Halfway down a muddy slope in the Russian taiga, a team of welders shelters in a small tent to solder two giant steel pipes, bringing Russia 24 meters closer to its Asian oil El Dorado.

When the 4,070-km East Siberia-Pacific Ocean (ESPO) oil pipeline's second stage is finished in 2013, it will be the world's longest. At a cost of $25 billion, it dwarfs all other infrastructure projects in post-Soviet Russia.

But price is no object when it comes to ensuring that Russian oil producers, which generate 44 percent of federal revenues, penetrate Asian markets that OPEC expects to account for 75 percent of world demand growth through to 2030.

This was a historic inevitability, said Al Troner, managing director of Asia Pacific Energy Consulting.

Ultimately, Russia has to go East. Europe is a busted flush. It's fast becoming a mature market, Troner added. Russia is giving companies access to a new, growing market, but under the government's terms of course.

Russia is the world's largest oil producer, trumping OPEC member Saudi Arabia while the kingdom holds back some output. But most of its 48,000-km oil pipeline network is concentrated in West Siberia and runs toward Europe.

The OPEC cartel, whose members are Russia's rivals for the eastern oil bonanza, estimates that Asian consumers will drive global oil demand up 20 percent over the next 20 years to 105.5 million barrels per day (bpd).

RAIL TO PIPELINE

When the 7,000 construction workers complete their muddy slog to the Pacific, Siberian oil will zigzag through Russia's eastern woodlands, bypassing the narrow Gulf straits choked by tanker traffic carrying Middle Eastern crude to Asian refiners.

Those refiners, in turn, are paying record prices for the new crude on the block, while Middle Eastern producers are struggling to claw back market share.

And by guaranteeing an outlet for Siberian oil in Asia, ESPO insures Russia's public finances against a future decline in demand for Russian oil in Europe.

Budget revenues here are crucial, said David Dusseault, a Russian energy specialist and professor at Helsinki University.

The project conceivably could pay for thousands of social development projects if rent is distributed effectively among the players involved. Success can also be interpreted in political terms.

But Russia must pay to play. State oil pipeline monopoly Transneft heavily subsidizes the long journey from Western Siberia -- the source of two-thirds of ESPO Blend crude sold in the Pacific -- to lure the barrels east.

WEST TO EAST

Transneft now ships 300,000 bpd of crude along the first stage of the pipeline, which was commissioned in December 2009 and runs in a 2,757-km arch above Lake Baikal. From there the oil is transported by rail to its Pacific port of Kozmino.

ESPO Blend's premium to benchmark Dubai crude has risen to $2.60-$2.80 per barrel as refiners in Japan, Korea and on the U.S. West Coast have snapped up the grade, which has a shorter delivery time than long-haul Mideast crudes.

Once phase two of ESPO is completed, volumes will double to 600,000 bpd, or 30 million tonnes per year, with another 15 million tonnes flowing via a pipeline spur to Daqing, China.

Yet only one-third of the barrels that make up the light, medium-sweet blend actually comes from new East Siberian fields.

To make sure (the pipeline) is filled, (Transneft) has to take the money paid by firms sending crude in other directions and use it to subsidies deliveries east. This is typical for such a large corporation, said a government energy source.

The subsidy is key as it persuades producers with swing deposits equidistant to Europe and Asia to send oil east.

Russia will have to subsidies oil transportation tariffs to the East (via ESPO) due to its length as long as the route exists, unless some major oil deposits appear in the eastern part of the country, a trade source told Reuters.

EXTENDING THE JOURNEY

From Siberia's Samotlor hub, from where oil can go west or east, transport data for December showed shippers paid 40 percent less per kilometer to ship a tonne of oil to the Pacific terminal at Kozmino than to Novorossiisk on the Black Sea.

And while the total cost of the 3,750-km route to the Black Sea is 1,450 roubles per tonne, the journey to Kozmino, nearly twice the distance from Samotlor, costs 1,850 roubles.

From the Arctic Yamal Nenets region, 500 km north of Samotlor, where all output from current and future greenfields has been earmarked for the east, it becomes even cheaper to send a tonne of crude to Kozmino.

The Arctic-Eastern link will only grow longer. Most of the new oil to feed ESPO will come from Russia's Arctic oil frontier via a new line that will effectively extend the existing route by which crude is evacuated from Rosneft's giant Vankor field.

Eager to begin pumping, oil majors LUKOIL, Gazprom Neft and TNK-BP, all developing deposits in the remote Arctic region, have agreed to co-fund construction of a pipeline link from Zapolyarnoye to Purpe.

Most dependent on the new Arctic spur is TNK-BP, half-owned by BP, which has 18.3 million barrels of light oil in its Arctic Suzunskoe and Tagulskoe fields, and 2.25 billion barrels of heavy oil in the Russkoe field, and wants to pump from 2013.

For now, benefits are felt by firms already able to ship crude to Kozmino from East Siberia, namely Rosneft and TNK-BP, yet all have seen their tariffs rise.

Export to the east is a political issue, said a trader at a Western major. And politics is always an expensive pleasure.

(Writing by Jessica Bachman; editing by Melissa Akin and Douglas Busvine)

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