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Russia: Oil Companies Shift Toward U.S.-Backed Routes

Russia's Yukos oil company is said to be seeking a share in the Baku-Ceyhan pipeline. The decision follows reports that Russia's LUKoil is also considering an investment in the project.

Boston, 15 January 2002 (RFE/RL) -- Russia's second-largest oil company has reportedly shown interest in joining the Baku-Ceyhan pipeline project, continuing a shift toward accepting the U.S.-backed route from the Caspian Sea.

Last month, Russia's Yukos wrote to Azerbaijan's state-owned oil company SOCAR seeking a role in the pipeline, according to Azerbaijan's Turan news agency. Yukos is said to be ready to finance a 12.5 percent share of the $2.8 billion project, which is scheduled to start construction this year.

Yukos told Turan it is studying routes from the Caspian region and opportunities in Azerbaijan. The interest of Russia's biggest oil company, LUKoil, has also been reported for several months. Last month, LUKoil's president Vagit Alekperov said the company would take a 7.5 percent stake in the venture, if it gets approval from the Russian government.

The reports seem to be signs of a gradual but steady change in Russian attitudes toward the 1,730-kilometer pipeline, which is planned to run through Georgia to Turkey's Mediterranean port of Ceyhan.

Last May, Russian Deputy Foreign Minister Ivan Ivanov gave the first indication that Moscow might soften its opposition to the pipeline, despite its preference for transit on its own territory. Speaking at a conference in Turkey, Ivanov said Russian companies would be allowed to join in construction, even though he continued to argue against the route.

As reported by the "Turkish Daily News," Ivanov said: "We say that the line is not economic. You can go on with the construction of the pipeline. Our firms are ready to take part in the construction. And we will not assert any political conditions for this."

The statement seemed to mark a new stage in the evolution of Russian policy from outright opposition, to competition, and finally to acquiescence as the project moves toward reality. But despite U.S. arguments that Russian companies may find the route to be a useful option, the final word on participation has been slow in coming.

In the seven months since Ivanov's statement, LUKoil has repeatedly hedged on a commitment to the pipeline. In late December, Alekperov issued a statement saying that reports of a decision were premature and conditional.

Alekperov said, "We do not rule out a positive answer to the company's participation in the Baku-Tbilisi-Ceyhan main export pipeline, provided there is recognition of its economic efficiency and approval by the government of the Russian Federation for participation in the project," Azerbaijan's Mediapress reported.

Azerbaijani officials, including SOCAR's vice president Ilham Aliev, have been talking with LUKoil for months about a role in the pipeline. Last month, Aliyev told Azerbaijan's ANS television that "in all likelihood, they will join." LUKoil has held a 10 percent share in Azerbaijan's major offshore oil project since 1994.

Britain's BP oil company, which is leading the pipeline consortium, said last month that it welcomes LUKoil's interest. But officials added that the project will be successful whether the Russian firm joins it or not.

It is notable that the reports on Yukos' interest in the pipeline have not included any reservations based on Kremlin approval. The Russian government holds 15.5 percent of LUKoil, while Yukos is fully privatized.

Russia is still likely to be sensitive about the line, which competes with its preferred route from Baku to Novorossiisk. But the Black Sea port, which is often closed by winter storms, also serves as the outlet for a new Caspian pipeline from Kazakhstan which crosses Russian territory and was backed by the United States.

Early last month, Russia's Caspian envoy, Deputy Foreign Minister Viktor Kalyuzhny, denied in an ANS interview that he had spoken against Baku-Ceyhan during a State Duma session, when the pipeline was reportedly criticized for running counter to Russian national interests.

Russian oil companies may now see the merit of alternatives for their Caspian investments. LUKoil and Yukos are competitors, but they are also partners in the Caspian Oil Company, a venture in the northern Caspian. The Russian government estimates that its sector contains 4.4 billion barrels of oil reserves.

According to Interfax, Yukos has also offered to help upgrade shallow-water production at Azerbaijan's Guneshli field, which accounts for much of SOCAR's output.

Perhaps most important, Russia's big oil companies now have investment capital which could be frozen out of a profitable project in the region unless they act soon.

Last month, LUKoil vice president Jevan Cheloyants told a press conference in St. Petersburg that a new feasibility study showed an increase in the pipeline's profitability from 16 percent to 24 percent.

Since some of the risk may be due to Russia's opposition, the decisions of the Russian oil companies could prove to be a big break for the project.