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. Last Updated: 07/27/2016

Big Oil Joins to Boost Crude Exports to U.S.

ReutersLUKoil's Vagit Alekperov, TNK's German Khan, Yukos CEO Mikhail Khodorkovsky and Sibneft president Eugene Shvidler join hands.
Four of the country's oil majors teamed up in a multi-billion dollar deal Wednesday to build a giant export terminal in Russia's only ice-free Arctic port, a move that should help the United States cut its dependency on the Middle East.

The planned deal comes as Russia seeks markets outside Europe, while the United States is looking to diversify its crude sources away from traditional but politically turbulent suppliers.

The proposed new port also comes amid increasingly friendly relations between Moscow and Washington.

"It is extremely important that the Russia-U.S. relationship is developing in a constructive way. It convinces us that we will secure access to U.S. oil markets and U.S. oil companies will gradually join our production projects," Mikhail Khodorkovsky, CEO of No. 2 oil major Yukos, told reporters.

The memorandum of understanding was signed by executives from LUKoil, Yukos, Tyumen Oil Co., or TNK, and Sibneft, which together account for more than half of Russia's 8 million-barrel-per-day output.

"Russian companies could supply up to 13 percent of the United States' total crude oil imports by 2010," the companies said in a statement. They agreed to build a 1 million bpd terminal in Murmansk in the Barents Sea and a link of between 2,500 kilometers and 3,600 kilometers to connect Murmansk with the country's existing pipeline network. This should be completed by 2007.

Russia ships up to 4 million bpd of crude to world markets. Its output is booming for the fourth straight year, and Moscow needs new export routes as its domestic consumption remains flat.

Oil companies, which traditionally ship their crude to Europe, say they are ready to supply more crude to the United States but need more deep water ports.

Khodorkovsky said the port was vital for growth as Russia planned to produce up to 10 million bpd by 2010.

"We have to build this route before oil prices collapse. Without new export routes Russian output will again slide to 6 million bpd. This would be against our economic interests, as our oil reserves are simply massive," he said.

Yukos has already tested the Murmansk route, sending several 100,000-metric-ton cargoes to Europe over the past two months. The company was first shipping crude to the port either by rail or taking ship-to-ship transfer from small northern ports.

The planned pipeline is due to dramatically reduce costs. LUKoil said it would cost $24.7 per ton to ship crude from western Siberia to the U.S. East Coast via Murmansk, compared with $30 per ton from western Siberia via the Black Sea. LUKoil said the sea route to the U.S. East Coast from Murmansk will be just 9,300 kilometers compared to 20,600 kilometers from the Gulf.

"Trans-Atlantic shipments from Murmansk become profitable with cargoes above 240,000 tons," Khodorkovsky said.

The four majors said more companies could join the project soon, including state pipeline monopoly Transneft.

"I'm sure the number of participants will grow and Transneft is likely to operate the project," Sibneft president Eugene Shvidler said.

But the four companies said the state should allow them to regulate the new pipeline's access rules and tariffs.

"Let's make it clear: Regulation rules for a private pipeline should be different from existing state pipelines regulations," Khodorkovsky said.

Transneft has opposed the existence of private pipelines, saying the monopoly was the last arm helping the state regulate its almost fully privatized oil sector.

Transneft declined to comment.

The four majors said Surgutneftegaz and Rosneft could join the project.

"With more participants, we could boost the pipeline and port capacities to about 120 million tons," Khodorkovsky said.