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. Last Updated: 07/27/2016

Agreement Reached on Caspian Oil Pipeline

ALMATY, Kazakhstan -- Russia, Kazakhstan, Oman and 10 oil companies over the weekend resolved the last remaining differences over construction of a key export pipeline from Kazakhstan to the Russian port of Novorossiisk.

The $1.5 billion pipeline would pump 28 million tons of oil a year from western Kazakhstan to Novorossiisk, connecting $30 billion of Western ventures to world markets. An expansion to 68 million tons would be financed partly from early revenues.

Ed Smith, general director of the Caspian Pipeline Consortium that will build the pipeline, said the parties "agreed in principle" on all issues at a meeting in Moscow last week and hope to sign a shareholder agreement in early December. This should enable the 10 oil companies, including Chevron and Mobil, to purchase 50 percent of the consortium in late January from its current members, the governments of Russia, Kazakhstan and Oman.

Investors such as Chevron and British Gas have held back production in Kazakhstan because Russia, claiming capacity limitations, would not grant sufficient access to its export pipelines. Kazakh officials accused Russia of using its stranglehold on the project to press for political concessions but have not been able to finance any pipeline avoiding Russia.

Oman in 1992 formed the CPC with just Russia and Kazakhstan, but Chevron, the pipeline's main potential client, refused to take a stake unless Oman cut its stake to reflect its limited investment.

The breakthrough came last spring, when Chevron, Mobil and other producers pledged to finance construction of the pipeline in return for a 50 percent stake.

Russia was mainly persuaded by a 24 percent state share, plus a 20 percent block held by LUKoil and Rosneft -- jointly with Western partners -- and revenues for the pipeline's Russian operator, Transneft. Previously, the Russian government held one-third of the venture.

"The smell of oil got too strong," said Umirserik Kasenov, director of the Institute for Strategic Research in Almaty. "Projects in the Caspian region are getting on line, and Russian businesses and oil ministry officials felt that Russia would miss the boat.

"Russia started to understand that all that oil should go through Russia, because serious talks had started aboutalternative routes," Kasenov said. "It's in Russia's interest to have the CPC built. Whoever builds the pipeline controls the oil exports from the Caspian region."

More worrying to the negotiators were recent suggestions by Boris Berezovsky, deputy chairman of Russia's Security Council, that all oil pipelines from the Caspian should pass through Chechnya -- a war-torn region the Caspian Pipeline is designed to miss. "Such a detour would be uneconomic," one CPC negotiator said curtly.

The consortium will include the U.S. oil companies Chevron, Mobil and Oryx, British Gas, Agip of Italy, Kazakhstan's state company Munaigaz and the Russian companies LUKoil and Rosneft.

Arco, LUKoil's American partner, will take 46 percent of LUKoil's stake to provide financing and bring the share of U.S. companies to 30 per cent. This allows U.S. members to deduct taxes paid in Russia, according to a tax treaty with the United States. Royal Dutch Shell will take over 49 percent of Rosneft's share.