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Russia: Moscow Clears Way For Oil Pipeline To China

Russian Prime Minister Mikhail Kasyanov said this week that the government will clear the way for an oil pipeline to China, ending months of struggle over a rival plan for Japan. He also signaled approval for an export plan aimed at the United States, handing a victory to private oil companies in their battle with state monopolies over new export routes.

Boston, 1 May 2003 (RFE/RL) -- The Russian government seems to have ended months of arguments and infighting over its energy policies, clearing the way for new oil routes to China and the United States.

The decisions announced this week by Prime Minister Mikhail Kasyanov signal a victory for privately owned Russian oil companies and their plans to invest billions of dollars in new export outlets. As a result, Russia's monopolies and state-owned companies appear to have suffered blows on two fronts at once, boosting private investments in the west and the east.

On 29 April, Kasyanov told Russian news agencies that the government had decided to back a plan by the private producer Yukos to pipe oil from eastern Siberia to China's petroleum center of Daqing. The decision means the government will put off a rival project for the Japanese market indefinitely, despite intense bidding from Tokyo to pull the oil its way.

ITAR-TASS quotes Kasyanov as saying, "We have resources only for Daqing." Kasyanov said that a 3,800-kilometer line for Japan from the Irkutsk region to the Far East port of Nakhodka could be built only after more oil is found and the China market is served.

The defeat of the Japan plan marks the end of a long tug-of-war for East Siberia's oil and a setback for Russia's state-owned interests on several counts. Although Moscow had pledged to build a 2,400-kilometer line from Angarsk to China in 2001, the state pipeline monopoly Transneft lobbied against it, arguing that Russian interests would be better served by a longer line to the Pacific coast at triple the cost.

The logic of the improbable $5.2 billion project was that the oil could reach many markets instead of being captive to the whims of a single Chinese buyer. Japan added to the allure by offering to finance the whole thing. Transneft was also driven by fears that a private line controlled by Yukos, the first of its kind, would punch a hole in its monopoly over Russian exports.

But the real force behind Transneft's arguments may have been other interests, including gas monopoly Gazprom and the state-owned oil company Rosneft. Analysts said that both saw the Nakhodka line as a giant wedge for promoting their interests in the Far East. They were joined by at least one private investor, the Tyumen Oil Company (TNK), in calling the Pacific route "the most promising from the viewpoint of the country," RBC News reported in February.

Analysts suspected that Gazprom and Rosneft were behind a series of recent challenges to Yukos production licenses in the region, which have been pursued by a Ministry of Natural Resources task force.

On the other side, the government had to deal with the diplomatic damage of disappointing Beijing, since only enough oil has been discovered for the 600,000 barrels a day it has promised to China -- far less than the 1 million barrels needed to justify another line for Japan.

This week, Moscow also made clear that it had taken a dim view of Japan's terms for the loans, which included a Russian government guarantee. A government source told Interfax that the demand was "unacceptable." The reaction suggests that the government refused to be liable for a project that it saw as financially suspect, since it would have to pay for the losses if the pipeline could not be filled.

A final factor may have been the announcement on 22 April that Yukos would join with fifth-ranked Sibneft in a $35 billion merger to create the world's fourth-largest oil company. Kasyanov called it the new "flagship" of the Russian industry in a sign that Moscow now sees the country's interest in promoting private enterprise and investment. That conclusion may have been long overdue, since the growth of Russia's oil output has outpaced its ability to export and state-owned enterprises lack the funding to fix the problem.

That sense may have spilled over onto another Yukos-backed plan for the Arctic port of Murmansk, which has also been opposed by Transneft. Private companies, including TNK, would build an ambitious pipeline and terminal project costing up to $4.5 billion and aimed at serving the European and U.S. markets. The companies hope to provide 10 percent of U.S. imports.

Despite Transneft's concern about opening another crack in its monopoly power, Kasyanov confirmed this week that the government has become more flexible about privately financed export projects. Kasyanov said that "the state can control the pipeline system not only as property," RIA-Novosti reported. He added that the government might look for "some or other way of regulation or payment."

On 17 April, Energy Minister Igor Yusufov suggested that the government would clear the way for Murmansk by announcing it would launch a feasibility study for the pipeline and port plan. This week, Kasyanov went further by predicting the outcome, saying, "I think the studies will confirm the advisability of building the pipeline."

Speaking at an International Energy Agency meeting in Paris, Yusufov made clear that the government has no plans to abandon its regulatory powers, but it may now see few benefits for Russia in frustrating the growth of the private oil industry.