[A-List] Russia: oil companies vs. state?

[Michael Keaney]

Russian oil majors fight state over Arctic port
By John Helmer
Asia Times, December 12 2002

MOSCOW - The four Russian oil producers who signed an agreement recently to
build a new oil terminal at Murmansk, Russia's Arctic port, are taking on
not only the state pipeline operator Transneft, but also the Russian
government's power to regulate and limit the volume of oil exports.

"If the oil companies have the money for the project, let them build it,"
Sergei Grigoriev, vice-president of Transneft, told Asia Times Online.
"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 Primorsk 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
(VLCC) 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. The Kremlin has already signaled approval for the construction of a
pipeline to China, which Yukos officials were in Beijing this week to plan.
Transneft has said that it prefers to build a more costly pipeline to a
Pacific coast port, and not tie oil exports to a single destination such as
China.

However, Transneft has lost that argument for the time being. In Murmansk,
the oil companies are trying to expand their power even more. Industry
analysts in Moscow believe that the memorandum of understanding, signed with
a blaze of publicity at the start of 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.

The companies are considering two routes leading from Western Siberia to the
Barents Sea port of Murmansk, 1,450 miles north of Moscow. It is the only
port in northern Russia that is ice-free year-round. The network is to carry
584 million barrels of oil annually from Murmansk to Western Europe and the
United States, the companies said. It would provide the shortest sea route
for Russian oil to those markets, the Interfax news agency reported.

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 US$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 the
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."

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

According to Lukyanov, "The project for construction of a pipeline to
Murmansk and an oil terminal there for 50 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. "Since Russian oil exports now amount to 145-150
million tons per year," Lukyanov said, "including exports through
Transneft's pipelines, railway transportation, river tanker transportation
and direct delivery from the oil deposits, even if the project in Murmansk
is realized, it will have initial capacity for just 10-15 million tons of
oil per year. So, there will be no increase in the overall proportion of oil
exported through routes and modes that are independent of Transneft."

Russian high-sulfur oil can be supplied to the US, Lukyanov told Asia Times
Online, but the growth of output is moving much faster than the export
capacity. "Weather is another significant factor that influences exports
from Russia. For example, there is a stormy season in Novorossiysk now, and
every winter this creates a surplus of 2 to 4 million tons in December,
which is impossible to export. This establishes a very serious pressure on
the domestic market. So in order to get rid of this type of dependence,
Russia has to develop its export capacities through implementation of such
projects as Primorsk and Murmansk."