MOSCOW, November 26 (RIA Novosti) Government pipes opposition/ ESPO becomes a political project/ Ashgabat dictates new gas prices to Moscow and Kiev/ Prokhorov edges his old partner to asset division/ Petrodollars make Russia giddy, industrial West keeps sober/ French companies may finance Olympic projects in Sochi
Government pipes opposition
Radical opposition movements in Russia have got what they wanted: the Marches of Dissent were top news over the weekend. The government, in turn, has helped the opposition achieve its goal, while working toward its own end, which is to rally as much voter support as possible. The powers that be are consistently pushing the opposition to the edge, unwilling to accept any sort of political competition, even in their current position as clear front runners.
So what was the idea of banning the march and then arresting its activists? Weak and disunited as it is, the opposition still poses a slight threat of an "orange" scenario. Since the upcoming parliamentary elections have been turned into a referendum of trust in [President Vladimir] Putin, the standard United Russia will have to meet has significantly gone up.
The pro-Kremlin party will no longer be content with 50% or even 60% of the vote, because both will look small compared to Putin's result at the last presidential vote (71.31%).
The party in power must win an enormous share of the vote, so the authorities are running to capacity trying to reduce the number of political rivals. With each new election campaign, the number of parties allowed to run has been growing smaller. This time, there was a good chance of adopting a two-party system instead of simplifying the political system to an absurd level - one party and one leader.
Unfortunately, this simplification scheme has been adopted in economics as well. If one wants to influence decision-making, they need to hold a controlling interest in a company. A minority shareholder has no influence at all. This logic is also leading us to an absurd situation in which the government might decide it can not pursue the right economic policy without placing businesses under rigid state control.
ESPO becomes a political project
The Russian Industry and Energy Ministry has announced that the traffic schedule for the first sector of the Eastern Siberia-Pacific Ocean (ESPO) oil pipeline was not prepared on time. The construction deadline and costs may be revised.
Analysts say the problem is a failure to decide on transit tariffs, as oil transits can be unprofitable for oil companies.
Another 2,100 km (1,305 miles) of the pipeline is to be built at the second stage, increasing the throughput to 80 million metric tons.
The first stage of the ESPO pipeline from Taishet to Skovorodino and the oil terminal in the Kozmino Bay were assessed at $6.6 billion in 2004, with oil transit tariffs of $38.8 per metric ton. The costs went up to $11.3 billion in 2006 and may exceed $13 billion now.
In March 2007, Prime Minister Mikhail Fradkov said further increases in the project's cost could make it unprofitable. The cost of transporting oil by rail from Skovorodino to Nakhodka on the Pacific coast was assessed at $44 per metric ton.
Valery Nesterov, an analyst with the Troika Dialog investment company, said: "Tariffs have not been determined, and prices are growing, making it more profitable to deliver petrochemicals rather than crude. Therefore, not all oil producers are eager to supply oil for the pipeline."
Nesterov said that the ESPO construction schedule and initial costs were "excessively optimistic." However, since the project is very important for Russia's Far East, the government "will do its best to complete it."
Mikhail Krutikhin, an analyst with Rus Energy, Russia's first full-scope web publication highlighting investments in the energy sector, said: "Real transport outlays will be four to six times higher than the cost of exports from Western Siberia to the West. The idea is that tariffs should be network dependent, but it would be unwise to distribute the total sum among oil exporters. The government will subsidize the ESPO tariffs or find some other solution, which will be a political rather than an economic one."
Ashgabat dictates new gas prices to Moscow and Kiev
The plans of Moscow and Kiev, who had virtually agreed on a gas price of $150-160 per thousand cubic meters for Ukraine, have crashed. On Friday, Turkmenistan demanded that the gas price for supplies to Russia should be raised by at least 30%. Since all this gas is resold to Ukraine, Moscow and Kiev face a new price bargaining session.
The $100 per thousand cubic meters price for Turkmen gas in 2007-2009 was fixed in September 2006.
"Ashgabat is playing on two fronts: while not abandoning the Russian route, it is trying at the same time to hedge itself in other ways," said Yekaterina Kravchenko, a gas analyst with BrokerCreditService. In such circumstances Moscow will not risk dictating prices to Ashgabat.
The problem with Turkmen gas supplies, according to Sergei Pravosudov, director of the National Energy Institute, is that Turkmenistan, which signed agreements on long-term supplies with Russia, has no available gas.
Therefore the option of supplying Turkmen gas to Ukraine via Russia remains the only reality, and all talks between European representatives and the Turkmen leadership are conducted mostly as a diversion.
The actual tug-of-war, according to the analyst, is going on within the Ukraine-Russia-Turkmenistan triangle, where Ashgabat wants to push prices up, and Moscow is acting as a middleman, with Kiev going out of its way to stop price hikes.
Gazprom is insisting that Ukraine sign a price formula to gradually bring gas prices to European levels, while at the same time conducting negotiations with Turkmenistan to ensure prices rise to a predictable schedule.
Gazprom tends to offer discounts to partners when it has access to a gas transporting system, as the relatively low prices for Belarus and Armenia testify.
