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Russia: Pipeline Projects To Remain Under State Control

Russian Prime Minister Mikhail Kasyanov has told private oil companies that their pipeline projects will remain under state control. The statement is seen as a victory for the pipeline monopoly Transneft, but it could complicate export policies toward countries including the United States, China, and Japan.

Boston, 13 January 2003 (RFE/RL) -- Prime Minister Mikhail Kasyanov may have declared Russia's policies toward its oil industry and several foreign nations simultaneously with a statement supporting Transneft, the state pipeline monopoly.

During a visit to the arctic port of Murmansk, Kasyanov announced that all oil pipelines built in Russia "would remain state property," the official RIA-Novosti news agency reported. The decision means the government would give Transneft control over a $4.5 billion pipeline to Murmansk that private oil companies are planning for exports to the United States.

Kasyanov said that private investment in the project could give the companies lower tariffs for their oil transit, but it would not give them control. The stand is bad news for the companies, who are reluctant to stake billions of dollars on pipelines if the state can raise the transit fees.

The Kasyanov statement came a day after the Interfax news agency reported that five oil companies had sent him a letter, complaining about Transneft's stranglehold on oil exports. The firms specifically cited Transneft's refusal to allow exports through the Latvian port of Ventspils, but three of the firms -- LUKoil, Yukos, and Tyumen Oil Company -- are also investors in the Murmansk plan.

The issues at the two ports are linked because Russia's growing oil companies want an open market for exports at a time when production is rising at a 9 percent rate and Russia's outlets are unable to keep pace. The result has been an oil glut on the Russian market that has driven prices as low as $4 per barrel, while world prices have soared to more than $30 per barrel.

In the meantime, Transneft has been doling out export allocations and pursuing an agenda that has appeared to be all its own. Analysts say it has cut off Ventspils for months in a bid to control it, while the oil companies need all the export capacity they can get.

In their letter to Kasyanov, the private companies were joined by state-owned Rosneft in saying, "This is having a negative influence on the possibility for growth in production, and as a result, is causing significant losses to the federal budget."

The group added, "Further restrictions in sales will unavoidably lead to more serious consequences, right up to the stoppage of wells, which in winter conditions is extremely undesirable." Transneft has also opposed the private Murmansk project, which some analysts have suggested was intentionally designed to break Transneft's grip.

Last week, it seemed that the companies had picked a perfect time to take on Transneft. Earlier this month, Russia agreed to cooperate with Saudi Arabia and the Organization of Petroleum Exporting Countries to boost output and ease a world oil squeeze, caused by strife in Venezuela and possible war with Iraq. The companies implied that Transneft would frustrate that goal.

But the timing may also have been aimed at influencing yet a third Russian policy, in the Far East, where Yukos and Transneft are also at odds. Yukos has been seeking support for a project to build a privately controlled oil pipeline from Angarsk in the Irkutsk region to China's oil center at Daqing. Russian and Chinese leaders have embraced the $1.7 billion plan at a series of summits in the past three years.

But Transneft has opposed it, arguing that a much longer and more costly line should be built instead to the Far East port of Nakhodka, where exports could serve Japan, South Korea, and perhaps the United States. After Japanese Prime Minister Junichiro Koizumi met with President Vladimir Putin in Moscow last week, the two countries agreed to "study the expediency" of the $5 billion project. But they defied press predictions that a deal would be signed.

The reason is that the issue is far too complex to settle so easily. Putin will be wary of offending China after signing protocols for the Daqing pipeline, and Irkutsk does not have enough oil for both China and Japan. At the same time, Putin is likely to see the Yukos plan as another attempt to evade Transneft and state control.

Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, said: "Transneft is the Russian government's final lever over the private oil companies. It certainly seems to have emerged as the winner in that it epitomizes Putin's goal to have a strong center controlling the important oil resources."

But it is unclear whether the government will support both Transneft and all of its plans. It may be one thing to keep control over Russia's oil exports and quite another to give the pipeline monopoly so much political power. Transneft's push for exports to Japan rather than China, as well as its maneuvers against exports through Latvia and Murmansk, all suggest that it has been trying to drive export policy for its own purposes instead of simply doing the government's will.

The government may also find that it cannot afford too many disincentives to private investment without harming the oil companies which are Russia's main source of revenue.

In coming weeks, Putin may have to make clear how far Kasyanov meant to go on behalf of Transneft by deciding where Russia's oil exports should go.