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Russia: Oil Firms Trying To Step Up Exports To U.S.

Russian oil companies are supporting a huge project to ship oil to the U.S. market through the Arctic port of Murmansk. The plan is the first to unite the country's private petroleum giants, but it could face trouble from the Russian pipeline monopoly Transneft.

Boston, 28 November 2002 (RFE/RL) -- Four Russian oil companies pledged yesterday to build a new Arctic outlet that could become their export avenue to the United States.

The project for an oil port at Murmansk on the Barents Sea won backing from LUKoil, Yukos, Tyumen Oil Company, and Sibneft with the signing of a memorandum of understanding in Moscow. The facility, to be fed by a new Siberian pipeline, would open in 2007 and cost between $3.4 billion and $4.5 billion, the group said in a statement. The four firms account for most of Russia's daily oil output of over 7 million barrels. Export capacity is estimated at up to 1.6 million barrels per day.

Russia's oil giants have warmed quickly to the plan for shipments from the ice-free port since LUKoil advanced it during a Moscow summit between presidents George W. Bush and Vladimir Putin in May. The Murmansk initiative is perhaps the most concrete result of an energy partnership declared by the two governments six months ago. The companies said the project could help Russia supply up to 13 percent of U.S. oil imports by 2010, up from less than 1 percent now.

The project is unusual not only because it is aimed at the distant U.S. market. It is also the first in which four leading Russian competitors have cooperated on a joint export investment. Although first greeted with skepticism, the plan appears to have moved faster than many analysts thought.

The group said that two more companies, Surgutneftegaz and state-owned Rosneft, could join their consortium. The Reuters news agency quoted Yukos Chief Executive Mikhail Khodorkovskii as saying, "With more participants we could boost the pipeline and port capacities to about 120 million tons," or about 2.4 million barrels per day.

LUKoil has pressed hardest for a port and pipeline from Siberian oilfields. LUKoil President Vagit Alekperov has said that his company wants to export 15 million tons of oil annually from the Timan-Pechora region through Murmansk and an additional 5 million tons from either the Komi Republic or western Siberia, Interfax reported last week.

Yukos soon followed with expressions of interest and plans for even longer pipelines than LUKoil proposed. Although first reports this week said the group would build a 1,500-kilometer pipeline, the companies are now supporting a plan for a line 2,500 to 3,600 kilometers long to join the main Russian network, Reuters said.

Estimates for the ambitious project have varied widely, but earlier this month, the industry weekly "Petroleum Argus" quoted a LUKoil official as saying that even the smaller pipeline-and-terminal project could cost $5.4 billion. The variations proposed by Yukos with longer pipelines could cost even more, and the lower figures announced yesterday could rise later on.

The deep-water port at the former Soviet naval base has the advantage of being able to handle 300,000-ton tankers. Yukos has already loaded three 100,000-ton test cargoes at Murmansk since October for north European ports.

The concerted action suggests that Russia is driven by the need to develop its Arctic resources as much as the chance to sell them in the United States. Although the Russian companies have appealed for U.S. investment, they also appear willing to go ahead on their own. So far, no foreign partners have been announced.

Khodorkovskii said, "We have to build this route before oil prices collapse. Without new export routes, Russian output will again slide to 6 million barrels per day. This would be against our economic interests, as our oil reserves are simply massive." Russian oil companies are also obligated to sell at low subsidized prices in their domestic market, making exports essential. An increase in home prices to world levels would cut consumption, creating an even greater incentive to sell oil abroad.

But one major uncertainty may come from Russia itself and the role that the state pipeline monopoly Transneft will play. Alekperov has called for a project group that would be modeled on the Caspian Pipeline Consortium, the $2.5 billion link from Kazakhstan to the Black Sea that opened last December. The group may make a good precedent for organization, but it has had a history of trouble with rival Transneft.

Transneft Chief Executive Semen Vainshtock has made clear that he has little liking for the Murmansk initiative, for several reasons. First, Transneft has invested heavily in the new Baltic Pipeline System (BPS) to export from the port of Primorsk on the Gulf of Finland. Earlier this month, Vainshtock told Petroleum Argus that the two routes are in direct competition, saying, "We don't have sufficient crude reserves for both Murmansk and BPS."

Vainshtock warned that a pending approval for a second phase of the BPS project could "ruin" the Murmansk plan. Transneft then proceeded to approve the $200 million expansion of the system, "Petroleum Intelligence Weekly" reported last week.

Secondly, Transneft has argued against a costly project that would depend only on the U.S. market, preferring to build an even more expensive line to Far East ports that could reach other markets, as well.

Thirdly, Transneft wants control over any oil export pipeline to be built in Russia, particularly one that would present so much competition for its monopoly. Vainshtock has said that if Murmansk is built, Transneft should serve as "state agent in the project" with state support, "Petroleum Argus" reported.

Yesterday, Sibneft President Eugene Shvidler said, "I'm sure the number of participants will grow, and Transneft is likely to operate the project." But Khodorkovskii argued that the pipeline must remain a private venture with control over its own rules and tariffs. The issue could take some time to play out.

Even if agreement is reached with Transneft, it is unclear how long it will last. In the case of the Caspian Pipeline Consortium, officials said this month that the project has suffered from constant attempts to subject it to Russian monopoly laws, tariff regulations, and taxation, even though legal agreements were supposed to make it exempt. The Murmansk project will have to find a way to avoid the same traps before private companies invest.