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. Last Updated: 07/27/2016

Fradkov Backs Idea of Parallel Gas Pipeline

Prime Minister Mikhail Fradkov on Tuesday threw his weight behind the idea to build a gas pipeline alongside the Pacific oil pipeline, a proposal that could enable Gazprom to reach Far East markets and keep spiraling construction costs under control.

"I regard it positively," Fradkov told reporters at a meeting on the oil pipeline in the Sakha republic with regional officials. "We plan both the gas pipeline and the development of subsoil resources."

The parallel pipeline, a proposal by the Sakha regional government, is "on the table and being discussed," Kremlin spokesman Dmitry Peskov said Tuesday.

Fradkov on Tuesday warned against rapidly rising costs on the construction of the 4,000-kilometer East Siberian-Pacific Ocean oil pipeline, which will run from Taishet in the Irkutsk region to Primorsk on the Pacific coast, via Skovorodino near the Chinese border.

"The government does not like the trend that the project could exceed economic calculations made at the feasibility stage," Fradkov told Sakha President Vyacheslav Shtyrov and regional officials, Itar-Tass reported. "We understand that work is being carried out at high speed, but blunders must be prevented."

In an interview published Tuesday, Semyon Vainshtok, the CEO of pipeline monopoly Transneft, said he would seek to introduce a uniform pipeline tariff in an effort to meet the costs of the Pacific oil route.

On a separate tack, Vainshtok also said work could begin as soon as April on a pipeline to bypass Belarus, with whom Russia had a price spat early this year, as a way of diversifying its European export routes.

The estimated cost of the Pacific oil pipeline, originally put at $11 billion, has risen since construction began last year, due to the higher cost of raw materials and a rerouting of the pipeline away from the environmentally sensitive area of Lake Baikal.

Transneft said last month in a eurobond prospectus that the first leg of the Pacific pipeline would cost at least $11 billion, up from initial estimates of $6.6 billion. The pipeline will have an initial capacity of 30 million tons annually, rising later to 80 million tons.

The rerouting around Lake Baikal, ordered by President Vladimir Putin last April, has added $1 billion to the bill.

Deutsche UFG said in a research note last month that total project costs could reach $20 billion, based on 2006 prices.

Vainshtok told Kommersant in an interview published Tuesday that the company would seek to introduce a uniform nationwide tariff for its pipelines -- to replace the range of different fees that currently exist -- in an effort to meet the cost of the Pacific pipeline.

With existing tariffs, the $11 billion investment in the first phase of the pipeline would take 16 years to recoup, Vainshtok told Kommersant.

UBS said in a research note Tuesday that currently the oil pipeline did "not look attractive from a financial perspective." But Vainshtok's plan for a uniform tariff based on transportation distances would, in effect, subsidize the Pacific pipeline and "could make it easier for Transneft to recover its investment," UBS said.

The idea of parallel pipelines has been discussed before but not properly explored, and Fradkov's remarks should be taken seriously, analysts said.

While several proposals for gas pipelines from eastern Siberia to Far East markets are floating around, it would be much cheaper to run two pipelines alongside each other, said Valery Nesterov, oil and gas analyst with Troika Dialog. Both projects could then use the same infrastructure and no additional land would have to be acquired, he said.

But Nesterov added that he did not expect a second pipeline to be built anytime soon.

Nesterov and Kakha Kiknavelidze, natural resources analyst with UBS in London, agreed that oil pumped through the Pacific pipeline would benefit under Vainshtok's proposed new tariff policy, while helping to earn back the considerable investments.

The gas pipeline would fit in well with plans to diversify Russia's export markets, Kiknavelidze said.

Much will depend on the development of new Siberian fields, such as the long-stalled Kovykta gas field currently run by TNK-BP, and on strategic decisions Gazprom and the government will have to make about sending the gas east to China or west to Europe, Kiknavelidze said. Such decisions should not be expected before next year's presidential elections, he said.

Kovykta has long suffered from a lack of export routes, a problem that could disappear if TNK-BP reaches an agreement with Gazprom on the state-controlled gas giant taking a majority stake in the project.

The section of the oil pipeline to Skovorodino near the Chinese border is scheduled for completion by the end of next year.

Igor Voloboyev, a spokesman for Gazprom, said Tuesday that the company was looking at possible export routes but declined to comment on which one would be chosen.

Vainshtok told Kommersant that such a tariff policy would make it viable to export oil either eastward or westward from any region of the country.

Analysts said the change would benefit oil exports to Asia, but could make exports to Europe, such as through the Black Sea port of Novorossiisk, more expensive.

But using oil exports to Europe to subsidize exports to Asia would make political sense for the government, as it would help to diversify its markets, Kiknavelidze said.

It is not clear when a decision on the new tariff policy would be taken, Transneft vice president Sergei Grigoryev said by telephone late Tuesday.

The decision on building a Belarus bypass pipeline will likely be made within one or two weeks, Vainshtok told Kommersant. Construction of the bypass from Unecha near the Belarussian border to the Primorsk terminal near Finland, with an annual capacity of 50 million tons, could then start as soon as April, he said.

UBS warned in its note Tuesday that the Belarus bypass, with estimated costs of $3 billion, was "economically unjustifiable."

But it would make political sense, Kiknavelidze said, in that it would reduce political risks and ensure stable energy supplies to Europe.