A slowdown in throughput in recent months has meant that Transneft, the Russian pipeline monopoly, has surplus export capacity for the first time in years. While officials at the pipeline major say that this surplus is likely to last at least for the short term, studies by the Siberian branch of the Russian Academy of Sciences suggest that the long-term forecast for oil production may be even more bleak.
But, despite a report from the academy saying that about 60 percent of all proven reserves in Western Siberia, Russia's prime oil-producing region, were near depletion, talk of new pipeline-construction projects continues to swirl around the industry and through government circles.
Part of the reason for this is the obvious importance that the presidential administration continues to attach to
monitoring conditions in the energy sector in general. In a system that is sometimes described by analysts as "state capitalism," the government has dramatically increased its involvement in oil and gas questions, as well as those
related to the generation of electricity. The Kremlin believes that greater state control is the only way to
make the energy sector more effective and viable, end the virtual theft of natural resources, rein in the oligarchs and, in the final analysis, reform the entire economy.
One element of the Kremlin's energy strategy is the expansion of the pipeline infrastructure. But available funds are limited, so the order in which the new lines
will be built has become a point of debate - a debate that has often focused more on Moscow's global priorities than on purely economic motives.
A State Matter
This geopolitical factor lies behind repeated statements by both President Vladimir Putin and Prime Minister Mikhail Fradkov that the new pipelines will remain state property and that there are no plans to allow private players - foreign or domestic - entrance into the transportation of oil or natural gas.
The critics of the Transneft system within the oil industry have been joined by liberal economists both inside and outside Russia, who say that the monopoly's
infrastructure is inadequate to deal with growing export volumes. But, despite the fact that the oil industry set a new post-Soviet production record, pumping out 9.4 million barrels in one day in September, the Ministry of Industry and Energy says that the country's pipeline system currently has had enough excess capacity to handle all of the oil being produced in Kazakhstan. The ministry says that the system will be able to pump 4.77 million barrels of oil by the end of the year, almost double the capacity it could offer as recently as 1999.
Transneft has been doing just fine under the present conditions, with its profits this year projected to reach $5 billion. But the company's monopoly position continues to be an irritant for the oil companies, who have brought their lobbyists into play both in the State Duma and in discussions with the presidential administration. Yukos, with its proposal for a line running to Daqing, China, was one of the first, but the battle in which the company's leadership is embroiled with the courts, the tax ministry and the government has almost certainly signaled its demise.
A second suggestion, coming from a consortium of companies, was for a joint venture that would construct a line ending at the major northern port of Murmansk. Both proposals ended in defeat for the private companies and Transneft retained its sole position as coordinator and operator of the sector.
Transneft may be the pipeline monopoly, but it is clear that the Kremlin makes decisions for further development in relation to the company. As this edition was going to press in mid-November, the ball remained fully in the Kremlin's court with regard to choosing between three pipeline projects on the table: expansion of the Baltic Pipeline System (BTS); construction of the Eastern Siberian Oil Pipeline (Taishet-Nakhodka); or of the Western Siberia-North pipeline.
New Path to the Baltic
The BTS has a current capacity of just over 350 million barrels per year, which are shipped to the port of Primorsk, on the Gulf of Finland, from the Timano-Pechora field in Western Siberia and from Kazakhstan. A proposal has been made to expand the system's capacity by another 90 million barrels per year. The project, which would involve the construction of one new branch of the line
from Yaroslavl to Kirishina, in the Leningrad Region, and another from Kirishina to the existing port at Primorsk, would take 16 months to complete and carry a price tag of $1.4 billion.
The BTS has run into opposition, ostensibly over environmental concerns, from a number of states around the Baltic Sea, particularly Latvia and Estonia. The opening of the existing part of the pipeline removed the necessity for the Russian oil industry to ship via the two Baltic states. Ventspils, Latvia had been the largest port used by the Soviet Union for the export of oil, but it was shut down eighteen months ago, following the opening of the
BTS. There is also a modern port for oil transport presently sitting idle in Tallinn, Estonia.
