Russia pushing Chechen bypass for Baku-Novorossiisk line

Nov. 15, 1999
Russia is moving forward with plans to reroute its Baku-to-Novorossiisk oil pipeline around Chechnya.

Russia is moving forward with plans to reroute its Baku-to-Novorossiisk oil pipeline around Chechnya.

The pipeline has been a frequent target in recent years. Tapping of the line in order to steal crude oil has been common in Chechnya, leading to repeated interruption of oil shipments. In fact, the line has been out of commission for much of this year.

Although some care was taken to avoid irreparable damage to the Chechen section of the pipeline during the 21-month conflict between Russia and Chechnya that ended in 1996, press reports indicate that large sections of the line have been destroyed in recent fighting.

Russia is keen to improve the reliability of shipments on the pipeline, as it is one of three routes being considered by the Azerbaijan International Operating Co. consortium for exporting oil produced in the Azeri sector of the Caspian Sea (see story, p. 23).


One of the first tasks given to Semyon Vainshtok after he was installed last year as chairman of Transneft, Russia's state oil transport company, was to start work on the bypass project under orders from Prime Minister Vladimir Putin.

The bypass project would pay for itself in 5-15 years, says Russian Fuel and Energy Minister Viktor Kalyuzhny. The pipeline, which would traverse Dagestan, could be financed with an investment tariff, he added. But no decision on this has been made, and the issue of financing remains open.

The 250-km pipeline around Chechnya would cost $200-250 million, the Fuel and Energy Ministry estimates. But Russia's plans for financing the bypass have so far been problematic.

The government considered the possibility of using money raised for its planned trans-Baltic pipeline to finance the Chechnya bypass. But it was decided that the Baltic project is a priority and that the funds collected for it should be used as intended.

An appeal from Transneft for financial support from Azerbaijan, Turkmenistan, and Kazakhstan-potential suppliers of oil to the pipeline-has gone unheeded. Kalyuzhny later said the pipeline could transport oil from Turkmenistan but would not carry Kazakh oil.

On Oct. 19, Interfax quoted Vainshtok as saying that Russia's Sberbank and the European Bank for Reconstruction & Development (EBRD) had agreed to guarantee $120 million in funding for the project. But even if that were approved, it would fall short of the required capital.

An EBRD official in London said that Russian reports of a financing deal were "premature." The official said, "We are in talks on this project but cannot at the moment even confirm the tentative time frame when the project will be presented to the board."

On Oct. 26, Transneft Deputy Director Sergei Ter-Sarkisyants said the company had lowered the cost of the bypass to less than $100 million and could provide at least half of that sum from its own funds.

An earlier bypass plan, introduced in 1997 and estimated to cost $220 million, was supposed to be backed by an issue of Euro- bonds. Such financing of the current bypass project now appears out of the question because of the limited market for new Russian debt, as well as the risk involved.

The 1997 bypass plan was quietly dropped after Chechen officials agreed to provide security for the reconstructed line through their territory. Those arrangements broke down amid widespread lawlessness in the enclave and charges that Russia failed to honor its pledges of reconstruction aid to Chechnya (OGJ, July 26, 1999, Newsletter).

But now, given the reported destruction of the old pipeline, Russia seems to have closed the door on the possibility of going back to the route through Chechnya. If that is the case, Russia has staked much of its Caspian strategy on the success of the bypass. Both the financing and the future of the plan remain in doubt.

Russia says that it has already produced a large quantity of pipe for the construction project, which it expects to take 6 months. The schedule for completion of the bypass could provide a clue to Russia's intentions in the Caucasus, because it presumes that peace will return to the region and that pipeline construction and operation will be secure. If that is the case, a substantial troop presence could be required to guard against disruption indefinitely.