Publication: Eurasia Daily Monitor Volume: 4 Issue: 115

In a wide-ranging news conference during the Economic Forum just held in St. Petersburg (Interfax, June 10), Transneft president Semyon Vainshtok outlined the state pipeline monopoly’s ambitious plans for internal and external expansion.

Transneft, monopolist for crude oil pipelines, is swallowing up the smaller Transnefteprodukt, the Russian state monopoly for oil-product pipelines. Russian President Vladimir Putin made this decision in April, and Prime Minister Mikhail Fradkov signed the order on May 10, giving Transnefteprodukt until October to hand over 100% of its shares to Transneft. The takeover is apparently a hostile one, as Transnefteprodukt’s management is trying to drag out the process. Transneft plans to increase the capacity of product pipelines in the context of the government’s intention to increase oil refining in Russia for internal consumption and export.

Beyond Russia, this takeover carries implications for Belarus, where the oil-product pipelines are jointly owned and operated by the Belarus government and Transnefteprodukt. Oil products from Russian crude processed at Belarus refineries — the country’s main hard-currency earners — move to export markets partly through those product pipelines. The refineries (Navapolatsk and Mazyr) receive their oil through Transneft. Russian oil companies are eyeing those refineries for possible takeovers, as Russian ambassador Alexander Surikov has just confirmed in Minsk (Interfax, June 11). Russian leverage in that regard will increase when Transneft concentrates control over those oil product pipelines in its hands as well.

Transneft has taken over in trust management the Russian government’s 24% stake in the multinationally owned Caspian Pipeline Consortium’s (CPC) pipeline, which runs from Kazakhstan to Russia. In this case as well, Putin made the decision by presidential decree in April, ordering the state property agency Rosimushchestvo to hand over that stake to Transneft. The move ends any residual hopes that the CPC pipeline might be free from Russian state control (as U.S. investors had hoped when launching the CPC project). Transneft has now become the single largest participant in the multinational CPC consortium, on both sections of the pipeline: CPC-K on the territory of Kazakhstan and CPC-R on the territory of Russia.

The shareholders include Kazakhstan with 19%, Chevron with 15%, ExxonMobil with 7.5%, and other international and Russian companies. The pipeline connects onshore oilfields in Kazakhstan, operated mainly by ChevronTexaco and ExxonMobil, with Russia’s Black Sea port of Novorossiysk. Thanks to its control of the sole existing pipeline from those oilfields, the Russian government has imposed extortionate terms regarding transit charges through Russian territory, repayment of U.S. companies’ loans and investments into the project, distribution of management posts, and other issues. The companies have complained very discretely while apparently giving in step by step. According to Vainshtok, at his June 10 news conference, however, the companies are now becoming “more constructive” toward Russia’s position on the terms of using the pipeline.

Vainshtok elaborated on the plan to expand the Baltic Pipeline System, running on Russian territory to the maritime terminal at Primorsk, for shipping as much as 150 million tons of oil annually via the Baltic Sea. “This route will in the near future carry the bulk of oil exports from Russia,” he anticipates (Interfax, June 10). Russia’s state shipping company Sovkomflot is currently negotiating with Transneft about building a fleet of 150,000 ton tankers to carry the oil from Primorsk to ports in the Baltic and North Sea and beyond. According to Vainshtok, that size should enable the tankers to navigate through narrow passages in the Gulf of Finland and the Danish-Swedish and Danish-Norwegian straits. According to Chevron president David O’Reilly, speaking also at the St. Petersburg Forum, Chevron is the leading foreign customer of Sovkomflot’s tankers (apparently out of Novorossiysk primarily).

Transneft’s other giant project is the East Siberia-Pacific Ocean (ESPO) oil pipeline. The first phase, with a capacity of 30 million tons annually, is envisaged to run for 2,400 kilometers from Taishet in Irkutsk oblast to Skovorodino and a maritime terminal. The second phase would involve an extension to China and a capacity increase to 50 million tons annually. Russian banks are financing part of the costs on credit while Transneft counts on a Eurobond issue for $1 billion, the road show for which began on June 7.

To advance this project, Transneft intends to introduce as early as September a unified system of tariffs for oil-producing companies using its pipelines. Traditionally, those tariffs differ on pipeline routes in various parts of Russia, depending on a number of criteria, chiefly the length of the route traveled. Vainshtok plans to eliminate this and other criteria, unifying all tariffs in order to stimulate oil-producing companies from any part of Russia to use the planned ESPO pipeline for export to the East Asia-Pacific region. ESPO will give Russia some flexibility to choose and switch the direction of oil exports, potentially playing off one set of customers against another.