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Baltic pipeline: Future prospects

14:46 26/07/2005

MOSCOW, JULY 26. (Igor Tomberg, for RIA Novosti.)The Baltic states are increasingly worried that expansion of the Baltic Pipeline System (BPS) may soon deprive them of Russian oil transit revenues, which previously accounted for a substantial part of local budgets.

Joint Latvian-Russian venture LatRosTrans, which controls transport of oil and oil products, anticipates serious competition in the future. Director General Sergei Alexandrov said that Russia's Transneft, while developing the oil pumping system at Primorsk in 2003, stopped sending oil to Ventspils, leaving the company with serious losses in 2003 and 2004 (8 million lats and 3 million lats, respectively).

Lithuania is also nervous, fearing for the future of its oil terminal at Butinga (part of the Mazeikiu Nafta complex). It may well be that a desire to avoid stoppage of Russian transshipments via the Lithuanian terminal is behind a threatened substantial rise - up to 30% - in Kaliningrad transit rates.

Russia's relations with its Baltic neighbors can hardly be described as warm. But they need to be maintained to guarantee Russia's interests and those of the Russian-speaking population in the area. Oil is becoming an ever more powerful factor of political leverage. Pipelines are a major component in the armory of petroleum politics, including the Baltic Transport System (BTS), whose strategic significance for Russia is clear. Transporting oil through the BTS greatly reduces the dependence of Russian oil exporters on the transit services of Latvia, Lithuania, Estonia and Finland, while taxes contribute to the federal and local budgets in Russia. Besides, compared with current transit routes via Ventspils (Latvia) and Odessa (Ukraine), the BTS reduces the oil exporting costs of Russian companies to $4 per ton, and meets Russia's economic and strategic interests.

Transneft shareholders had a general meeting at the end of June, after which board members replied to journalists' questions. Commenting on the prospects for the Russian pipeline system, Industry and Energy Minister Viktor Khristenko emphasized that pipeline transport has an established scheme of priorities. The current focus is on expanding the Baltic Pipeline System and the eastern oil export route from Taishet to Nakhodka.

At the same time, oil exports oriented solely toward Europe are hotly debated. An obvious result of this discussion has been to delay the decision to increase BTS capacities to 62.5 million tons a year (the current figure is 47.5 million tons).

Success in the construction of the BTS is Transneft's trump card in its dispute with producing companies that accuse it of being reluctant to diversify export oil routes. Oil producers have calculated that the country is suffering tremendous losses due to a lack of necessary capacities. LUKoil Vice President Leonid Fedun said that the state loses between $6 and $8 billion per year, with direct budget losses amounting to $3-$4 billion. The shortage of pipelines forces LUKoil to resort to other kinds of transport, he said. As a result, the company's overall transportation expenses total about $2 billion, and exceed production costs.

LUKoil has launched a massive PR campaign, drawing on the expert community, to promote the construction of a northern oil pipeline in the Murmansk area to deliver oil on huge crude carriers (300,000 tons) and reach out farther afield - even as far as the U.S.

However, Transneft says that there are no guarantees that Russian oil will be accepted in American ports in large enough amounts to justify the laying of the northern pipe. Besides, LUKoil itself does not guarantee that it will pump oil through the northern line, although Transneft has been asking it to do so for several months. Transneft head Semyon Vainshtok said that although he sent letters asking for guarantees to LUKoil and Rosneft, they still remain unanswered. Without guarantees Transneft does not intend to launch the project.

Thus, bearing in mind the undoubted need to extend the geographical range of Russia's oil exports, we should not forget the strategic and economic importance of the large transport system in the Baltic that supplies oil without interruption and helps maintain Russian interests where they are not always welcome.

Igor Tomberg, PhD, is a senior researcher at the Russian Academy of Sciences' Institute for Economic and Political Studies

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