[A-List] Russia: oil pipeline development

[Michael Keaney]

Russia gains first Mediterranean oil outlet
By John Helmer
Asia Times, December 20 2002

MOSCOW - As Russia's crude oil production for 2003 is forecast to continue
this year's growth, outstripping domestic demand, and the Kremlin remains
unconvinced and undecided on major new export outlets, a new agreement to
open a pipeline to the Croatian port of Omisalj has been made, with a
minimum of controversy.

According to Sergei Grigoryev, vice-president of Transneft, the state
pipeline operator, "realization of this project will not require any
large-scale investments in the Russian part of the pipeline, but some other
countries, particularly Croatia, will have to invest [the largest part]".

The project announcement, issued on Monday by the governments of Russia,
Croatia, Belarus, Slovakia and Hungary, will require Croatia to spend US$19
million to reverse the flow of the pipeline between Omisalj to the terminal
town of Sisak. Another $320 million in investment is projected to triple the
existing capacity of the Druzhba-Adria pipeline network, so that shipments
can jump from 5 to 15 million tonnes per annum. The project has been in
negotiation for two years. Agreement was made possible by the decision of
Ukraine to accept a tariff of $0.64 per tonne per 100 kilometers, 12 percent
below the current pipeline tariff being charged across Ukrainian territory.

This is the first transportation agreement enabling Russian oil to reach the
Mediterranean without having to pass the Turkish straits. Russians are being
squeezed by the government in Ankara, which prefers to concentrate oil flows
through the planned new pipeline from Baku, Azerbaijan, to Ceyhan. Another
Russian alternative, involving a tanker shuttle across the Black Sea to
Burgas, Bulgaria, and a pipeline from there to Alexandropoulos, Greece, is
stalled in negotiations that have now lasted more than five years.

Transneft is proving to be a tough defender of its pipeline monopoly inside
Russia; tougher indeed than Russia's oil majors have anticipated. While the
oil producers want the Kremlin to agree to support and help finance pipeline
routes to Murmansk, on the Barents Sea, and to Daqing, in northern China,
Transneft is objecting, arguing that the costs do not justify either the
outlays, or the market forecasts.

However, the Croatian outlet, Grigoriev told Asia Times Online, is
unobjectionable. "Five million tonnes per year to begin with is not a large
volume of exports, but this route opens access to the US market for Russian
oil companies. This project will not lead to any changes on other routes
operated by Transneft. It will only expand Russian export capacities by
using a new route."

Yukos, Tyumen Oil Company and Rosneft are reported to be the first Russian
oil producers to aim to ship through Omisalj to the US. Yukos - which this
year also acquired the Slovak pipeline operator Transpetrol - is likely to
dispatch 5 million tonnes of oil for shipping out of Omisalj; Tyumen Oil
Company 2.5 million tonnes.

Dmitri Panteleyev, spokesman for Rosneft, said that his company has signed a
memorandum of understanding with Marathon Oil for shipments to the US. "This
is not a contract," he said, "so it doesn't specify the volumes of possible
deliveries, but the letter says that deliveries are to start some time in
2003. When we will be discussing the volumes and exact routes for
deliveries, we will probably pay special attention to Omisalj."

Sergei Lukyanov, an industry analyst in Moscow, told Asia Times Online that
"Yukos and probably other oil companies are now trying to establish
themselves as suppliers of oil to the US. In order to do that, they have to
have one or two shipments per month to the US. Omisalj port is perfect for
supplies to the US, as it enables the companies to use larger tankers."

Russian tanker companies say that they don't expect to be favored for
shipments out of Omisalj. Yukos has been trialling shipments from the
Murmansk roadstead using tankers from Novorossiysk Shipping Company, but
none of the Russian tanker operators has the very large crude carriers
(VLCCs) that are likely to be used from Omisalj. According to Panteleyev of
Rosneft, "Deliveries to the US will be considered later, including whether
we will use services of Russian tanker companies or not. Until now, Rosneft
has not made any trial oil deliveries to the US."

Igor Borisenko, deputy general director of Sovcomflot, Russia's leading
tanker operator, said that the Russian fleet doesn't have VLCCs because
"analysis shows that these are very problematic vessels from the point of
view of investment. Often the performance of VLCC tankers is close to
loss-making, and there are not many cases when VLCC vessels are used very
effectively." He said that negotiations are under way with Yukos and LUKoil
for long-term tanker contracts that include US deliveries. But he added, "I
don't think there will be any privileges given to Russian shipping
companies."