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. Last Updated: 07/27/2016

Chevron Pipeline Set to Expand

The government is close to giving the go-ahead for the expansion of the Chevron-managed pipeline that ships oil from Kazakhstan to the Black Sea, a top Chevron official said Thursday, casting off concerns that the Kremlin's recent moves against foreign participation in the energy sector would harm the U.S. oil major's project.

Yet the company is still battling the courts over hundreds of millions of dollars in back tax claims against the Caspian Pipeline Consortium, or CPC, Chevron Neftegas president Ian MacDonald said in an interview.

MacDonald refused to comment on Gazprom's decision this week to exclude foreign partners from developing the huge Shtokman gas field. Chevron was short-listed for participation in the project, along with U.S. company ConocoPhillips, Norway's Statoil and Norsk Hydro, and France's Total.

Total spokeswoman Patricia Marie also declined to comment, saying: "As we did not receive notification or direct communication, it is premature to react."

Menno Gruvel, Total's senior vice president for continental Europe and Central Asia, on Thursday said Total would only participate in Shtokman if it were offered partnership in the project.

President Vladimir Putin said Tuesday that while Gazprom would be the sole owner of Shtokman, it could still invite foreign companies to participate as contractors.

"We are not a servicing company," Gruvel said, Interfax reported from Paris. "Our goal is to have access to production in exchange for our expertise and risk."

Gazprom's shock decision to go it alone at Shtokman comes amid increasing pressure against foreign oil majors Shell, ExxonMobil and Total, as the government seeks to ensure it reaps the most benefit from the country's enormous oil and gas reserves.

The government has long been opposed to the expansion of the CPC, a 1,510-kilometer pipeline that connects oil fields in Kazakhstan to the Russian Black Sea port of Novorossiisk. It is the only oil pipeline running through Russia that is not controlled by pipeline monopoly Transneft.

"Russia and Kazakhstan have both agreed that they want CPC expanded, provided Russia's economic interests are taken care of," Chevron's MacDonald said.

"We're confident that we're edging towards a final agreement on CPC," he said, adding that the company expected a decision "in the coming months."

The government has long opposed CPC's plans to double the pipeline's capacity to 1.4 million barrels per day, as it would greatly increase the amount of oil in direct competition with Russian products for passage through the already-crowded Turkish straits.

With a 15 percent stake in CPC, Chevron is the largest of eight private companies involved in the venture. The Russian and Kazakh governments have the largest shares, with 24 percent and 19 percent respectively. Shell and LUKoil, as well as the government of Oman, also hold stakes in CPC.

The companies have funded the $2.67 billion project, and MacDonald said they had in principle agreed to a series of Russian demands that should allow the expansion, which includes the construction of new pump stations, storage tanks and a third offshore loading system, to go ahead.

"Most of the economic changes have been agreed," he said, including tariff adjustments, a structure for renegotiating tariffs in the future, and shipper pay, whereby shippers would agree to pay the set tariff even if they had not reached their contractual shipping obligations.

Yet the consortium is still embroiled in a tax dispute with the government, and has recently appealed a Moscow court's decision that the group owed hundreds of millions of dollars in back taxes.

A Moscow court decided Sept. 14 that the Chevron-led group would have to pay $175 million in back taxes for 2002 to 2003, ruling in favor of the Federal Tax Service, which had brought the claim in July.

"We think that the tax office's decision to disallow deductibility is wrong in law, and contrary to the shareholders' agreement," MacDonald said.

Chevron deducts interest on shareholder loans, listing the amount as an operating expense, in accordance with Russian law, MacDonald said. If the court holds up the illegality of deductibility, the back tax claim could be applied to other years, possibly adding up to about $700 million in back taxes and affecting future tax payments.

The company has faced dozens of tax claims, MacDonald said, adding "we expect to have the court find in our favor in due course."