Publication: Eurasia Daily Monitor Volume: 4 Issue: 102

Armenia targeted by Kremlin gas diplomacy

On May 21, the Russian government announced its final approval of the second trunk line of the Baltic Pipeline System (BPS-2) for oil export from Russia’s port Primorsk through the Baltic Sea and the North Sea.

This is Russia’s fifth major move within ten days to capture or monopolize energy transit routes outside Russia or kill projected routes that are not under Russian control. Through agreements signed on May 11 and the following days, the Russian state cemented its monopoly on gas pipelines out of Turkmenistan, Kazakhstan, and Uzbekistan and near-monopoly on oil exports from Kazakhstan; and it defeated conclusively or almost conclusively the Western-backed Odessa-Brody-Poland oil pipeline and trans-Caspian gas pipeline projects. Russian President Vladimir Putin comes prepared for a coup de grace to the Nabucco gas pipeline project when he visits Austria on May 22-23.

The BPS-2 pipeline is intended to redirect Russian oil exports toward the Baltic Sea at the expense of the existing Druzhba pipeline, which runs (with ramifications) through Belarus, Ukraine, Hungary, Slovakia, the Czech Republic, Poland, and the eastern part of Federal Germany. The new line would, however, run through Russian territory northward to the Baltic sea, instead of transiting those countries.

Signed by Prime Minister Mikhail Fradkov, the decisions on May 21 approved the BPS-2 blueprint prepared by the Industry and Energy Ministry and the pipeline monopoly Transneft and instructed them to proceed with the engineering work. Transneft will be mainly responsible for the construction. According to the company’s vice-president, Sergei Grigoriyev, the pipeline can be completed within 18 months. The construction cost is estimated at $2 to $2.5 billion.

The throughput capacity of BPS-2 will be 50 to 75 million tons annually, aiming to match the existing 75 million ton capacity of the BPS-1 system, which runs from Russia’s interior to Primorsk and was completed in 2006. The port of Primorsk is being correspondingly enlarged for an uploading capacity of 150 million tons annually, to be shipped through the Baltic Sea by tankers. This figure is twice the annual volume of Russian- and Russian-loaded oil transiting the Bosporus, three times the volume shipped annually from Novorossiysk, and three times the capacity of the Baku-Ceyhan pipeline.

The Druzhba pipeline carries some 75 to 80 million tons of oil annually, tending slightly downward since July 2006 when Russia stopped oil deliveries to Lithuania through a Druzhba spur for political reasons. Moscow apparently intends to redirect up to 50 million tons from Druzhba’s main trunk line into BPS-2. The new line would branch off from Druzhba at the Unecha junction, on the Russian side of the Russia-Belarus border. Skirting Belarus territory it would run northward for almost 1,000 kilometers through Russia’s Bryansk, Pskov, and Leningrad oblasts to Primorsk.

Furthermore, Transneft plans to build a pipeline link from BPS to the Surgutneftegaz company’s Kirish refinery and connect the latter with Primorsk. Almost certainly, Moscow also counts on some volumes of oil from Kazakhstan in order to attain the 150 million ton capacity target for BPS and the port of Primorsk.

The European Union has yet to assess the environmental and navigation-safety risks posed by oil tanker traffic on such an unprecedented scale in the Baltic Sea. Meanwhile, Belarus is the first country affected by the planned cutback in Russian oil deliveries through the overland Druzhba pipeline.

Minsk’s first reaction was to seek an oil concession in Russia and alternative sources of oil supply in Venezuela and Iran. This issue figured prominently on the agenda of Iranian President Mahmoud Ahmadinejad’s May 21-22 visit to Minsk (Belarus Television and Radio, May 21-22). Those ideas were nonstarters because of distance from the sources, the landlocked position of Belarus, and its lack of investment capital for such ventures.

Meanwhile, Russian oil-producing companies that traditionally refined their oil in Belarus and selling the products to nearby EU countries have significantly reduced those operations in Belarus. This is a result of Moscow’s introduction in January 2007 of a new taxation regime that cuts deeply into the profit margins (see EDM, January 8-11). With the state budget thus deprived of its most lucrative source of revenue, Belarus is seeking a Russian loan of $1.5 billion for budget- and balance-of-payments support.

Minsk is now being driven to the extreme of selling off stakes in the Navapolatsk and Mazyr refineries, the country’s most lucrative business entities prior to January 1. According to First Deputy Prime Minister Uladzimir Syamashka, the government will first offer a 10-15% stake in the Navapolatsk refinery. The government’s criteria for selecting investors include: ability to guarantee full supplies of crude oil to the refineries; capacity to invest substantially for the refineries’ modernization; and guaranteed access to markets in nearby EU countries for the refined products. These criteria seem to predetermine selling the refineries to Russian companies. Such may have been the intent of Russia’s new tax regime from its inception.

(Interfax, Belapan, May 21-22)