But Ukraine is unwilling to go this way, and prefers to flaunt its status as a transiting country without giving Gazprom access to the pipeline.
Business & Financial Markets
Prokhorov edges his old partner to asset division
RusAl could merge with Norilsk Nickel to form an international metal mining corporation through an asset swap. The deal will only go through if Vladimir Potanin does not exercise his option before January 4, 2008.
Prokhorov's alliance with RusAl depends on the decision by its main partner: Potanin needs to collect $15.7 billion to buy out a 25% plus one share stake in Norilsk Nickel.
Prokhorov is agreeing only to cash compensation for his stake and will not accept an asset swap with Interros.
RusAl and Onexim Group have signed an agreement under which RusAl will purchase a 25% plus one share stake in Norilsk Nickel. Instead Onexim will receive an 11% stake in RusAl and cash. Prokhorov's representatives will also be put on the aluminum holding's board of directors.
The companies are not disclosing the details.
As calculated by analysts, RusAl costs $40 billion, and 11% is estimated at $4.4 billion. The stake for sale in Norilsk Nickel is estimated at about $13 billion.
A few days ago, Prokhorov announced he had agreed to sell Potanin his blocking stake in Norilsk Nickel at $293.6 per share plus 12.5% premium, i.e. at the price of $15.7 billion.
Market players believe that Potanin does not have such funds available.
But Interros has already chosen consultancies for the deal: in legal matters it is Debevoise & Plimpton, and on financial questions, Citigroup Global Markets.
In order to accumulate funds, Potanin has 45 days. In the meantime, RusAl has already received credit guarantees from the ABN Amro, BNP Paribas, Credit Suisse and Merrill Lynch banks.
Valentina Bogomolova, an Alfa-Bank analyst, said there would be no production synergy following the merger. It could only be achieved by diversifying the two companies' assets.
Petrodollars make Russia giddy, industrial West keeps sober
This year, Russia has topped the world list of oil producers, with 9.87 million bbl/pd in January-October, 10%-12% more than the second largest producer, Saudi Arabia.
The latter could have easily boosted production and outmatch Russia, but they prefer not to do it for a reason. The United States, also a major oil nation, has been reducing production of late, but augmenting refining capacity instead.
The U.S. currently refines 180% more oil than it produces. Russia, on the contrary, processes less than half of the oil it produces, with the average degree of conversion (the percentage of light products) barely reaching 70% (85%-95% in the West).
The reckless drive to pump more and more oil will soon lead Russia to an uncontrolled fall in production, not because it will start saving its resources like the U.S., but because it will not be able to compensate for depletion in the traditional oil-producing areas. Russian oil majors can no longer boost production, and it is only growing because of the recent Sakhalin projects.
The situation in the oil-processing sector is no better either. Russia is currently using around 80% of its refining capacities. Oil processing is growing by 5%-6% a year, but it has remained static for the past three years, according to a BP statistics review. Which means that by the time Russia is in a position, where it can no longer boost production, it will also be unable to increase processing if it does not start building new refineries now. The old ones will be running at full capacity by then.
It is a shame that the billions of dollars that state oil companies have poured into buying more assets, have not been invested in either production (if they are so determined to export all their crude) or, better still, in building refineries based on cutting-edge western technology.
French companies may finance Olympic projects in Sochi
Russia's electricity monopoly has found a way to finance the construction of power plants for the 2014 Winter Olympics in Sochi, a Russian seaside and mountain resort city on the Black Sea.
Three power plants with a total capacity of 1,000 MW may be built under a project financing scheme, in which Gaz de France and Electricite de France have shown interest.
However, experts believe that the project could be interesting to them only if gas supplies to the power plants are guaranteed.
A source close to UES said: "There is no money for the construction of the three plants, and so outside investors will be encouraged to participate. Talks are under way with Electricite de France and Gaz de France."
The two French companies refused to comment.
Igor Vasilyev, an analyst with the Troika Dialog investment company, said the project could become attractive for investors if "RAO UES solves the gas supply problem, which often is the most difficult aspect of all power plant projects."
Mezhregiongaz, a wholly owned subsidiary of energy giant Gazprom, said it had received a request from RAO UES concerning gas supplies to new power plants in the Krasnodar Territory (southern Russia) and responded to it. The company refused to elaborate.
Vasily Sapozhnikov of the Otkrytie financial corporation said the mechanism would give foreign companies "relatively cheap" access to the Russian market.
Yekaterina Tripoten, an analyst with Sovlink, a company set up to attract foreign investment in the Russian fuel and energy sector, said the construction of power plants costs $1,000-$1,200 per 1 KW of design capacity, while Sapozhnikov said the cost could be $1,200-$1,500.
Tripoten said the cost could increase, just as happened in the case of the Sochi thermal power plant, where 1 KW of electricity cost $2,000 because of difficulties of building a power plant in a zone susceptible to mudslides and seismic activity.
"These difficulties became apparent during construction, not during the preparation of the feasibility study," Tripoten said.
Analysts are not sure potential investors will be foreign, as the fact that the Games will be held in Sochi is a sufficient attraction for any investor.
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