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Russia: Oil Plan Seen Hurting Both Moscow And Latvia

Russia's plan to take control of Latvia's oil port of Ventspils by withholding crude shipments appears to be hurting its own exports in the near term. Shipments through the underused outlet are down 42 percent as Russian Energy Minister Igor Yusufov prepares to visit for negotiations next week.

Boston, 6 November 2002 (RFE/RL) --As Russia pressures Latvia to gain control of a key oil facility, reports suggest that the tactics are harming the interests of both countries.

Over the past six months, the Russian pipeline monopoly Transneft has slashed oil supplies to the Latvian port of Ventspils in a strategy aimed at taking over the export terminal, oil traders and officials have said. Despite Russia's surge in exports by nearly all routes this year, business has nearly stopped at Ventspils, which once served as a major outlet to Europe.

Last month, the London-based industry newsletter "Petroleum Argus" quoted an unidentified Transneft official as saying that either "Ventspils will dry up," or it "should be controlled by the Russian side."

While exports of Russian and transit oil rose 4 percent in the first 10 months of the year, exports through Ventspils dropped by over 42 percent, the Russian Energy Ministry said on 4 November. In the first nine months, earnings at the Ventspils Nafta enterprise plunged 88 percent to 1.9 million lats ($3.1 million) as revenues of 24.1 million lats slipped 34 percent, according to figures from Latvia's LETA news agency.

But this week, some analysts also saw damage on the Russian side. While stormy weather reduced Russian oil exports in October, the country's oil production kept rising, creating a glut on the home market and threatening a price slide. A Western oil trader quoted by Reuters said the oversupply could have been averted if Transneft had lifted restrictions on shipments through Ventspils.

The trader was quoted as saying, "It is really amazing that Russian oil majors are not yet protesting against Transneft's policies, despite losing huge export possibilities when an oil glut is already knocking at their doors." Ventspils Nafta is scheduled to handle only two oil cargoes this month, Reuters said. Ventspils accounted for 45 percent of the Russian petroleum shipped through the Baltic states last year, based on figures cited by the RosBalt news agency.

Much of the oil missing from Ventspils has been going to Russia's new port to the north at Primorsk on the Gulf of Finland, where Transneft has built a Baltic Pipeline System to bypass ports it cannot control. Last month, Transneft launched a second stage of the system, costing some $300 million. But before that, the chief executive of state-owned Transneft, Semen Vainshtock, suggested that the investment decision could depend on whether a Russian company would control Ventspils Nafta or not.

Next week, Russian Energy Minister Igor Yusufov plans to visit Ventspils to meet with Mayor Aivars Lembergs, LETA reported. Lembergs is said to be a Ventspils Nafta shareholder. A Russian takeover is a likely topic. The issue may also be a subject for Latvia's new government, which is still being formed.

The takeover tactics are also familiar in Lithuania, where Russia's LUKoil withheld oil from the Mazeikiu Nafta refinery and the port of Butinge in 1999. LUKoil competitor Yukos eventually gained control over the facilities in September after the U.S.-based Williams Companies withdrew from Lithuania due to lack of funds.

But the latest Russian move on Baltic oil ports may raise more questions, since Transneft is 75 percent state-owned. It is unclear whether Transneft is acting on behalf of Russia's political or business interests, or both.

Last month, Reuters quoted a Transneft source as saying, "We are not holding direct talks with Ventspils, but Russian firms are pushing us toward buying into the terminal." LUKoil chief executive Vagit Alekperov said, "Transneft's participation in Ventspils's charter capital could help optimize Russian crude exports."

Transneft's agenda is often difficult to read, since it has appeared less cooperative with other initiatives of Russian oil companies. In August, Transneft officials openly criticized a plan backed by LUKoil and Yukos to build an export terminal at the arctic port of Murmansk to serve the U.S. market. Although the proposal has won Russian government backing, Transneft is seen as a reluctant participant, perhaps because it will not control the terminal itself.

Last year, Transneft held up the opening of a $2.5 billion pipeline from Kazakhstan to Russia's port of Novorossiisk for months with arguments over oil quality, tariffs, and how much business it would lose out of its own lines. Although the Russian government was the biggest shareholder in the Caspian Pipeline Consortium, Transneft seemed more intent on defending its own interests.

But in the case of Ventspils, Transneft may well be acting on behalf of interests other than its own. The company borrowed heavily to finance the first stage of the Baltic Pipeline System to Primorsk, costing $430 million. On 5 November, Vainshtock told RBC News that Transneft would borrow almost the entire $316 million needed for the second stage.

In the future, Russian acquisitions at Ventspils and Butinge could compete with those investments. But Russia seems to be showing how much it wants Ventspils by choking it off now, even if it hurts its own exports in the near term.

Primorsk could be troubled by ice in the winter, making Ventspils a valuable asset, and Russia's plans for more oil exports may be driving it to buy up all the ports it can get.