Saint Nose is out of joint – Putin to the oil pump

For a decade Washington has been backing the Turkish and Azerbaijan governments to steer the export of Caspian region crude oil away from Russia. Russia's newest riposte has been to ally the Russian and Iranian oil industries, and open up the shortest, cheapest, and most lucrative oil route of all, southwards out of the Caspian to Iran.

The economics of the southward route are the latest blow for the Bush Administration, as it tries to redraw the geography of the Caucasus on an anti-Russian map. But for oil exporters and shippers in the Caspian, President George Bush's jawboning looks to be as futile as King Canute telling the sea to roll backwards.

Early oil from Azerbaijan's newest offshore oilfields has been piped northwestwards through the Russian pipeline system to Novorossiysk port, on the Black Sea, along with crude from the Caspian shoreline of Kazakhstan. But there have been frequent arguments with the Azeris over volumes and transit fees, and these have led to frequent oil stoppages. Azeri oil for transit across Georgia to Supsa port is a costly trickle, by comparison.

In parallel, Turkey has been steadily tightening restrictions on tanker movement out of the Black Sea, through the Bosphorus Straits. The latest rules ban lengthy and large-capacity tankers -- those which are most cost-effective for charterers and cargo-owners -- from moving through the straits at night. The delay adds to the transport charges, creating an expensive chokepoint that has multiplied the costs of routing oil through the Black Sea for US allies, and Russia, alike.

As new Caspian oilfields come onstream, and the volumes of crude lifted grow beyond the capacities of the Russian pipeline system to absorb, the American strategy has been to press hard to redirect these exports across land towards Turkey. The pipeline route chosen is known by its origin and destination as Baku-Ceyhan.

The Russian government has always understood that the this pipeline was part of the broader US strategy to cut all links with Moscow of the former Soviet states in the Caucasus, building new economic infrastructure that would dissuade the Caucasus group from ever renewing these ties. These efforts have proved to be a costly boomerang.

To thwart those in Turkey, who view the Bosphorus logjam as leverage to promote the Ceyhan route, Russia’s state-controlled pipeline agency Transneft has found a Turkish partner, and proposes building a relatively low-cost, short-distance pipeline to avoid the straits – and avoid the Ceyhan pipeline too. Transneft disclosed its Bosphorus Bypass plan in February, when CEO Semyon Vainshtok said his company was interested in constructing a 193-km pipeline on the territory of Turkey, with the local contractor Anadolu. Last year, he noted, Russian companies shipped 62 million tonnes of oil through the straits, or over 30% of all Russian export volumes. Compared with the Ceyhan’s project cost of more than $5 billion, the bypass reportedly would cost about $900 million, with capacity estimated in the range of 50-60 million tonnes per year. This is roughly equal to Russian shipments by tanker through the straits. Vainshtok also claimed that that two major Russian oil producers, Tatneft and Tyumen Oil Company -- now controlled by British Petroleum -- have offered their guarantees to supply the bypass with crude. This was another slap at the Ceyhan project whose backers admit it lacks guarantees of enough crude to justify its cost. According to the latest news reported in Moscow, the potential starting point for the Bosphorus bypass route could be Kiyikei on the Black Sea, and the end-point at an offloading terminal at Ibrikhaba on the Aegean Sea.

In June, while NATO heads of state were holding their annual meeting on the shores of the Bosphorus at Istanbul, the Russian government despatched a warning that the security measures Turkey had implemented in the straits violated 68-year old treaty provisions that still bind both the NATO states and the Russians. In an unusual statement, the federal Ministry of Transport in Moscow issued a warning to the Turkish government, accusing its ban on tanker traffic through the Bosphorus of being a violation of the Montreux Treaty. According to the Ministry, "unilateral actions undertaken by Turkey contradict Article 2 of the Treaty of Montreux of 1936." The statement, drafted by the foreign relations department at the Transport Ministry, referred to the ban, in effect from June 27 to 29, on vessels carrying hazardous cargoes, notably oil and gas. The Montreux Treaty was the most recent in a series of last-century international pacts declaring the straits to be international waters, and prohibiting Turkey from taking unilateral action to interfere with innocent passage of vessels.

