Russia's new oil route worries neighbors

  • 2002-08-08
  • Michael Lelyveld
Some of Russia's neighbors have suffered a sudden shock to discover a major new oil outlet springing up in their midst.

Russia's latest export expansion is taking place on the island of Vysotsk in the Gulf of Finland, where giant LUKoil has started building a new terminal that will greatly increase Russia's oil access to the sea.

The new port will be the second northwest of St. Petersburg following the opening of a crude-oil terminal at Primorsk last December. The appearance of another facility for exports of products like gasoline has startled Finland, whose border is only about 25 kilometers away.

The daily Helsingin Sanomat reported last week that "Vysotsk would double petroleum transport in the Gulf of Finland." The construction came as "a complete surprise" to Finnish officials, the newspaper said.

Officials are concerned about the risk of spills in the narrow passage. The sector is said to be the worst part of the Baltic Sea in winter.

"Storms make ice pile up near the shores in amounts so great that they can tear holes into the hulls of ships," the Finnish paper reported.

The surprise may reflect the speed of the move. Work appears to have started immediately after the Russian government's approval of the new port in late June. Last month, LUKoil was given clearance to export up to 12 million tons of products a year through Vysotsk. The facility is scheduled to open next year.

LUKoil has sought funding for the project from the Overseas Private Investment Corporation, a U.S. finance agency. The company says it will use the terminal, in part, to supply the 1,300 gasoline stations it now owns in the United States. As a result, the project has been seen as part of Russia's drive to supply energy to the U.S. market.

Russian Energy Minister Igor Yusufov seemed to be promoting LUKoil's plan in July during U.S. Energy Secretary Spencer Abra-ham's visit to Moscow.

"We should transfer the bulk of our supplies to oil products," Interfax quoted him as saying.

Refined products like gasoline are potentially more profitable than crude.

Russia's rapid moves in creating new export routes and capturing markets may have shocked Finland, but the speed may be less surprising in the Baltic countries, which have already witnessed Russia's determination to build pipelines that bypass their ports in favor of new ones like Primorsk.

When Russia began work on its Baltic pipeline system in April 2000, it did not even wait for sources of funding to cover the $430 million cost. The motive was to end reliance on former Soviet ports like Latvia's Ventspils and Butinge in Lithuania, where Russia had lost control after the Baltic countries declared independence. In the process, Russia hoped to lower its export costs.In launching the construction, Deputy Fuel Minister Vladimir Stanev said, "Initially, this was a purely political project that later became economically viable."

The question of politics may still be debated, but Russia has since started a second stage of the Baltic pipeline system for Arctic oil at a cost of an additional $800 million.

The moves may aid Russia's drive for more energy exports to the West, but they are also part of Moscow's long-running security effort to gain direct access to the open sea. President Vladimir Putin seems to have seized on such issues immediately upon taking office two years ago.

Even as prime minister in 1999, Putin ordered the state pipeline company Transneft to build an oil bypass around Chechnya as one of his first official acts, although thecompany lacked the funding. Putin also spent two years trying to gain control over Russian gas export routes through Ukraine, using the threat of bypass lines through Poland and Slovakia.

Russia has invested heavily in its Blue Stream gas project to cross the Black Sea to Turkey, a direct route that does not depend on transit countries like Georgia. It also hopes to build a bypass around the Bosporus through Greece to avoid limits on its Black Sea oil exports.

In one sense, the bypasses are modern commercial versions of Moscow's old security problem of access, which haunted the Soviet Navy during the Cold War. Russia now seems to have adapted the issue even further by making it part of its new energy partnership with the West.

But Moscow's ability to adapt may be less remarkable than its continuing distrust of the U.S. goal for similar access routes from the Caspian Sea to the open water of the Mediterranean. Moscow has apparently denied LUKoil permission to join in building the Baku-Tbilisi-Ceyhan pipeline out of concern that it would bypass Russia for oil exports from Azerbaijan.

Russia could use the route to boost exports, as with Primorsk and Vysotsk, especially since LUKoil owns a share of the Azerbaijani oil fields that will feed the pipeline, known as BTC. LUKoil has said it may ship oil through the line, but its cost will be higher than for companies that join the project as sponsors of BTC.

Despite the changes in U.S.-Russian relations, the Caspian still seems to be the limit of energy cooperation. That could change, but so far, what works in the north has yet to work in the south.