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Russia: Fradkov's Statement Unlikely To Affect Foreign Investment In Oil, Gas

Russian Prime Minister Mikhail Fradkov Russia's Prime Minister Mikhail Fradkov has announced that Moscow will not allow any private gas or oil pipelines to be built in the country. Fradkov said Russia's state-owned pipeline grid provides a competitive advantage and should be safeguarded. How is this likely to affect foreign investment in the oil and gas sector?

Prague, 14 April 2004 (RFE/RL) -- A statement made on 9 April by Prime Minister Mikhail Fradkov that Russia will not privatize its oil and gas grid, nor agree to the building of any new private pipelines, did not come as a shock to foreign investors.

In the wake of the arrest of Yukos chief Mikhail Khodorkovskii, who had -- among other things -- lobbied for the construction of a privately financed pipeline in the Far East, analysts had expected the Kremlin to reassert its grip over the oil industry.

Maintaining control over distribution routes remains the government's most effective way to do this, as Julian Lee, of the London-based Centre for Global Energy Studies, tells RFE/RL.

"I don't think anybody's been under too many illusions that they're going to relax their grip on pipelines in a major way."
"What, of course, lies behind all of this is that the Russian government itself wants to make sure that it can control, to some degree, the Russian oil industry. And having sold off all the upstream assets, all the oil-producing companies, its leverage for control is access to export pipelines. And that really is the reason that the government won't let them go."

Oil, gas, timber, and metal sales account for 80 percent of Russia's foreign revenues. Russia's recent economic upswing has been underpinned by high oil prices, and the Kremlin has sought to increase exports to keep the money flowing.

But will the state oil pipeline monopolist, Transneft, be up to the task of building enough new routes?

At present, Russia has the capacity to export 4.5 million barrels of oil per day through its existing pipeline network, according to Lee. Another 2 million barrels is exported by rail and ship. That adds up to 6.5 million barrels per day, but experts say Russia could easily export 10 million barrels a day by the end of this decade if it opened new pipelines.

Transneft's record so far has actually been impressive, says Lee, pointing to the opening in 2001 of a new pipeline -- built in record time -- feeding into the Russian Baltic port of Primorsk. But soon, a decision on building a far more challenging and longer pipeline leading from Siberian oil fields to Russia's Pacific, or directly to China, will have to be taken.

"The decision will have to be taken, I would suggest, probably sometime by the end of this year, on the construction of a major new export pipeline," Lee says. "It looks likely that if that decision is taken, it will be for a pipeline to the Pacific coast. There is still time for that decision to be taken, but I would suggest it needs to be taken this year in order to have the pipeline in place to meet the rising demand for exports."

Michael Ritchie, editor of the London-based "Neftecompass" weekly newsletter, which tracks oil and gas in the former Soviet Union, believes foreign investors have largely recovered from the shock of the Yukos indictments and are once again looking to Russia with confidence.

He agrees that few people watching developments in Russia were surprised by Fradkov's announcement, but he notes that -- despite the prime minister's blanket statement -- there already is one private oil pipeline operating on Russian territory, in which the Russian government has only a 24-percent stake. And indications are that another two privately built pipelines may soon be added.

"I don't think anybody's been under too many illusions that they're going to relax their grip on pipelines in a major way," Ritchie said. "[But] there have already been a couple of exceptions to the rule. They've built the Caspian Pipeline Consortium, known as the CPC pipeline, which goes from Kazakhstan across Russia to a Black Sea port on the Russian coast. And that is a privately owned pipeline to all intents and purposes, [although] in fact, Russia is actually the largest stakeholder in the pipeline. They've also given tacit approval to the Shell consortium to build two pipelines carrying oil and gas from the north to the south of Sakhalin. That's for a large project that Shell and its partners are developing off the Pacific coast of Russia. So there have been these exceptions to the rule. But I think that, by and large, it's pretty clear now that they're going to tighten up."

Whatever restrictions the government imposes on pipelines, Ritchie expects foreign oil companies to continue to flock to Russia -- which still offers better terms than many other global oil producers.

"You mustn't forget that foreign investors are very eager to get into Russia because it's one of the few places in the world where you can go in and actually own reserves, in a sense. You can put them on your bottom line, and you can't do that in any of the major Middle East producing countries."

In 2002, British Petroleum bought a 50-percent stake in Russia's third-largest oil producer, Tyumen Oil, in the largest such transaction to date. The Russian government gave its final approval to the $7 billion deal last year. Analysts expect more deals to follow.

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