Publication: Monitor Volume: 7 Issue: 211

When they met in Slovenia in June, U.S. President George W. Bush raised with Russian President Vladimir Putin the issue of the Tengiz (Kazakhstan)-Novorossiisk (Russia) pipeline, the single largest American investment project in Russia, affected by extortionary practices on the part of Russian authorities. Yet the problems with the Caspian Pipeline Consortium’s (CPC) project remain unresolved to date, prolonging an impasse that took hold in March of this year (see the Monitor, March 29, May 21).

In his meeting with U.S. media in Moscow on the eve of the current summit in Texas, Putin held up that project as a good example of “joint work with our American partners” and an encouragement for more active involvement by Western investors in joint mineral development projects with Russia (Official transcript by RIA Novosti, November 10; Kommersant, November 12). Putin’s comments notwithstanding, the pipeline is inactive, and shipments of the Tengiz consortium’s Kazakh oil out of Novorossiisk are at a standstill as a result of the Russian authorities’ tactics.

Two sets of Russian obstructions need to be overcome if the project is to become fully operational and yield the expected rate of return on the mainly American investments. The first set involves the issue of an oil quality bank. Novorossiisk has all along been the export terminal for the inferior-grade Urals Blend, a mix of oils from various Russian fields. The CPC pipeline, however, carries the Kazakhstani Tengiz oil of superior grade. The quality differential generates a significant price differential. At Novorossiisk, the Kazakhstani oil is due to be mixed with the Russian oil for export to international markets in the form of a newly created CPC Blend.

The mixing can unfairly penalize the owners and exporters of high-quality oil, cutting into their revenue and awarding unearned income to the low-grade oil suppliers. In such situations, in the world outside Russia, it is a standard practice of oil companies to create an oil quality bank. This mechanism apportions the export revenue among the individual producer companies contributing to the blend. Under it, each producer is compensated for the market value of its own oil in accordance with its quality and current price relative to the blend.

Western companies in the CPC and Tengiz consortia, as well as Kazakhstan, had all along made clear that creation of an oil quality bank was a sine qua non for this project. But Moscow is stonewalling. Clearly, the Russian government and Russian owners of inferior oil are trying to profit unfairly, at the expense of the American and Kazakhstani exporters of superior oil.

The second set of difficulties involves customs and tax issues. There seems to be neither a clear-cut agreement regarding Russian customs duties on the oil at the Kazakhstan-Russia border nor taxation on the Russian stretch of the pipeline. The American and Kazakhstani members of both consortiums have all along aimed for signing a set of agreements on oil transportation on Russian territory and on customs issues, so as to establish a clear regime for oil transit. The Russian government has been dragging its feet, however, in the hope of imposing its unilateral rules of the game. It has set onerously high transit tariffs for the oil on Russian territory and attempted to dictate a raise in customs duties for the Tengiz oil at the Russian border (Moscow Times, AFP, October 15).

The pipeline was officially commissioned on March 29 but never came fully on stream. The plan called for putting 8 million tons of oil through the pipeline, for shipment out of Novorossiisk, by December 31, 2001, as a prelude to pumping 28 million tons annually thereafter. As of today, however, only one small-capacity tanker has been loaded–as a trial run–with Tengiz oil at Novorossiisk. The pipeline was filled with some 1 million tons of oil. Because this is the line’s maximum holding capacity, the owners then had no choice but to stop the flow.

In August, the commissioning of the CPC’s dedicated oil loading installation at Novorossiisk had to be delayed because the expensive hoses necessary to load the oil onto tankers disappeared. They were finally found elsewhere in Russia, but no official explanation was given for the misplacement (Reuters, September 18).

The pipeline was due to have been solemnly commissioned at Novorossiisk in the presence of Presidents Putin and Nursultan Nazarbaev of Kazakhstan. Between March and now, however, that event has been postponed several times. The latest rescheduling had aimed for October 14. Instead, on that date, only the small tanker was loaded, as a trial run, in the presence of U.S. Commerce Secretary Donald Evans. On that occasion, top American executives of the Tengiz consortium expressed “hope” that the issues could be resolved by the end of the current year. For their part, Kazakhstani executives in the CPC consortium hoped it could happen “within the next four months,” which would push the actual coming onstream into 2002, almost a year since the pipeline became operational on March 29 (Interfax, RIA, Western news agencies, Kazakh Commercial Television, October 15-18).

Those mid-October statements remain the last official word to date. The Texas summit may, perhaps, concentrate Putin’s attention on the need to instruct his government to resolve this problem.