The American effort at the north end of the Black Sea, on the Ukrainian shore, has had even less success.

A Ukrainian pipeline, designed to attract Caspian oil into Odessa port, on the Black Sea, and then pump it northwards to Brody, and thence into Poland and other central European destinations, has lain empty for almost a year. Despite US government prodding, even the major US oil companies in the Caspian cannot quite absorb the commercial disadvantages of the route. Nor can US allies in the Polish government overrule their colleagues with demands to buy this anti-Russian, but higher-priced oil.

The Russian government, together the Russian oil exporters, have countered with a proposal for the Ukrainian government to reverse the oil flow in the pipeline, and pipe Russian crude southwards to Odessa, for tankering out of the Black Sea. At first,, the Ukrainians rejected the offer. But as port shipments of oil from Odessa dwindled, and the economics of the Brody direction began to talk louder than the politics, a deal was done to accept the Russian oil, and reverse the pipeline direction.

The conflict in Kiev over the strategic pros and cons of these alternative oil routes has damaged another US ally in the region. Late last year, the Ukrainian parliament voted to block the Adria pipeline reversal project. This is aimed at delivering Russian crude to the deep-water port of Omishalj in Croatia, on the Adriatic Sea. The Ukrainian veto was retaliation by the anti-Russian oil lobby in Kiev for the failure of its Odessa-Brody project.

The irony of this outcome is that the Omishalj project was first proposed in 2002, and agreed by Russia, Belarus, Ukraine, Slovakia, Hungary, and Croatia as a way of despatching Russian crude in large tankers to Bush constituents who own the refineries on the Texas coast of the United States. Initial capacity, according to the Omishalj plan, was 5 million tonnes per year, rising eventually to 15 million tonnes. The Ukrainian deputies justified their no-vote because, they said, it would be the final blow to the proposed Odessa-Brody pipeline, should the Druzhba line be filled up west of Ukraine. "This is true," says Adam Landes, an oil analyst in Moscow. "but Odessa-Brody is doomed regardless. It offers no competitive advantage to potential Caspian shippers, or buyers of crude, and this is why it has been idle for two years now, since it was essentially completed. The longer Ukraine takes to face up to these rather obvious facts, the longer that this ill-fated pipeline will lie dormant." The Croatians too have now bowed to the realities of the oil marketplace, and Omishalj will soon start regular dispatches of Rusdsian oil cargoes.

Another US ally to be caught in the cross-fire has been Latvia. As the anti-Russian pressure has mounted against Russian oil shipments in the south, Moscow accelerated the completion of a new oil outlet on the Gulf of Finland and Baltic Sea. This is Primorsk, which opened two years ago, and is being expanded by Transneft to become Russia’s largest oil port.

Controlled by Transneft, Primorsk receives its crude from the Baltic Pipeline System -- a network of pipelines linking Russia's new Arctic oilwells and expanding northwest Siberian fields to the sea lanes to Western Europe's markets. Once the Primorsk outlet was established, the Russian government ordered Transneft to turn off the supply of oil to Ventspils in Latvia. At one time the Soviet Union's northern gateway for oil exports, in 1990 Ventspils almost matched Novorossiysk in capacity and throughput. But no longer. The Latvians have appealed to Washington for help, but Moscow will not listen. The opening of Primorsk was the deathknell for Ventspils.

The Americans responded in 2003 by pressing the Russian government to end Transneft's monopoly over pipelines, and allow the Russian oil majors to build a pipeline of their own to Murmansk. That, Washington energy officials claimed, would open a new, commercially effective route for crude deliveries to US East Coast refineries. Transneft has responded by accelerating the expansion of the Baltic Pipeline System, while the Kremlin has started prosecutions of Yukos, the oil company which was closest to Washington. The speed of this pipeline expansion effort will overtake the growth of Russian export volumes by 2005, Transneft officials have said.

