[A-List] Russia: oil industry machinations

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

Tokyo outbids China in Kremlin oil link
By John Helmer
Asia Times, January 4 2003

MOSCOW - The Kremlin has decided to curtail its support for a new pipeline
proposed for oil shipments to China, and according to Moscow industry
sources the Russian government is now quietly in favor of a more expensive
option backed by the Japanese government.

At present, Russian law gives the state strict control over every ton of
exported crude oil and petroleum products through regulation over access to
oil pipelines, tariff pricing for pipeline and rail transportation, port
control, and customs inspection and export taxation.

Oil industry sources in Moscow told Asia Times Online that negotiations
between Yukos, Russia's largest oil producer, and the China National
Petroleum Corporation (CNPC) failed in Beijing last month, because the
Russian government has gone cold on the plan to build a US$1.8 billion line
between the Siberian town of Angarsk and the northern Chinese terminal
center of Daqing. Half of the financing for the project has been pledged by
CNPC.

No public word of the shift in Russian policy has leaked as yet, as the
strategic implications, following months of high-level official endorsements
of the project from both Russian and Chinese leaders, have yet to be
estimated.

The change in official thinking in Moscow has been stimulated, the sources
believe, by Transneft, the state-owned pipeline operator, which argues that
it is unwise for the Russian government to commit new pipeline capacity to
single destinations, like China or the US. Until now, the government has
been publicly backing Yukos and CNPC in their plan to construct the
southward export line.

Industry sources in Moscow confirm the shift in government thinking has been
encouraged by a Japanese offer, rivaling the Chinese, to finance the $4
billion cost of building the new Siberian pipeline eastwards to the port of
Nakhodka. This route is favored by Transneft, which argues that, although
more than double the cost of the Yukos-CNPC proposal, it would give Russian
oil access to the entire Pacific and Asian market.

Intense lobbying by Yukos to neutralize the Transneft-Japan bid can be
expected in the coming weeks. If Transneft has managed to convince the
Kremlin to change its mind on its Asian oil marketing strategy, it is also
likely to put in doubt the plan of the four Russian oil majors who signed an
agreement last month to build a new oil terminal at Murmansk, Russia's
Arctic port.

"If the oil companies have the money for the project, let them build it,"
Sergei Grigoriev, vice-president of Transneft, told Asia Times Online
regarding the Murmansk project. "However, we doubt that they will build a
pipeline cheaper and better than Transneft can." Transneft has voiced its
opposition to the Murmansk terminal plan before, arguing that Primorsk, on
the Gulf of Finland, is better positioned to supply European oil markets.
Transneft is busy expanding pipeline capacity to expand Primorsk's shipping
volume by laying additional pipeline delivery capacity to the port.

According to Grigoriev, "The proposal to build a pipeline to Murmansk
doesn't compete with the plan for expansion of Primorsk, because Pirmorsk is
oriented towards deliveries of oil to Europe, while the Murmansk project is
aimed at the United States. No tankers go from Primorsk to the United
States." Transneft has expressed skepticism before that a consortium of
Yukos, LUKoil, Sibneft and Tyumen Oil Company will be able to develop a big
enough market in the US to make Murmansk shipments by very large crude
carriers economically feasible. "I'm sure that the oil companies can count
their own money," Grigoriev said. "While they are optimistic about the
project now, they may later change their minds when they realize what it
will cost."

Grigoriev added that it is up to the Russian government to decide where
scarce investment resources on expanded oil export infrastructure should be
built. Industry analysts in Moscow believe that the memorandum of
understanding, signed with a blaze of publicity in December, is an attempt
by the oil majors to lobby the Kremlin. Negotiations with Surgutneftegaz and
other oil producers are under way to expand the Murmansk consortium.

However, according to Sergei Lukyanov, director of Petroleum Argus in
Moscow, "The main question here is how influential Transneft will be in this
project. The role of Transneft in this respect is great, as oil companies do
not have experience, technical means and resources to operate pipelines by
themselves. The Murmansk project is also a matter of relations between the
state and the oil companies. Judging by the sum of investment necessary for
the Murmansk project - up to $5 billion - it can be considered a project of
state importance, and most likely it will be the state that will pronounce
its judgment on the reasonableness and the necessity of this project. So the
oil companies are likely to use their lobbying capacities in order to
persuade the state to support this project. The oil companies dream of doing
away with the strong monopoly of Transneft and having a 'free' oil export
hand."

According to Lukyanov, "The project for construction of a pipeline to
Murmansk and an oil terminal there for 50 to million tons of oil undermines
Transneft's project for expansion of the oil terminal in Primorsk up to 50
million tons. I'm sure that Transneft will defend its project in Primorsk,
and even if it agrees to the role of operator of the pipeline to Murmansk,
it is likely that it will not assist the Murmansk project. At maximum it
will act against it."

He estimates that Transneft has "enormous lobbying capacities" that will be
used to argue against any diminution of state control over oil exports, even
if the Murmansk project adds no more than 10 percent to Russia's foreseeable
oil export capacity.