Private Pipelines Get State's Backing

The government on Thursday ended its opposition to private oil pipeline projects, saying it had agreed to study an idea to turn Arctic Murmansk into a vast oil port to boost supplies to Europe and the United States.

Analysts said the state was ready to sacrifice its pipeline monopoly to allow the sector to raise exports to lucrative Western markets and increase revenues for state coffers.

"The strategic decision that the pipeline [to Murmansk] should exist has been taken," Energy Minister Igor Yusufov told reporters after a weekly Cabinet meeting. "The government has for the first time made public its position that the state is not trying to fully own new pipelines, but it reserves itself the right to monitor and regulate the transport infrastructure."

The decision to consider developing a terminal at the Murmansk port, ideal for shipping crude to the United States, could help Moscow cement its energy links with Washington.

The government, which controls all Russia's trunk pipelines via its monopoly Transneft, had long been opposed to the idea of building a pipeline and a vast oil port in Murmansk, backed by some of the country's largest private firms.

But Russia's oil output is booming, while export capacity remains limited, and oil firms say the country needs Murmansk if it wants to return to the Soviet-era output volumes and catch up with the world's largest oil producer, Saudi Arabia.

Russia produces 8.2 million bpd and wants to increase output to 10 million bpd in a few years. It exports 2 million bpd of oil and another 2 million bpd of refined products per year, and oil firms say Russia needs at least another 3 million bpd of new export capacity.

The state in March approved a plan by Transneft to quadruple the capacity of the new Baltic port of Primorsk to 1.2 million bpd, but oil firms say the ice-prone port is not economic for U.S. shipments compared with the proposed ice-free and deep-water Murmansk port.

Oil firms said they were delighted with Thursday's decision.

LUKoil vice president Leonid Fedun said building the pipeline would allow Russia to overtake Saudi Arabia in terms of output, Interfax reported.

He said the project would bring the state $40 billion in taxes over 10 years.

However, he said the government was still discussing whether Transneft or the oil companies themselves would run the project. "We can only welcome this decision and promise from our part to do our best in implementing the project as fast as possible," Yukos spokesman Alexander Shadrin said.

Yukos and three other firms, LUKoil, Sibneft and BP partner Tyumen Oil Co., all of whose output is growing much faster than export capacity, have touted building a 2 million bpd link to Murmansk by 2007. The pipeline from west Siberian fields and the terminal would cost $4 billion to $5 billion.

"The government showed today that it is aware that by limiting the expansion of the transport infrastructure it is only limiting exports and reducing its own revenues," said Pavel Kushnir from United Financial Group. "Today, oil firms' plans to further boost oil output seem more feasible."

But Leonid Mirzoyan from Deutsche Bank cautioned this did not mean the government was wholeheartedly behind the Murmansk project.

"It is clear that the government will prioritize Primorsk, and we should not expect quick progress on the Murmansk front," he said. "I'd like to see other top government officials confirming that the opposition to private pipelines is definitely dropped."