02/03/2003 | Englisman

FROM THE ARCHIVES: January 31, 2003


Have Oil, Won't Let
It Travel Via Latvia

By VLADIMIR SOCOR

Russia's oil production and exports are growing spectacularly in response to strong international demand, high prices and Western strategies to reduce dependence on OPEC oil. The Russian oil flow is about to overtake the capacity of Russia's pipelines and export terminals. New pipeline routes and oil ports are urgently required in order to handle the growing exports. Yet construction of such infrastructure, is not keeping pace with the growth in exportable oil volumes. Bottlenecks are already apparent, constraining Russian oil deliveries to Western markets.

In this situation, you'd think that the government in Moscow would encourage the country's oil-producing companies to use every available pipeline and port, to maximum capacity. Instead of doing that, however, the Russian government and its fully-owned pipeline monopoly, Transneft, are forcing a major export terminal for Russian oil to shut down.

That terminal is Ventspils in Latvia, the largest oil port in the Baltic region and the second-largest (after Novorossiisk on the Black Sea) maritime outlet for Russian oil. Ventspils boasts an annual handling capacity of at least 16 million tons of oil and oil products, modern installations, and proven high-quality service to tankers carrying Russian oil to points West. The oil port is owned partly by Latvian private investors and partly by the Latvian state; the latter had planned to auction off most of its shares this year.

This month, Transneft cut Russian oil exports via Ventspils to zero. The Russian government then announced what amounts to a death threat against the Latvian port -- namely, that it would not export any oil through Ventspils in the coming months.

These are only the final moves of what has been a methodic asphyxiation. Between January and December last year, for instance, the Russian government reduced the oil transit through Ventspils from a once-healthy volume to a trickle. It seeks to force the oil port into bankruptcy and asset depreciation, and thus to blackmail the Latvian owners -- both state and private -- into selling a controlling stake to Transneft at a fraction of the real value. Moscow also undoubtedly calculates that Russian state control of Latvia's single largest economic asset would translate into economic and perhaps political leverage on this small country.

Moscow claimed all along that it was merely rerouting the flow from Ventspils to the newly built oil port of Primorsk, owned by Transneft, at the Russian end of the Baltic Sea. By now, however, it turns out that Primorsk -- and indeed Russia's overall export infrastructure -- is insufficient for handling the existing -- let alone the projected -- oil export volumes. This is especially true in winter, when Primorsk freezes for several months, while operations at Novorossiisk are also being severely disrupted for several months by storms and high waves, endemic in winter to that area.

By contrast, Ventspils is ice-free and ideally suited for year-round operations. Thus, to force it to shut down in winter is to exacerbate the deficit of infrastructure for Russian oil export. The infrastructure deficit will be felt even more in the spring when Russian oilfields ramp up their production in response to rising Western demand.

An oil glut is already in evidence and growing within Russia, seeking outlets to international markets. Thus, the Russian government's moves against the Latvian export terminal hurt not only Latvia, but Western interests, and, indeed the interests of Russian oil-producing companies, most of which are private by now.

Earlier this month, five of Russia's largest oil producing companies -- Lukoil , Yukos, Surgutneftegaz, Tyumen, and Rosneft -- petitioned Prime Minister Mikhail Kasyanov to authorize them to resume exports of oil and oil products through Ventspils, using Transneft's pipeline. Kasyanov demonstratively ignored the petition; while Deputy Prime Minister Viktor Khristenko, who is responsible for the energy sector, turned down the request. Russian government officials indicated that the Kremlin backed Transneft and so authorized the government's negative response to the producer companies.

To be sure, Ventspils can only handle a relatively small part of Russia's total exportable oil volume. But it can at least alleviate the situation in the short term, enabling Russian producer companies to increase exports in keeping with their recently assumed commitments.

The United States and other Western countries want to boost Russian oil exports as a price stabilizer on the world market, a substitute for the shortfall in Venezuela's output, and a hedge against possible disruptions in supplies from the Persian Gulf in the event of war in Iraq. While Russian companies seem ready to respond to market demand, the Kremlin authorizes the government and Transneft to cut off the Latvian outlet at a critical time.

Russian producer companies are currently sending small amounts of crude oil and refined products to Ventspils by railroad, which is outside Transneft's authority. But rail transport is expensive, and the volumes are too small to make a difference on international markets -- or to rescue the Latvian port from the stranglehold.

This month, the Russian government has discontinued the transit of Kazakhstani oil via Russia to the Latvian terminal. The amounts involved were meager in the first place. The issue of shipping Kazakhstani oil from Latvian and Lithuanian ports is a perennially vexed issue.

Russia insists on retaining a near monopoly on the transit and shipment of oil from Kazakhstan. By cutting off Ventspils from Kazakhstani oil as well, the Russian government raises doubts with respect to Russia's reliability as a transit route for Caspian oil.

Latvia, soon to become a member of the European Union, naturally seeks EU support against such extortion. In a recent letter to EU External Affairs Commissioner Chris Patten, Latvia's Foreign Affairs Minister Sandra Kalniete expressed concern that the Russian government's moves against Ventspils are politically motivated, and also incompatible with Russia's aspiration to become a member of the World Trade Organization (of which the three Baltic states are members). The minister underscored Latvia's wish to resolve these issues jointly with the EU and to become actively involved in the EU-Russia energy dialogue.

Thus far, the EU does not seem to have devised a policy answer to the massive entry of Russian energy giants in the energy sectors of the Baltic states and other prospective member countries. While those Russian companies function as energy exporters to EU member countries in Western Europe, the same Russian companies act or seek to act in the Baltic states in the multiple role of energy suppliers, distributors and part owners of generating plants and transport systems.

Moreover, while the EU's Western members are in a position to diversify their energy supply sources, Russia enjoys a near-monopoly as energy supplier to prospective EU members such as the Baltic states. This economic clout seems to be growing, and can potentially be misused for gaining political influence.

The EU must forestall any trend toward a division of EU territory into two zones -- western and eastern -- that do not enjoy the same level of energy security and immunity to political misuse of energy deliveries. The answer should be a program of targeted investment by the EU in the energy sector of the Baltic states and other prospective member countries.

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