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Russia: Government Seeks Compromise With Big Oil Companies

The Russian government stressed compromise with the country's oil companies this week after rising tensions over plans to build private export pipelines. But the state monopoly Transneft blasted a project for the Arctic port of Murmansk as potentially illegal, challenging both the companies and the government to make tough decisions that could set the course for investment in the industry.

Boston, 31 January 2003 (RFE/RL) -- The Russian government and private oil companies both tried to cool down their confrontation over exports this week, but the state pipeline monopoly Transneft continued to throw fuel on the fire.

After two months of conflict over plans to increase exports with privately owned pipelines and port facilities, the government took the unusual step of denying on 29 January that there has been any battle with Russia's independent oil giants.

Government spokesman Aleksei Gorshkov said, "There is no confrontation at all," the official RIA Novosti news agency reported.

Gorshkov was responding to a "Wall Street Journal" report on a struggle between the state-controlled pipeline operator Transneft and independent oil companies, which has threatened to turn into the biggest issue for the Russian oil industry since the 1995 loans-for-shares scheme gave rise to most of the firms.

Oil majors like Yukos were first encouraged by the government to invest in new production, helping to pull Russia's finances back from oblivion following the 1998 ruble collapse. Last year, the government again touted the capacity of the companies in offering the West an alternative to the Organization of Petroleum Exporting Countries, when it cut oil exports to drive up the price.

Last November, the companies took the next step in building their empires by banding together to build a pipeline and terminal for the Arctic port of Murmansk to export more oil to the West in a project costing up to $4.5 billion. But Transneft stepped in to fight the plan, seeing it as an attempt break its monopoly. The companies are now balking at investing billions of dollars if Transneft can set export volumes and transit fees at will.

Transneft and Yukos are locked in a nearly identical match in the Far East, where the nation's second-largest oil company is trying to build a privately run pipeline to China. Transneft wants to build its own line for the same resources to a port that would serve Japan and other countries instead.

The government has been caught in the middle, dealing with the consequences of its own private enterprise policies while refusing to give up state controls over oil exports. So far, the government has tried to keep a foot in both worlds. The fear is that oil could rush out toward markets that are willing to pay higher prices, leaving the low-priced Russian market with a shortage instead of the glut it has now.

Speaking to reporters in Moscow, Gorshkov specifically denied that the cabinet had rejected the plan to expand the pipeline system and insisted that the companies had not pressed for control over their new projects. He suggested instead that the companies could get greater access to the new facilities and better rates. Gorshkov noted that pipeline privatization in Russia remains illegal, but he added that "the cabinet is ready to cooperate with private capital in implementing projects of [the] building of export pipelines."

The Reuters news agency quoted unnamed industry officials, who hailed the government's tone of flexibility. Deputy Prime Minister Viktor Khristenko is due to meet with the companies today (31 January) to discuss a 300,000-barrel-per-day boost in exports on sections of the main Druzhba pipeline, a plan that would not entail compromise of Transneft's power. Reuters quoted one company official as saying, "The fact that the government agreed to meet us is already positive."

Some companies seem glad to turn down the level of confrontation after Yukos chief executive Mikhail Khodorkovsky suggested that he would cut some production unless he could build new export pipelines. But the slight increase under discussion is unlikely to provide a solution to the conflict over privatization.

This week, the RosBalt news agency reported that the group of five oil firms behind the Murmansk project has already chosen a contractor for the pipeline from the Kola Peninsula. The Starstroy company, which has worked on Sakhalin Island projects in the Far East, has been chosen to develop a line that would eventually carry up to 120 million tons of oil per year, or 2.4 million barrels per day.

The huge size of the plan may be a sign of why Transneft has put up so much resistance. This week, Transneft Vice President Sergei Grigoriev said the company would have "no part" in the project, RosBalt reported. Grigoriev said dismissively, "The project is being developed by oil companies in order to pressure the government, and we stay out of politics. There is no project yet. All there is so far is intent, while the oil companies are not yet even certain about the route."

Grigoriev said the companies want to force the government to lower export tariffs or "slip from under the government's control altogether, as concerns exports."

Grigoriev challenged both the practicality and legality of the private plan, noting that only 30 percent of Russia's oil output can be exported under the law, while Russia will produce no more than 450 million tons of oil by 2010. Besides, Transneft is promoting an export route through the Gulf of Finland that it hopes will draw away any new growth.

But Transneft and the law may be precisely what the companies are challenging in a confrontation where the pipeline monopoly seems to be acting as a competitor to the private firms. If the companies succeed, they could also take on the gas monopoly Gazprom, which would force them to sell all their gas in the domestic market rather than allow access to pipelines for export.