Russia: Moscow Extends Its Pipeline Web

(ITAR-TASS) In April, the Russian oil-pipeline monopoly Transneft announced that it had decided to support the construction of a new overland oil pipeline from the Bulgarian port of Burgas on the Black Sea to the Greek port of Alexandroupoli on the Aegean.

The long-anticipated decision has significant implications.

For one thing, it allows Russia to kill two birds with one stone as it seeks to expand its delivery of oil supplies to the global market.

Countering The BTC

The overland route will allow Russian oil to overcome recent restrictions on the passage of oil tankers through Turkey's Bosporus Strait while providing a viable alternative to an optional route -- the Baku-Tbilisi-Ceyhan (BTC) pipeline, which was heavily lobbied by the West as a means to bypass Russian territory and strengthen Western influence in Central Asia.

For another, if the Burgas-Alexandroupoli favors Russian supplies, it could have serious consequences for the West's efforts to secure alternative energy supplies in the short term.

As Russia continues the restructuring of its energy sector, many observers believe that the country aims to create a vertically integrated, state-owned energy conglomerate. Such an endeavor, if it is to succeed, would require state control over Russia's entire hydrocarbon-transportation system.

That is where questions over Transneft's role arise.

Transneft In The Shadows

Unlike the state-controlled gas monopoly Gazprom, Transneft has for the most part avoided accusations of complicity in Russia's use of energy supplies as a geopolitical weapon.

But is Transneft above such involvement?

Transneft is, after all, controlled by the Russian state, which owns 75 percent of its stock and 100 percent of its voting shares. Transneft builds, maintains, and manages most of the crude-oil pipelines in Russia, and one can assume that most of its management decisions -- its board is headed by Industry and Energy Minister Viktor Khristenko -- reflect the interests of its owners.

Transneft's support for the Burgas-Alexandroupoli pipeline comes amid criticism the company has received for its opposition to the expansion of the Caspian Pipeline Consortium (CPC), the only privately owned oil pipeline in Russia.

The Russian state has the largest stake in the CPC, with 24 percent, followed by Kazakhstan's 19 percent. Altogether, three governments and 10 companies representing seven countries are involved in the consortium.

The main CPC pipeline is 1,510 kilometers in length and connects the oil fields in western Kazakhstan with the oil terminal at Russia's Black Sea port of Novorossiisk, from where almost 90 percent of Russia's oil is exported.

From there, the idea was that the Kazakh oil could be loaded onto tankers, which would cross the Black Sea and pass through the Bosporus Strait on its way to global destinations.

The Bosporus Strait

However, anticipation that Russia's partners in the consortium, particularly Kazakhstan, would have an uninhibited route to the world market was blunted by Turkish concerns over the amount of tanker traffic and the subsequent increased risk of a disaster. As a result, Turkey decided in December 2003 to restrict access to the Bosporus.

This had the effect of placing the oil from Kazakhstan and elsewhere that had begun flowing through the CPC in April 2003 in direct competition with Russian oil for space on the limited number of tankers allowed to traverse the strait.

The CPC exported more than 30 million tons of oil in 2005, and is predicted to do the same in 2006. But the non-Russian partners in the consortium are unhappy with the output, insisting that it reach its originally planned capacity of more than 67 million tons by 2009.

Focus On Kazakhstan

Most vocal has been Kazakhstan, whose multibillion-dollar expansion of its Tengiz oil field is proceeding at full speed and whose production is expected to double by 2007. The oil from Tengiz has been committed to the CPC, which would require that the pipeline be able to handle at least 45 million tons of oil. In addition, the giant Kashagan field is expected to come on line shortly after the Tengiz expansion is finished -- meaning an additional 12 million tons of oil per year would be available for transit via the CPC.

A pipeline at Kazakhstan's Tengiz oil field (epa file photo)

Nevertheless, expansion of the CPC was opposed by Transneft and held up by Russia, which made expansion contingent on increased Russian participation in the consortium's management, guarantees against cost overruns and financial losses, and increased tariffs. By September 2005 those initial demands were met, but Russia introduced further conditions.

Transneft Vice President Sergei Grigoriyev explained the company's opposition to the expansion of the CPC to the "Russia Journal" on April 12, saying Russia "will not allow the expansion of the CPC pipeline to squeeze the volume of Russian crude that may currently move down the Black Sea."

That comment came just after an apparent breakthrough that was made on April 3, when Kazakh President Nursultan Nazarbaev announced after meeting with Russian President Vladimir Putin that they had agreed to expand the capacity of the CPC to 67 million tons. This, he said, "will mean that in the next eight years oil production in Kazakhstan is provided for," the "Russia Journal" reported.

However, there are other factors casting doubt as to whether the Kazakh president's expectations will be realized.

On June 16, Nazarbaev suddenly announced that he had agreed to export some of his country's oil through the BTC pipeline. How much he can send is unclear -- most experts believe that the BTC can only handle an additional 3 million to 7 million tons of Kazakh oil in the initial phase, given that BTC's initial throughput capacity of 50 million tons is almost all spoken for with oil from Azerbaijan. BTC managers claim that their pipeline can be extended 800 kilometers to handle a great deal of Kazakhstan's oil exports (25 million tons of oil once the necessary infrastructure is in place) -- at a cost of over $4 billion.

Catching Russia's Attention

The announcement gained the attention of Russia, which seems determined to keep Kazakhstan within its sphere of influence and to counter Western overtures to Nazarbaev.

Nazarbaev's announcement was followed three days later by reports that Russia's Industry and Energy Ministry, headed by Transneft Chairman Khristenko, had officially proposed that "the state transfer its stake in the CPC to Transneft."

That announcement could be an indication that the Kremlin has decided to renege on its word and not expand the CPC at this time, instead focusing its efforts on the Burgas-Alexandroupoli pipeline and its new Baltic Pipeline System, which was built to pump oil from Russia's northern fields to a newly built oil terminal in Primorsk, on the Gulf of Finland. The faster Russia can increase its export capability, the better it can reap the benefits of high global oil prices.

In the event the expansion of the CPC is further delayed, Russia could put a damper on the West's efforts to obtain alternative energy sources while at the same time sending a message to Kazakhstan -- which could be left holding 20 million tons of oil per year with no way of getting it to outside markets.