Both Estonia and Latvia have been vociferous in their complaints in the European Parliament over the environmental degradation that they maintain will be caused by the BTS, particularly if it is to be expanded. The Russian government has replied with charges that the complaints are simply sour grapes over the lost revenues as a result of the new transport route, and that the complaints would quickly dry up were Russia to open its Baltic state taps again.
Regardless of the nature of the complaints, the BTS is
believed to have the best chance of being selected, as it is the least expensive and time-consuming project under consideration.
The Eastern Siberian Pipeline
The plan to build a pipeline that will run to markets in the east already has a rocky history. Yukos initiated such a project by signing a supply agreement with China for 5.1 billion barrels of oil, to be delivered over the span of 25 years. A feasibility study had already been completed and the details agreed upon with the Chinese government when the project was sidelined, officially because the
pipeline ran along the southern shore of Lake Baikal, which is the largest freshwater body in the world and is protected by UN environmental agreements.
Experts believe, however, that the decision to shelve the project had more to do with geopolitical than environmental considerations. Focus on the East has returned to a Pacific outlet, which would allow Russia
access to more markets. The government also appeared uncomfortable with the dependence on the Chinese market that the original plan could create. Much of the 2,400-kilometer pipeline currently being discussed would follow the Baikal-Amur railroad line and pass north of the lake, ending at the Pacific port of Nakhodka.
A variant of this plan has emerged that would involve adding a branch running to the town of Skovorodino, near the Chinese border in the Amur region. Semyon Vainshtok, the president of Transneft, recently announced that such a variant would take three and a half years to build and
would carry 175 million barrels of oil annually from Western Siberia, part of which would be destined for China, with the remainder transported via Nakhdoka. The exact breakdown proposed with regard to the level of shipments to each destination has yet to be announced.
The most complicated aspect of this project is not the
intended route, but whether there will actually be enough oil available for transport to justify the project. East Siberian proven reserves will have to total at least 590 million barrels for the proposal to be worthwhile and the necessary exploration of existing reserves will cost $3 billion to $4 billion.
This price tag is beyond the reach of private oil companies, particularly given the fact that the Natural Resources Ministry says that the total amount spent on
geological surveys for the whole country last year was $3 billion. The expected cost of the whole project has been put at $12 billion, meaning that the period to recoup the original investment will be long. As a result, the government will likely opt for a long and careful analysis before any chance of it giving the green light.
Murmansk or Bust?
The proposal to build a pipeline to the ice-free Barents Sea port of Murmansk has been on the table from a consortium of five Russian oil companies for two years. The consortium has already applied to the federal government for the go-ahead and Transneft has received the nod as the general contractor. A decision on the proposal, however, will have to wait until next August, when Transneft is due to present its feasibility study on what is being labeled as the "northern" pipeline.
The government is considering two routes for the pipeline. One runs from the northern Urals Mountains to the Arctic Circle through the city of Ufa, carrying oil from Western Siberia, the polar Urals deposits and the Timano-Pechora oil and gas fields. Of the one million barrels of oil that will be carried per day, approximately 60 percent of the oil will be Siberian. Each plan involves a pipeline 2,000 kilometers in length.
No Room at the Inn
In a bid to ease some of the tension that has been generated by the extended nature of the debate around the future of the northern-pipeline plan, Transneft's Vainshtok has said that it would be pointless to rush the launch of the project as the U.S. market, the intended
destination for much of the oil, is currently unable to handle the volume of oil shipments about which the Russian firms are talking, as the Marathon Oil terminals on the U.S. east coast can only handle 110 million barrels of
Russia's Urals or Siberian grade oil per year.
Despite this, the route through Mur-mansk appears to pose the fewest difficulties of the available options. Any increase in throughput volumes via the BTS will exacerbate the problems tankers also face in navigating the narrow Danish Straits, while the exploration and development involved in bringing the Eastern Siberian project on line will require a huge investment.
The strange paradox is that with the possibility that the present slowdown in shipments could turn into a long-term development, one or more new pipelines might do little, if anything, to increase export volumes. The recent pipeline has allowed Russian firms to cut transport costs, while simultaneously increasing the state's revenues from exports. Perhaps most importantly, they have underpinned a rise in Russia's geopolitical influence, the consideration that may have the greatest bearing on decisions about further construction.
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