Beginning in May 2002, Russian and US energy officials appeared to endorse public announcements from the two leading Russian producers and exporters, Yukos and LUKoil, that they were prepared to start strategic shipment of oil to the US. Russian tanker operators were skeptical from the start. Yukos led with the shipment of about 250,000 tonnes of oil which was despatch to Houston in June of 2002 on three 80,000-tonne tankers which transferred the cargo to a VLCC in the Mediterranean. LUKoil followed with an announcement it was preparing a shipment at Malta. Dmitri Skarga, chief executive of Sovcomflot, Russia’s leading tanker company, told me at the time that he thought the Yukos project "may be effective, but that depends on the level of prices and the tariff rates." He said that adjusting deliveries to refiney needs is a time-consuming and costly business. Yukos chief executive Mikhail Khodorkovsky then announced that the trade would not be profitable unless oil were above $25 per barrel.

Mikhail Perfilov, a leading Moscow oil analyst, noted skeptically "LUKoil has been speaking of plans to start supplies to the US for years now, and I won't be surprised if they still continue this talk a few years from now."

By August of 2004, Russian oil industry sources were conceding that two years of publicity and political talks by the two governments had failed to produce a viable Russian supply line for crude deliveries to the US.

Sergei Grigoriev, vice president of Transneft and the company spokesman, told me that the Murmansk project – also known by the Russians as the North Project – is still under study, and no decisions have been made. “The pipeline direction starts from Surgut and goes towards to the Barents Sea, but we don’t know where it will finish. We have two variants – a port in the Indigo area, in the Nenets region, or at an undeveloped site called Svyatoy Nos [“Saint Nose”], also in the Nenets region.” In the ongoing feasibility studies, Grigoriev said the throughput target is “approximately 50-60 million tonnes.”

But is this route a realistic option for Russia to supply the US? “I wouldn’t talk about US shipments now,” Grigroiev replies, “because currently there is no direct shipment of oil from Russia to the US. The numbers are insignificantly small – something less than 300,000 tonnes a year in 2002, and I don’t know the later numbers. Maybe the US buys some Russian oil in Rotterdam. The only direct shipment project I know was the Yukos experiment, but it failed.”

Two years ago, LUKoil, Russia’s largest oil producer and second exporter after Yukos, waxed enthusiastic on the Murmansk project, but no longer. Spokesman Mikhail Mikhailov says now “it’s too early to speak about the project. While it’s at the feasibility study stage we aren’t ready to announce how we will use it because a lot of necessary information is unknown.” He claimed that LUKoil had earlier announced that it would contribute 20 million tonnes to the line, “but now the situation has changed, and the terms and extraction volumes are different.” Does LUKoil have a view of the projected capacity of Russia to supply the US with crude oil? “We are speaking about non-existent facts. Maybe some oil was shipped through Rotterdam, but its volume was very small.” The commercial viability of Russian oil shipments to the US, LUKoil now concedes, depends, not on the US, but on the Russian government. “[This] depends on the terms of the project, terms which Transneft will create.” TNK-BP – the new British-controlled form of Tyumen Oil – is also no longer the talkative US booster it once was. A spokesman, claiming anonymity, would say only that the Murmansk project is “currently at such a preliminary stage we are not ready to discuss its details or its opportunities.”

The data on Russian crude exports to the US confirm that the Yukos experiment has failed. Petroleum Argus reports that in the first half of this year, direct Russian exports to the US were “close to zero”. ndirect shipments, through Rotterdam and other markets, were “approximately 250 to 270,000 tonnes per month.” A Russian Energy Ministry official told me he lacked a precise number for total Russian exports to the US, but he acknowledged that there is no direct shipment, and the aggregate is “too small to report.”

Yukos sources now say they believe Yukos, now close to insolvency after being held liable for billions of dollars in unpaid taxes from 2000, and former CEO Khodorkovsky – now on trial in Moscow on multiple charges relating to his share dealings, never intended that Russia should assist the US as a strategic oil supply partner. Rather, the sources believe that Khorokovsky and his shareholding allies in the company believed the oil shipments to Houston could generate favourable publicity as they sought to sell their shares on the New York Stock Exchange, or find a major US oil producer to buy up to 40-percent of the stock. “It was a case of what the US could do for the Yukos shareholders,” one source said, “not what Russian oil could for the US.” The arrest of Khodorkovsky in October 2003 exposed how far apart these two ambitious plans were.

