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Russia: Oil Giant, Pipeline Monopoly At Odds

Russian oil giant Yukos has sharpened its attacks against the state-owned pipeline monopoly Transneft and government policy, threatening to withhold production unless new export outlets are built. While consuming countries look to Russia as an alternative to the Middle East, conflicts have erupted within the country over attempts to control its private oil interests.

Boston, 29 January 2003 (RFE/RL) -- Russia's richest oil baron has stepped up his revolt against the state pipeline monopoly Transneft, suggesting that he may cut production unless he can build privately owned export routes.

In an interview with the Reuters news agency last week, Yukos chief executive Mikhail Khodorkovskii said Russia stands to lose up to 1 million barrels in oil exports per day if prices drop before the country builds new pipelines. Some analysts have predicted that prices could soon slide below $20 per barrel if the crisis over Iraq is resolved. Khodorkovskii argued that such low-priced oil would be too unprofitable for Russia's second-largest oil company to ship by rail. "This oil will simply remain underground because I won't produce unprofitable crude," he said.

The concern about a future price plunge is Khodorkovskii's latest tack against Transneft and its dominance over the newly rich oil industry. Yukos and other independent companies have been locked in a struggle to develop new, privately run pipelines outside the Transneft network, which has been at or near capacity for most of the past year.

The independents hope to shake off Transneft's grip over export volumes and transit fees, which has backed up their oil and flooded the low-priced domestic market. On 27 January, the Russian investment bank Troika Dialog estimated that only 440,000 barrels of oil per day can bypass Transneft, compared with Russia's daily output of some 8 million barrels.

The issue is important at a time when Russia has risen to become the world's second-biggest producer after Saudi Arabia and a potential alternative if supplies are disrupted in the Middle East. But within Russia, the conflict has turned into a clash of titanic forces, creating splits with and within the government.

Khodorkovskii, with a reported net worth of $8 billion, often cites the need to consult with attorneys before speaking. But in recent days, he has cast caution aside, attacking both Transneft and government policy.

At the World Economic Forum in Davos, Switzerland, Khodorkovskii told a reporter that Russia was slipping toward "a Saudi Arabian-style government" with its excessive bureaucracy. Referring to Transneft, he said: "If the state knows better where to ship crude, I don't oppose [it], if it invests money and builds new pipelines. But don't tell me where to invest my money. I have my own plans, and I'm ready to take risks."

Khodorkovskii added: "I thought the state acknowledged a long time ago that the private sector is more effective than the public sector. But the pipeline issue became a stumbling block."

The reason for the frustration is that Transneft has blocked Yukos and other oil majors on several fronts at once. It has opposed a Yukos plan to build an eastern Siberian oil pipeline to China that would be privately operated. Instead, Transneft would build a $5 billion line to take the oil from Angarsk to the Pacific port of Nakhodka for sales to Japan and other countries.

In the west, Transneft has tried to block a private pipeline project for exports through the arctic port of Murmansk by expanding a Baltic pipeline system to Primorsk on the Gulf of Finland. This week, the Energy Ministry supported the $1 billion Transneft plan, paving the way for a government decision by April. Transneft officials have said that the project would take the oil that would otherwise go to Murmansk.

Transneft has also resisted all appeals from the companies to ship oil through Latvia's port of Ventspils, which offers one of the region's few outlets with unused capacity of 320,000 barrels per day. But Transneft has starved the port for months in hopes of winning an interest in its export terminal. "The Moscow Times" reported that the oil companies have written to the government four times in the past two weeks to protest the Transneft tactics.

But so far, Prime Minister Mikhail Kasyanov has backed Transneft, telling the official RIA-Novosti news agency on 10 January during a visit to Murmansk that "all oil pipelines under construction in Russia would remain state property." Other reports suggest even more bad news for the companies.

Last week, the industry newsletter "Petroleum Argus" reported that Natural Resources Minister Vitalii Artyukhov has proposed a plan for developing east Siberian oil and gas that includes "full state control over extraction and exports." Artyukhov is said to have written to Putin, seeking a decree to impose control over the resources and charging that private companies "have been violating license terms. The plan may amount to nothing less than re-nationalization."

While the government is unlikely to go that far, the proposal seems to be another sign of the counteroffensive against privatization and the growing power of the oil companies. Firms like Yukos may be kept busy fending off such threats while they seek to pull the government in the direction of open markets. Given Russian President Vladimir Putin's past reluctance to get involved in such battles, the result may be no gains on either side.