Prospects and pitfalls of oil transit through Ventspils port

  • 2004-11-10
  • By Vladimir Solomatin
The Russian oil industry has greatly helped propel Baltic transit in recent years. The favorable world oil market situation and large investments made in Russian's oil industry (both by domestic and international giants) help forecast growth in Russian oil exports for a medium term perspective until 2010.

But despite Russia's growing volume of oil exports, the amount of oil and oil-product transit through Ventspils port has decreased significantly during the last two years for a number of reasons.

First of all, the termination in January 2003 of crude-oil supplies to Ventspils through the Polotsk-Ventspils pipeline has affected transit. While the pipeline has a capacity of 16 million tons per year, the actual flow diminished to 9 millions tons in 2004.

Paradoxically, Russia lacks terminals and port capacities for oil export, but high-powered oil terminals and a neighboring state pipeline - into which significant investments have been made - are not in use.

Furthermore, Russia has an interest in forming partnerships with the Baltic states to help stand against Scandinavia, which has tried to constrain shipping to the Denmark Strait. Latvia supports Russia on this issue.

Ventspils port has a number of competitive advantages: It is ice-free and the climate conditions are favorable, it has the potential to serve high-tonnage vessels at high-depth berths, and it has a large tank-farm facility, modern equipment, highly qualified professional employees, long-lasting client relationships, an advanced railroad system and the ability to quickly adapt to market conditions.

The key reason for the standstill of the Ventspils pipeline is political. Russia's decision to stop transporting crude oil through the port will cause significant economic damage not just to Latvia but mainly to Russia. Today Ventspils port receives the remainder of Russian oil supplies.

Ventspils-Nafta operates with a wider nomenclature of oil products to create capacity reserves, as well as taking other measures. After closing the Ventspils oil-pipeline in 2003, Ventspils-Nafta began the transportation of crude oil entering Latvia by railway. By 2004, the volume of oil increased by more than 2 million tons.

The Russian media have reported that oil transit makes up more than 30 percent of Latvian GDP. However, although oil transit plays a significant role in the country's economy, this statistic is exaggerated. Russia faces multimillion-dollar losses due to its use of expensive ports rather than Ventspils.

It is difficult to believe that Russia will achieve its political goals by terminating the crude-oil transit agreement with Ventspils. The shift from political confrontation to political cooperation between Russia and Latvia could start with the establishment of close economic relations, and the creation of joint ventures. And the oil transit sector could lead this change.

Ventspils port-development prospects depend largely on Latvia's ability to attract Russian investors and strategic partners, which will guarantee the resumption of pipeline operations.

Vladimir Solomatin is a partner of Bridge Capital Finance Group