Since the beginning of 2003, Russia's oil pipeline monopoly AK Trans- neft has demonstrated its growing influence, resisting pressure from oil companies and winning support from key government officials, including Prime Minister Mikhail Kasyanov. In early January, Kasyanov ruled out the possibility of private oil pipelines such as those contemplated by Russia's oil majors. The government also approved of Transneft's decision to halt Russia's oil exports through Latvia.
These developments clearly benefit Transneft at the expense of oil exporters and the state budget. Private oil pipelines—in particular the one linked to the proposed Murmansk terminal project—may be delayed, although the oil companies will likely accept lower returns and greater state control to proceed with this project(OGJ.Online, Nov. 27, 2002).
Construction of private pipelines
On Jan. 10, Kasyanov made an unusually poignant statement opposing private oil pipelines in Russia. The remarks were directed against two major projects: the 1.6 million b/d Murmansk pipeline, supported by a consortium of OAO Lukoil, OAO Yukos, Tyumen Oil Co. (TNK), and OAO Sibneft; and the 600,000 b/d Angarsk-Daqing project in Eastern Siberia being developed by Yukos. Transneft opposes both projects and has designed a rival pipeline plan in Eastern Siberia, taking the oil to the Far Eastern port of Nakhodka.
Although the fear of losing state control over the pipeline network is irrational, Transneft has pulled off a successful maneuver. It now proposes to operate and own the pipelines constructed with the private companies in return for a lighter tariff (which it promises to determine in the future). The oil companies have found themselves in a difficult position. As Nikolai Fetisov, vice-president of Trust & Investment Bank in Moscow points out, the government will seek to provide equal access to all pipelines for all producers, making it difficult for the consortium to commit the financing.
Furthermore, oil companies have laid their cards on the table, proposing the Murmansk project themselves. Previously, they sought to resist Transneft's projects, arguing against their economic viability. This time, they likely will have to pay up, even if the state ends up owning and operating their capital projects. It is unlikely that the project will be abandoned. As Fetisov notes, "both sides have high strategic interests in new pipelines, and the compromise would eventually be found."
Russia's oil exports through Latvia
Another rebuff to oil majors came in mid-January, when Kasyanov tacitly approved Transneft's decision to stop Russia's oil transit through the Latvian port of Ventspils.
Media reports have suggested that Transneft may seek to take over Ventspils, as the Latvian government plans to sell its 42.68% stake in the port this year. Seemingly in pursuit of this aim, Russian exports have been diverted to the newly constructed port of Primorsk on the Baltic Sea (the endpoint of the Baltic Pipeline System), while Transneft steadily reduced exports to 80,000 b/d in fourth quarter 2002 through Ventspils from about 1 million b/d in 2001. On Jan. 1, Transneft ceased exports to Ventspils altogether, citing "technical reasons."
The decision evidently hurts not only oil companies but also the state budget, which will receive reduced revenue from oil exports. Major Russian oil companies face increasing export constraints. It was reported at the end of January, for instance, that Surgutneftegaz had seen some 500,000 tonnes of oil refused from the Transneft system because the company was unable to declare a destination for the crude. There were further indications that Surgutneftegaz has an even larger shipment of undistributed crude in the pipeline system.
The companies responded to the Ventspils pipeline shutdown by increasing more-expensive shipments by rail. Nevertheless, after Russian oil majors wrote a letter to Kasyanov in mid-January requesting him to open up the valuable export channel, the prime minister refrained from action. Later, Vice-Premier Viktor Khristenko presented the government view in support of Transneft.
Conclusions
These two episodes demonstrate the continued primacy of political interests over business or economic factors in Russia's oil industry. Although shutting down exports and banning expansion of throughput capacity seem absurd, given the current price environment and constraints, they fall neatly into the logic of the Russian political game.
Transneft's influence is on the rise even if others, including the state through the budget, have to pick up the tab. Private pipeline projects may be delayed, but it will take a lot more on the part of Transneft to derail them altogether.
The author
Alexander Zaslavsky is director of consulting for Eurasia Group. He specializes in the politics of Russia and the CIS, focusing on the energy sector and foreign investment. In Eurasia Group, Zaslavsky oversees development and production of research publications, multiclient studies, tailored reports, and presentations. He also directs the company's Russia Practice Group. Zaslavsky has held research appointments at Yale University and the Kennan Institute in Washington, DC. His business experience includes work for SBC Warburg's corporate finance department in London and service as advisor to the administration of a major region in Russia. Zaslavsky has a doctorate in international relations from Nuffield College, Oxford University and a BA from University College, Oxford University. He publishes regularly on Russian and international politics and is a frequent contributor to CNN, CNBC, and BBC television networks.