Until Vladimir Putin became president in 2000, Russian oil policy was dictated by a corrupt alliance of the Russian oil producers and the US government. Putin's campaign against Yukos has put a stop to that. Even during the Yeltsin period, however, Russian public policy was not to attack the Baku-Ceyhan pipeline on strategic grounds. Rather, Russian tactics were to play for time, and wait for the economics of oil transportation to tell against the US plan. So long as crude oil prices remained low, time encouraged delay in starting Baku-Ceyhan. The US war against Iraq threatened the pipeline plan too, by raising the prospect of a gusher of Iraqi crude on the market, cutting prices.

But now that President Bush is proving that he cannot lift Iraqi oil, and oil has begun to substitute for the US dollar in international financial speculation, further counters to Baku-Ceyhan are being created by Moscow to retain the upper hand.

One new export route for Russian goes southwards by tanker through the Caspian to Iran. Russian oil producers and shippers say they are expecting the volume of crude oil and petroleum products shipped from the Russian Caspian port of Astrakhan to Iran to more than double this year. A spokesman for Volgotanker, the leading tanker operator in the Caspian, said it is expecting growth of its oil volume to jump 150 percent over the 2003 level of 800,000 tonnes.

Russian industry sources claim the expansion of the Iranian port of Neka, and the construction of a 120,000-barrels/day pipeline from Neka to Rey, is one of the new options for oil movement southwards. The Russian shipments of Caspian oil are paid for by swap arrangements with Iranian oil shipped out of Persian Gulf ports. Enzeli, the only Iranian Caspian port able to receive deep-draught vessels, is also being considered for receiving oil aboard railcars shipped by ferry from Astrakhan. LUKoil's new oil terminal at Ilyinka, on the Astrakhan shore, will reach transshipment capacity of 3 million tonnes annual capacity (60,000 barrels per day) next year; this year capacity is 1 million tonnes (20,000 bd).

Russian use of its oil exports in strategic policy has been frustrating to China, an erstwhile ally in the Fareast. So far, despite years of negotiations, the government in Beijing has failed in its bid to get access to the pipeline flow of Russian oil exports. A non-binding agreement signed last year between the Chinese and Russian governments envisages that China will receive 700 million tonnes of Russian crude through the pipeline over 25 years at a current cost of about $150 billion. The price formula Russia and China would use for the oil has not been disclosed, and is apparently not settled. The strategic objective for Beijing is obvious: it wnats to reduce its growing dependence on oil shipped from the Middle East, Africa and South-East Asia, and lower both oil and delivery premiums Beijing is currently obliged to pay.

The target for this Chinese strategy has been the construction of a pipeline from the southeastern Russian refinery town of Angarsk to the northwestern Chinese terminal centre of Daqing. The Chinese section of the pipeline is already under way. The Russian section is stalled on the drawing-board. An increase in rail deliveries across the border makes up only a fraction of the planned pipeline deliveries.

Statements by Transneft executives have backed the Russian and Chinese goverrnment decision of last year to build the Angarsk-Daqing line at a cost of less than $3 billion, in preference to the $7 billion line to Nakhodka. But Putin's campaign since last July against shareholders of Yukos has complicated the China project; that is because Yukos had been the intended oil supplier to China.

Japanese offers to finance the heavy cost of the Nakhodka line have been treated skeptically by the Kremlin, which wants to avoid single-market oil commitments -- to repay Japanese loans, as much as to commit to Chinese supply terms. A Nakhodka oil shipping hub is, however, viewed in Moscow as potentially more open to spot-market pricing of oil than Daqing would be.

Transneft sources, along with oil industry executives in Moscow agree on one thing about the eastern option for shipping Russian oil. The principal market for this crude will be Asia, and not the US West Coast. But think for a moment what might have happened if the Yukos owners had managed to sell control of their company last July to Chevron-Texaco or Mobil, as Khodorkovsky intended -- Russia as an independent oil exporter would have been on its way to a level of independence that is less than Aramco, the Saudi oil company. It is unsurprising that the US media have failed to report the Yukos affair in this light, let alone to have noticed that the US, the world's largest oil consumer, has tried, but so far failed to compel Russia, the world's second largest oil exporter, to ship and market oil in the way Washington, or Houston, wants.

