[A-List] Russia: oil industry machinations

["Michael Keaney" <michael.keaney@xxxxxx>]

State keeps grip on Russian pipeline projects
By Michael Lelyveld
Asia Times, January 16 2003

BOSTON - Prime Minister Mikhail Kasyanov may have declared Russia's policies
toward its oil industry and several foreign nations simultaneously with a
statement supporting Transneft, the state pipeline monopoly.

During a visit to the arctic port of Murmansk, Kasyanov announced that all
oil pipelines built in Russia "would remain state property", the official
RIA-Novosti news agency reported. The decision means that the government
would give Transneft control over a US$4.5 billion pipeline to Murmansk that
private oil companies are planning for exports to the United States.

Kasyanov said that private investment in the project could give the
companies lower tariffs for their oil transit, but it would not give them
control. The stand is bad news for the companies, who are reluctant to stake
billions of dollars on pipelines if the state can raise the transit fees.

The Kasyanov statement came a day after the Interfax news agency reported
that five oil companies had sent him a letter complaining about Transneft's
stranglehold on oil exports. The firms specifically cited Transneft's
refusal to allow exports through the Latvian port of Ventspils, but three of
the firms - LUKoil, Yukos and Tyumen Oil Company - are also investors in the
Murmansk plan.

The issues at the two ports are linked because Russia's growing oil
companies want an open market for exports at a time when production is
rising at a 9 percent rate and Russia's outlets are unable to keep pace. The
result has been an oil glut on the Russian market that has driven prices as
low as $4 per barrel, while world prices have soared to more than $30 per
barrel.

In the meantime, Transneft has been doling out export allocations and
pursuing an agenda that has appeared to be all its own. Analysts say that it
has cut off Ventspils for months in a bid to control it, while the oil
companies need all the export capacity they can get.

In their letter to Kasyanov, the private companies were joined by
state-owned Rosneft in saying, "This is having a negative influence on the
possibility for growth in production, and as a result, is causing
significant losses to the federal budget."

The group added, "Further restrictions in sales will unavoidably lead to
more serious consequences, right up to the stoppage of wells, which in
winter conditions is extremely undesirable." Transneft has also opposed the
private Murmansk project, which some analysts have suggested was
intentionally designed to break Transneft's grip.

Last week, it seemed that the companies had picked a perfect time to take on
Transneft. Earlier this month, Russia agreed to cooperate with Saudi Arabia
and the Organization of Petroleum Exporting Countries (OPEC) to boost output
and ease a world oil squeeze caused by strife in Venezuela and possible war
with Iraq. The companies implied that Transneft would frustrate that goal.

But the timing may also have been aimed at influencing yet a third Russian
policy, in the Far East, where Yukos and Transneft are also at odds. Yukos
has been seeking support for a project to build a privately controlled oil
pipeline from Angarsk in the Irkutsk region to China's oil center at Daqing.
Russian and Chinese leaders have embraced the $1.7 billion plan at a series
of summits in the past three years.

But Transneft has opposed it, arguing that a much longer and more costly
line should be built instead to the Far East port of Nakhodka, where exports
could serve Japan, South Korea and perhaps the United States. After Japanese
Prime Minister Junichiro Koizumi met with President Vladimir Putin in Moscow
last week, the two countries agreed to "study the expediency" of the $5
billion project. But they defied press predictions that a deal would be
signed.

The reason is that the issue is far too complex to settle so easily. Putin
will be wary of offending China after signing protocols for the Daqing
pipeline, and Irkutsk does not have enough oil for both China and Japan. At
the same time, Putin is likely to see the Yukos plan as another attempt to
evade Transneft and state control.

Julia Nanay, director of Petroleum Finance Company, a Washington-based
consulting firm, said Transneft is the Russian government's final lever over
the private oil companies. It certainly seems to have emerged as the winner
in that it epitomizes Putin's goal to have a strong center controlling the
important oil resources."

But it is unclear whether the government will support both Transneft and all
of its plans. It may be one thing to keep control over Russia's oil exports
and quite another to give the pipeline monopoly so much political power.
Transneft's push for exports to Japan rather than China, as well as its
maneuvers against exports through Latvia and Murmansk, all suggest that it
has been trying to drive export policy for its own purposes instead of
simply doing the government's will.

The government may also find that it cannot afford too many disincentives to
private investment without harming the oil companies that are Russia's main
source of revenue.

In coming weeks, Putin may have to make clear how far Kasyanov meant to go
on behalf of Transneft by deciding where Russia's oil exports should go.