Company LOGO Causes of success Using of landlord port system: building terminals and operating with private capital (starting such system took time in Latvia and Lithuania) Positive conjucture in international markets. Strong market pull for Russian oil manufacturers and exporters at the conditions when: a) Russia‘s own ports were not built or operated with very low effectiveness b) there was multiplicity of exporters

9. Company LOGO Causes of success Depth of the ports (especially Port of Muuga), is very significant at black oil (mazut) cargo, which is usually done with big ships Advantageous capital structure in the port terminals: Russian capital (access to the product) + Western capital (technology) + local capital Advantageous business environment: taxation etc

10. Company LOGO Geopolitics Relations between Russia and Baltic states (incl. Estonia) Future transit transportation volume of oil and oil products through Estonia Lines on the territory of Estonia Estonian direction lines in Russia Railway yard capacity Oil terminals in Estonian ports Change of volume of Russian oil export and export geography World market prices Home consumption in Russia Changes in transport technology and logistics Development of oil processing in Russia Railway lines Potential capacity of oil transit is influenced by:

11. Company LOGO Transit transportation volume of oil and oil products through Estonia in future Change in of oil export capacity and export geography of Russia Political causes Economic causes Building of new oil terminals and their connections on the territory of Russia Future volumes of Russian oil export: a) through the Baltic Sea region; b) through three Baltic states Changes in the value chain (decreasing share of black oil) Potential structural change in the flow of oil products Possible increase of capacity by Port of Sillamäe Capacity and technological quality of existing terminals in Estonia Additional investments in Estonian railways (including EU structural funds) International pressure on Russia assuring fair competition (WTO) Improvement of railways' condition in Estonia Railway yard capacity in the ports and in the railway stations in Estonia Change of situation in transit channels of competiting countries (foremost Latvia and Lithuania) Possible additional flow by Russia from Kazakhstan Increase of throughput of railway lines running on the territory of Russia in the direction of Estonia Building border crossings (including Koidula railway border station) Creation of politically controlled and verticaly integrated oil complex in Russia Possible changes in Estonian railway policy favourably from other types of cargo and passengers It seems that Russian oil export has entered a new phase. Important shifts by determinants

12. Company LOGO Future prognosis (1) Influence of determinants decreasing the flows (on the figures arrows “up to bottom”) of oil products is stronger than the influence of conducive determinants (“bottom-up” arrows) We would emphasize to such negative determinants as: - shift of Russian oil export to East (China) - rising share of Russia‘s own ports; - in case of crude oil, replacement of railway transport with pipe transport and decrease of relative importance of Estonian key transit product, mazut, in Russian export of oil products.

13. Company LOGO Figure: ESPO Oil Pipeline route. Source: ESPO Construction, news release, 2007; Jeppesen 2007

14. Company LOGO Future prognosis (2) There are important changes in corporate governance of Russian oil-export-related companies: creating big vertically integrated companies controlled by the state It is difficult to assume that at these conditions, which are accompanied by political risk, Estonia is interested in big investments in the interests of mainly oil transport business. Rising importance of other criterias: passenger traffic, safety, moving from politically easily vulnerable oil products towards containerized products

15. Company LOGO Future prognosis (3) Taking above mentioned factors into consideration, by estimation of Estonian experts, volume of oil products' flow passing through Estonia would be in 3-5 years: - In case of the worst scenario approximately 17 million tons a year - In case of more optimistic scenario approximately 23 million tons a year

16. Company LOGO Thereat, it is important to reckon with two circumstances : Business nature has changed - terminals do not earn more from fast transit, as much from fuel loading Regarding dependence of oil transit to geo-political determinants (access to Near East oil etc), Baltic Sea transport channel handled not as linearly ascending or descending, but as fluctuated

17. Company LOGO Everlasting problem is still going to remain: whether wait for increase of capacities before investment or create assumptions through investments due to potential appearance of additional transit demand

18. Company LOGO Information sources Additional information can be found at: http://www.eti.ee (Estonian Institute for Futures Studies) http://www.eti.ee http://www.okt-infra.fi (OKT-Infra project) http://www.okt-infra.fi Thank you for listening!