Hope this opens some eyes to the Russsian-Iran cooperation in oil/gas market as well as transportation. It is an independent Russian move, and you should be proud RussianConservative. Soon enough when Iran falls the Russian money will have built a fine infrastructure for the West's BP, Texaco, Chevron to move on in.

We want oil now and cheap too. Direct sales are off, but nbon-direct sales are there. We are exploiting our investments. We put good stock in Azerbaijan and now have Iraq, Evanston and Pakistan and Non-Russian CIS oil producers favor. Good thing to know is the choke points in the Black Sea is becoming undesirable.

"it is US fault"

Alexander Vershbow, U.S. Ambassador to Russia Moscow, March 04, 2003:
"Finally, it is no secret that oil producers in Russia are constrained by a shortage of export pipeline capacity. Lack of export capacity hampers Russia's effort to meet world demand for its oil and to play the role of a reliable supplier.

This is unfortunate because it goes to the heart of what make Russian-U.S. energy cooperation mutually beneficial. The U.S. and other major energy-consuming countries seek adequate, reliable supplies of oil from diverse sources. Russia, with its substantial oil and gas reserves, is ideally suited to the role of bolstering world energy security. But to do so it must be able to increase its exports to meet growing world demand for Russian oil. "

Funny those terminals are inland to Iran but not on the coast. Start building and the USA will come.

A) The Iranians would not give up control of Russian pipelines to American firms and even of they did, so what? Russian exports the oil means money in Iran's pocket through the tranist fees. American control of any Iranian pipeline would not mean a thing for Russia. The American firms would be just as eager to make money on the tranist.

and

B) Who knows if the oil business will be using Eurodollars over USdollars in the near future?

Updated August DoE report on Iran and May 2004 report on Russia .

Re: "It's the US fault"

""Crude oil exports via pipeline fall under the exclusive jurisdiction of Russia's state-owned pipeline monopoly, Transneft. But bottlenecks in the Transneft system make the company's export capacity incapable of meeting oil producer's export ambitions."

"The Russian government and Transneft have acknowledged the capacity problem and have taken careful steps towards developing new export infrastructure. At issue, however, is not only the direction and scope of enhancements to the country's export infrastructure, but also the potential role that private firms and investors may play in these projects, presumably at the expense of state-owned Transneft."

"Murmansk The idea for a new pipeline and deepwater tanker terminal, designed to carry crude oil from Russia's West Siberian Basin and Timan-Pechora basin westward to Murmansk on the Barents Sea was first suggested during a summit in May 2002 between Presidents George W. Bush and Vladimir Putin. As conceived by a consortium of Russia's leading oil companies, the Murmansk project would allow for between 1.6 and 2.4 million bbl/d of Russian oil exports to reach the United States via tankers within only nine days travel time, much faster than shipping from the Middle East or Africa. A feasibility study considering the availability of crude oil supplies and the interest of U.S. refiners is expected in the Fall of 2004. A liquefied natural gas (LNG) facility at the port has also been suggested, possibly allowing for deliveries to American markets."

"But despite vociferous support for the Murmansk proposal from Russian oil companies, American oil companies, and the U.S. government, Transneft (and thereby the Russian government) has approached the project with trepidation. It is unclear whether the Russian government will allow private Russian oil companies to proceed with their plans to construct the port and its associated facilities, or if the project will be handed, either partially or entirely, to Transneft. Some Transneft officials and others have stated that Russia's expanding BPS system as well as a few other key export projects (listed below) will be sufficient to keep pace with growing production. At stake is not only the Murmansk project, but also the Russian government's ability to control the growing oil industry via Transneft."

Had to enter this here after I read it today 8/24/04. See, everythings all good!

CRAWFORD, Texas (Reuters) - Russian President Vladimir Putin told President Bush on Monday that Russian oil companies were boosting production as well as exports and would continue to do so.

"President Putin noted Russian oil companies are increasing production and exports and will continue to do so," White House spokesman Scott McClellan told reporters at the president's Texas ranch.

Putin and Bush also discussed the importance of keeping Iran from developing nuclear weapons, and they talked about the conflicts in Iraq and Afghanistan, McClellan said.

"They agreed on the need to work together to prevent Iran from developing a nuclear weapons capability," he said.

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