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Russia: Caspian Pipeline Consortium To Announce Expansion

Moscow, 13 November 1996 (RFE/RL) - The head of a multinational consortium that will build a pipeline to export Kazakh oil to world markets says he expects to announce an agreement this week on adding a number of oil companies to the project. The move would kickstart the project by making financing available.

Ed Smith, general director of the Caspian Pipeline Consortium, told RFE/RL in Moscow yesterday that negotiations on giving eight oil companies a 50 percent stake in the project should be wrapped up by Friday.

Smith's comments come as foreign ministers of Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan met in Ashgabat to discuss disputes over the status of the Caspian Sea, which could have implications for divisions of its vast oil reserves. But Smith said he did not expect any decisions from that meeting to have an impact on plans for the pipeline.

The governments of Russia, Kazakhstan and Oman are the original members of the Caspian Pipeline Consortium. In April this year, the three governments signed a protocol authorizing expanded participation in the project, but negotiations on the specifics of the deal were delayed for several months.

The expanded consortium would include British Gas, Italy's Agip, Kazakhstan's Munaigaz, Russia's Rosneft and Lukoil and the U.S. oil companies, Chevron, Mobil, and Oryx.

The 1,500 kilometer pipeline would connect Kazakhstan's Tengiz oil field to Russia's Black Sea port of Novorossisk. Chevron and Mobil, which are both involved in a major joint venture to exploit Tengiz oil, are eager for the pipeline to be up and running because of limitations on how much oil they can pump through Russia's pipeline network. The Caspian Pipeline may also carry oil from a several joint venture projects underway in Azerbaijan.

Smith said the companies that join the consortium would put forward financing for the project once the agreement is formalized. But he declined to answer questions about how much money was involved or when construction of the pipeline would begin.

Work on the Caspian Pipeline was originally scheduled to start this year and cost $1.2 billion. But the delay in restructuring the consortium has prevented the project from getting off the ground. Smith said the extensions in the negotations were "self-imposed" because of the complexity of the deal. He said that with three countries and eight international oil firms involved, complications were bound to arise. But he added that it was remarkable that the talks have made as much progress as they have.

Smith said the consortium has decided to build the pipeline in one go instead of in stages, a factor which could further delay start up of the pipeline. But it also recently almost doubled the estimated amount of crude oil it hopes to transport in the initial stage of the project, raising it from 15 million tonnes to 28 million tons. The expected increase in capacity is considered important for international oil companies who have been frustrated by the pipeline's slow progress and are eager to transport as much oil as possible to western markets.

The project entails refurbishing existing pipelines and building new links. Smith said once financing is in place, construction of the pipeline would take two years. But he said getting the necessary permits and land allocation agreements required for the pipeline could take some additional time.

Energy analysts also believe the $1.2 billion price tag on the project is no longer realistic. James Bunch, an economist with the Moscow-based brokerage firm Renaissance Capital, told RFE/RL that the cost of the pipeline is now probably closer to $2 billion. But he said it was unlikely that there would be problems financing the project.

Quarrels over financing for the pipeline was the main reason the project had been delayed. The original members of the consortium -- Kazakhstan, Russia, and Oman -- were unable to agree on a way to divide the costs.

Bunch said that international financial institutions, such as the World Bank, have made it clear that they support development of the pipeline network in the former Soviet Union. According to World Bank figures, every dollar spent on a pipeline opens up $10 of investment in the energy sector.

Bunch also said the companies joining the Caspian Pipeline Consortium would have no difficulties coming up with the necessary cash. He said that once more countries with deeper pockets are involved, disputes over financing will no longer be a problem.