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. Last Updated: 07/27/2016

Transneft Plays the Power Game

Pipeline monopoly Transneft has begun to exercise its power, although it faces a rival in the Caspian, analysts say.

Its importance was shown again last week when it followed a court order and stopped top oil company LUKoil from exporting for two days.

Analysts said the incident was another demonstration of how Transneft has switched from an obedient arm of private oil business and become a power in its own right, deciding on export strategy and with its own oil production plans.

"Transneft is constantly flexing its muscles to demonstrate its increased role," said one oil analyst.

Steven Dashevsky, an analyst at Aton brokerage, said that Transneft has taken over all independent pipeline projects over the last two years, managing at the same time to force private oil firms to pay the construction costs by persuading the government to introduce a special investment tariff.

Transneft has also taken over a Russian-Chinese oil pipe project as well as the Baltic pipeline plan from western Siberia to the terminal in Primorsk on the Gulf of Finland, which had been initially started by private companies.

Valery Nesterov, an oil analyst for Troika Dialog brokerage, said Transneft would also soon produce its first oil in the Timan-Pechora province in the north, long dominated by LUKoil.

"The importance of Transneft has risen considerably as the state wants it to increase export capacities to bring down the possible negative impact of an oil prices decline," he said.

Most of Russia's oil exports still flow through Transneft's network of pipes, much of which dates from the Soviet era.

Russia in 2000 exported 2.9 million barrels per day (21.2 million tons) of crude in 2000 and plans to increase oil exports to 4.0 million barrels per day within the next five years.

The country is currently benefiting from high world prices for crude, a key part of its exports and currency earner.

Transneft's position also seems likely to be helped by the fact that President Vladimir Putin is keen to exercise strong state control over key industries like oil export and take a stronger hand with the oil companies.

Last week's LUKoil incident was surrounded by mystery as the order to stop its exports was made by a court in the town of Ryazan on a case brought by a small shareholder. Some Russian media said Transneft itself or rival oil firms were behind the move, although LUKoil seemed not to agree.

At a news conference after a court in another city ended the stoppage, LUKoil vice president Leonid Fedun said he had been surprised that Transneft had not checked the details of the court order. He declined to comment on whether Transneft had arranged the whole stoppage itself.

Although Transneft still casts a long shadow over the industry, its export dominance is to be lessened as the Caspian Pipeline Consortium's pipe prepares to come on line.

The 1,510-kilometer pipeline, with an initial capacity of 560,000 bpd to ship oil from the Tengiz oilfield in Kazakhstan to the Russian port of Novorossiisk on the Black Sea, is expected to come on stream over the next few months. But the field is not yet fully operational and Russian oil companies LUKoil and Rosneft can ship their crude through CPC instead of using Transneft's pipelines.

"Transneft is nervous because it is also aware that it will lose up to 5 million tons [684,000 bpd] of Kazakh light crude, which is important for the quality of the Russian Urals blend," said Nesterov.

CPC unites the governments of Russia, Kazakhstan and Oman, LukArco, Rosneft-Shell Caspian Ventures, Kazakhstan Pipeline Ventures, Chevron, Mobil Caspian Pipeline Company, Agip International, BG Overseas Holdings and Oryx Caspian Pipeline.

Gennady Krassovsky, analyst at NIKoil investment bank, said CPC would not really undercut Transneft financially, but play its role in highlighting the chances of further competition.

"When CPC is built, it will mean the first pipeline project in Russia which is not controlled by Transneft," he said.

"However the financial problem is not very big for Transneft, it will not lose much money. The problem is only psychological."