MOSCOW - For a decade Washington has backed 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 W 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.
Bosphorus chokepoint, Bosphorus bypass
In parallel, Turkey has been steadily tightening restrictions on tanker
movements 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
(Azerbaijan-Turkey). It passes through Tbilisi in Georgia and is known as the
BTC project.
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 a 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 chief executive
officer Semyon Vainshtok said his company was interested in constructing a 193
kilometer 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 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 North Atlantic Treaty Organization (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.
Ukrainian reversal, Croatian opening
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 with Russian oil exporters, has 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 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 upon 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 Russian oil
cargoes.
Embargo for Latvia
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.
Checkmate for the Yukos-Houston alliance
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. The Murmansk project will wither, they believe,
for lack of oil to ship.
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
a shipment of about 250,000 tonnes of oil which was despatched to Houston in
June of 2002 on three 80,000-tonne tankers, which transferred the cargo to a
VLCC (Very large crude carrier) 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 Asia Times Online 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 refinery needs was 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 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, 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
Asia Times Online 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 was "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". Indirect shipments, through
Rotterdam and other markets, were "approximately 250 to 270,000 tonnes per
month". A Russian Energy Ministry official told Asia Times Online 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 chief
executive officer Mikhail 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 favorable 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% 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.
Putin's hand on the oil pump - the eastern option
Until Vladimir Putin became president in 2000, Russian oil policy was dictated
by a corrupt alliance of Russian oil producers and the US government. Putin's
campaign against Yukos has put a stop to that. Even during the Boris 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 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 oil 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% 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 Far East. 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 wants to reduce its growing
dependence on oil shipped from the Middle East, Africa and Southeast 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 center 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 to Asia Times Online by Transneft executives have backed the Russian
and Chinese government 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 or
first-largest oil exporter, to ship and market oil in the way Washington, or
Houston, wants.
(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact
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(Azerbaijan-Turkey). It passes through Tbilisi in Georgia and is known as the
BTC project.
