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Legislation Will Block Major Private Pipelines in Russia
22 January 2007
Legislation Will Block Major Private Pipelines in Russia

The following article originally appeared in Russian Petroleum Investor. WorldTrade Executive, Inc. publishes Russian Petroleum Investor, Caspian Investor, Russia/Eurasia Executive Guide and Buyer’s Guide to the Russian IT Outsourcing Industry. For more information go to http://www.wtexecutive.com or call 978-287-0301. Published permission of WorldTrade Executive, Inc., 2250 Main St., Concord, MA. 01742


Legislation Will Block Major Private Pipelines in Russia
by Kent F. Moors, Ph.D., Contributing Editor, Russian Petroleum Investor
December 19, 2006


Beginning on December 22, the Russian Duma will hold a second reading of a bill concerning major pipeline transport. Initially proposed in 1999 by a group of deputies including current Duma Energy Committee chair Valery Yazev, the bill passed first reading. Bureaucratic “red tape” then held up progress for the next six years.  

At least that is the official version of the story. Our sources, however, tell us that the government had the proposed legislation pulled and subjected to complete overhaul several times during the period to reflect a developing, and now prevailing, Kremlin attitude—no non state-controlled company administration over major hydrocarbon projects or infrastructure. An ad hoc group of Duma deputies, ministerial officials and representatives of Russian oil majors has worked on the latest version, begun, contacts tell us, only in 2004.

The issue of whether the Russian state would allow pipelines controlled by private companies has been discussed, but unresolved, for years. The question contributed to the official attack against YUKOS and its head Mikhail Khodorkovsky. YUKOS wanted its own export venue to China against the strenuous objections of Transneft, the Russian crude oil pipeline monopoly. Additionally, in 2002, a “who’s who” of Russian oil majors—YUKOS, LUKOIL, TNK (now the Russian-British venture TNK-BP), Sibneft (now Gazprom’s Gazprom Neft oil division) and state-owned Rosneft—announced its intention to build a major private crude oil trunk pipeline to the northern port of Murmansk.

Subsequent arrests, tax liens and an eventual bankruptcy tabled the YUKOS move. The authorities considered and rejected the Murmansk pipeline in favor of a Transneft-controlled expansion of the Baltic Pipeline System and the building of the East Siberia-Pacific Ocean (ESPO) export project. The issue itself, however, remained in a political limbo. That is, until the reemergence of the 1999 pipeline legislation. At the time the Murmansk line was under consideration, then Prime Minister Mikhail Kasyanov said a private major export trunk line would be legally allowed, but added that such a private pipeline is out of place in Russia. Kasyanov held that the principle of equal access for all oil companies to any pipe in Russia should be the primary objective. However, his successor, and current prime minister, Mikhail Fradkov cleared the matter up rather decisively in 2004--private pipelines cannot exist in Russia at all. Since that decision, the ad hoc committee has been busy revising the bill to conform to the Kremlin policy.

Sources tell us there are 53 new amendments to the original bill. The revised bill passed through the Energy Committee on December 13 and will move to the floor for second reading. According to information obtained on December 18, one well-placed contact tells us that the bill now “provides for main natural gas pipelines with no less than 50 percent plus one share state ownership and major crude oil and oil product pipelines requiring no less than 75 percent state control.”

“The lowered requirement for gas lines comes after the state regained control over Gazprom,” a source in the company reminded us on December 18. As for crude oil pipelines, the 75 percent threshold will guarantee that Transneft continues to control the main arteries on behalf of the Russian government. The state owns 75 percent of Transneft and all of the company’s voting shares.      

Of particular note is a section of the bill that may still occasion some opposition during floor debates. “The current version limits foreign ownership of any major pipeline to no more than 20 percent,” according to one source, who adds that it is framed as a clear restriction on foreign influence. Yet, deputies may yet regard the “limitation” as too generous. “The CPC still acts like a thorn in the Russian side,” a veteran London-based oil analyst reminded us on December 15. “It may yet result in a move for more restrictions on foreign participation.” The Caspian Pipeline Consortium (CPC) remains the largest export pipeline crossing Russia that is not under the majority control of the Russian government. Transneft has indicated on several occasions that it wants greater control over the CPC final span ending at the line’s terminal near Novorossiysk on the Black Sea.

The bill does not prevent private pipelines from operating within Russia. However, should the government designate that a pipeline is considered “major,” the provisions of the law would kick in. “This is very much a matter of how the government views the situation,” one Western contact noted. “There are no clear standards up front and the risk is always there that a line could receive the designation obliging government control retroactively.”

Two current lines stand out as subject to increased pressure, once the bill becomes law. The first is the major export pipeline currently administered by the Royal Dutch/Shell (Netherlands/UK)-led Sakhalin Energy operating company for the Sakhalin-2 offshore project. However, given last week’s developments in which Gazprom now seems certain to take over at least 50 percent of that operation, the pipeline attached to it will shortly fall from foreign hands. The only other major pipeline that may experience problems is the line from the Kovykta deposit. TNK-BP (Russia/UK) runs the deposit and the venture has 50 percent Russian ownership. However, it is still a private company, and that will almost assuredly bring upon it renewed government oversight.

The problem from the government’s standpoint is the intention not to fund pipeline development from the central budget. While denying private ownership of major pipelines within the country, the Kremlin still needs to expand gas and oil export volumes. And that will cost money.  

A compromise may already be in the works, at least among the Kremlin, Gazprom and dominant Russian oil companies. A source at Russian crude oil leader LUKOIL says the company has suggested to the government that pipeline access assurances are more important to LUKOIL than pipeline ownership. “It would seem reasonable that a company investing in a large pipeline project would receive a quota for pumping a certain volume through the line,” the source suggested. The current version of the bill apparently still contains an “equal access” provision, making the pipelines available to all companies. Transneft usually provides preference to companies exporting oil under quotas granted quarterly. Yet, neither the equality principle nor the export preference approach would provide any automatic improvement in assurances to pipeline investing companies.

“We anticipate there may be additional revisions in the bill before it is signed into law,” concludes the LUKOIL source. One thing, however, is already clear. Coming so close behind a renewed government attack on foreign-led production sharing agreements (PSAs) within Russia and the European unrest over a defiant Moscow decision not to approve the Energy Charter (and its provision for third party access to domestic pipeline systems),  the new pipeline restrictions will provide another round of foreign criticism.

For more information go to http://www.wtexecutive.com or call 978-287-0301.
Published permission of WorldTrade Executive, Inc., 2250 Main St., Concord, MA. 01742

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