BPS-2 -A New Russian Oil Pipeline Which Might Not be Needed

by Roman Kupchinsky
On June 10, 2009 the construction of the Baltic Pipeline System (BPS-2) got underway. The 1,170 km long pipeline will run from Unecha in the Bryansk Region to the Ust-Luga oil terminal south of St. Petersburg. The first stage with an annual capacity of 30 million tons is scheduled to be completed in September 2012. The second stage will increase capacity to 50 million tons and is due to be ready by the end of 2013.

In February 2007, Semyon Vainshtok, the-then head of Transneft, the operator of the BPS-2 pipeline, issued a statement saying that it was necessary to “protect the country” from the risks involved in transporting oil through the territories of neighboring countries. Earlier that year, a dispute occurred between Russia and Belarus over tariffs for oil transported via the Druzhba pipeline. “We discussed with colleagues that if we had had no risks with neighboring countries, we did not have to spend so much money,” Vainshtok said.

By ending Moscow’s dependence on Belarus as a transit country for Russian oil as well as relying on Ukraine’s oil terminal in Pivdenny on the Black Sea, Russia will deprive the badly starved Belarus treasury of some $1 billion annually in transit fees. At the same time, the Ukrainian Pivdenny oil terminal will most likely stand empty and the Odessa-Brody pipeline, originally built to ship oil from the Caspian to the Plock refinery in Poland will rust in the picturesque Ukrainian countryside if it cannot find a supply of oil.

Other factors also contributed heavily to the hurried pace of preparations of BPS-2, not least of which is the self-interest of some members of the Russian political and commercial elite who lobbied extensively for the project. Gunvor, a company which has often been linked in the media to Russian Prime Minister Vladimir Putin who is reputed to have a close relationship with Gennadiy Timchenko, a co-owner of Gunvor, obtained a majority interest in the oil terminal being built in Ust-Luga in March 2009.

Ust-Luga will become the biggest outlet for refined products in the region, with a spur line connecting the port and crude pipeline to the Kirishi refinery, owned by Surgutneftegaz. Kirishi is more than 100 kilometers to the east of Ust-Luga.

A report released by Moscow investment bank Troika Dialog in December 2008 criticized the Gunvor scheme for Ust-Luga as “politically-driven…It is unclear where Transneft intends to find oil for the new pipeline, given declining oil production and exports and already ample spare capacity in the pipeline system. Moreover, some 450,000 bpd of West Siberian crude will be re-routed to fill the first phase of the Eastern Siberia – Pacific Ocean (ESPO) pipeline. Transneft therefore faces the prospect of paying up to $5 billion for a project that would bring no additional revenues.”

In April 2008 Russia’s Ministry of Industry and Energy submitted to the government its negative conclusions regarding the pipeline; however their reservations took second place to the geopolitical motives and the personal interests of the Russian elite.