Kremlin, oil magnates clash over pipeline control

Tensions have risen in recent weeks between Russian oil magnates and the Kremlin, as the former are lobbying for increased pipeline capacity for exports while political leaders refuse to relinquish the control over the country's infrastructure.

Mikhail Khodorkovsky, president of Yukos, Russia's second largest producer, took the dispute to the World Economic Forum in Davos, Switzerland, last month, slamming Prime Minister Mikhail Kasyanov for allegedly trying to impose "Saudi-style government" in Russia.

"Our biggest problem is the friction between the entrepreneurial class and the bureaucrats," Khodorkovsky charged.

Oil producers recently urged the government to allow them to construct their own pipeline to help them cope with booming production and make good the deficiencies of Transneft.

Leonid Fedun, vice president of Russia's leading oil producer LUKoil, said that up to 25 million tons of oil were being held up within Russia's borders due to the insufficient capacity of the pipelines network run by Transneft, a state-owned monopoly.

According to analysts' data, January exports of crude fell by 0.3 percent.

Poor weather conditions impaired the movement of oil through Russia's Black Sea ports, while the government blocked exports carried to the Latvian port of Ventspils, further aggravating the problem.

Meanwhile, Russia aims to produce up to 424 million tons of oil this year, a significant boost compared with the 379 million tons produced last year.

Eighty percent of this new oil is intended for export.

"Russia must step up its exports in 2003, and it needs additional transport capacity. If the oil companies cannot export they will have to cut production," Valery Nesterov of Troika Dialog Bank said.

However, Transneft has so far been lagging in taking the technical measures needed to cope with an increase in production.

"Oil producers are prepared to invest in their own pipeline network, but the government is opposed as the Transneft monopoly gives it leverage over the companies," Nesterov noted.

Moscow also wants to ensure that the internal market is supplied at affordable prices.

LUKoil and Yukos, along with fellow oil giants Sibneft, TNK and Surgutneftegaz, have suggested that Murmansk could be equipped with a shared oil terminal with a pipeline connected to oil fields in the north or eastern Siberia, which would facilitate oil exports to the United States.

The companies said they were ready to finance the project if given preferential access rights.

"Transneft could thus remain the pipeline operator, as it retains the technical capacity, but the project would require a change in legislation," said Stephen O'Sullivan of United Financial Group, an investment bank.

"The oil companies were incensed" by Kasyanov's intention of keeping the pipelines in state hands, O'Sullivan explained, adding that he didn't think it was the last word on the matter.

Oil companies' owners have appealed to the Russian government to ease its stranglehold on Russian exports on several occasions. But so far they have failed to agree with Transneft over priorities.

"The oil producers want the emphasis to go on exports to Murmansk and China, while Transneft is looking to deliveries to Japan, and would like to develop an already existing pipeline to Primorsk" on the Baltic coast, the analyst noted.