TRANSNEFT SQUEEZING OIL MAJORS IN THE CASPIAN PIPELINE CONSORTIUM

On July 19 Transneft president Semyon Vainshtok told the press that Russian demands “are becoming more severe” toward Western companies in the Caspian Pipeline Consortium (CPC). The added severity includes a concoction of tax claims retroactively. The U.S. companies Chevron and ExxonMobil are among the targets of Russian extortion on this 1,580 kilometer pipeline, which was built mainly with U.S. capital and technology to carry oil from Kazakhstan to Russia’s Black Sea port of Novorossiysk.

At stake are the terms for using the CPC pipeline on Russian territory as well as the conditions for enlarging its capacity to accommodate production from Western-operated oilfields in Kazakhstan. The threat of greater severity is Moscow’s response to the companies’ resistance to continuing extortion over the years, with no end in sight.

Four main issues are again pending. First, Moscow demands a dramatic raise in the transport tariff on the pipeline’s Russian section, from $24.60 to $38 per ton.

Second, Moscow wants to halve the interest rate — from 12.66% annually to 6% — on the multibillion-dollar loans that the privately owned companies had provided for construction of this pipeline.

Third, Moscow wants the CPC consortium to issue $5 billion worth of Eurobonds in order to refinance the consortium’s debts, much of which have developed as a consequence of Russian-imposed terms of using the pipeline since 2001.

Fourth, Moscow demands changes to the CPC charter so as to increase the powers of Russian government-nominated representatives within the consortium.

The companies are permanently exposed to shakedown tactics on the Russian section of the pipeline in the absence of alternative options. For several years the Russian government did not compensate the oil companies for revenue lost through mixing high-quality oil from Kazakhstan with the lower-quality Urals blend in the pipeline on Russian territory, en route to Novorossiysk. Last year, Moscow imposed a first redistribution of consortium management posts in Russia’s favor.

A new issue is now coming to the fore. Russia wants U.S. and perhaps other Western companies involved in Kazakhstan to co-finance the construction of the Burgas-Alexandropolis oil pipeline and to commit their oil volumes from Kazakhstan to that pipeline. The Burgas-Alexandropolis project, from Bulgaria’s Black Sea coast to the Greek Aegean coast, is Russian-controlled and is planned as a continuation of the Kazakhstan-Novorossiysk line, so as to maximize Russia’s intake of oil from Kazakhstan. It is a rival to the U.S.-supported, trans-Caspian transport project for oil from Kazakhstan westward. The planned capacity of Burgas-Alexandropolis is 15 million tons annually in the first stage and 35 million tons in the second stage. These figures correspond with the capacity increases proposed for the CPC pipeline. They show Russia’s intent to absorb growing volumes of Western-extracted oil from Kazakhstan into Russian-controlled transit routes.

The CPC pipeline carried 31 million tons of oil from Kazakhstan in 2006 (above the design capacity of 27 million tons annually for its first stage). Existing plans call for enlarging its capacity to 67 million tons annually (above the originally planned 64 million tons for its second stage). Meanwhile, an intermediate goal of 54 million tons annually is under discussion.

This pipeline operated at a loss every year from 2001 to 2005. It registered a profit apparently for the first time in 2006, although Moscow continues insisting in 2007 that the line’s “profitability is doubtful.”

CPC’s main users include Chevron, ExxonMobil, Kazakhstan’s KazMunayGaz, Italy’s Agip, and a few other oil companies operating onshore fields in northwestern Kazakhstan. The CPC pipeline consortium includes Russia with a 24% stake (managed since April of this year by Transneft), Kazakhstan with 19%, Chevron with 15%, ExxonMobil with 7.5%, and other international and Russian shareholders.

Thanks to the pipeline’s stretch on Russian territory and the sole outlet at Novorossiysk, Russia holds a monopoly on the transit of Western-extracted oil from Kazakhstan’s richest fields. These include the Tengiz oilfield and Karachaganak oil, gas, and condensate field, where the U.S. companies and Agip hold the main stakes and operating rights. The production schedules are being held back year after year, most visibly at Tengiz, because Russia demands unacceptable terms for using the CPC line.

Hostage to the Russian transit monopoly, the companies could have countered by creating the U.S.-proposed transport system across the Caspian Sea to Azerbaijan and farther westward. The companies finally signed an agreement of intent to that effect in January of this year, but there has been no known follow-up since then (see EDM, January 25).

On July 3-4 in Moscow, a CPC shareholders’ assembly turned down most of Transneft’s demands by a majority of votes, but also decided to take several weeks to reconsider some of the demands. Transneft gave the shareholders two weeks to reassemble and hold another vote, apparently on different rules of procedure.

When this did not happen on July 19, Vainshtok announced that Transneft has exercised its right to convoke an extraordinary assembly for September to pose “more severe” demands. Moreover, a working group chaired by Transneft has been created to plan refinancing CPC’s debts through a Eurobond issue and draft a new charter of the consortium.

Those additional demands now include Federal Tax Service claims for “unpaid taxes” from CPC retroactively: 2.1 billion rubles for 1999-2002; 4.7 billion rubles for 2002-2003; and $290 million for 2004-2005. The consortium is disputing these claims in Russian courts. Retroactive tax claims — subject to escalation ad libitum — is a device that the Kremlin has tested and honed recently to expropriate major oil and gas companies or force them to yield controlling stakes in consortiums.

The Kremlin may well plan to take over control of CPC through such pressures. This could defraud the companies and their shareholders, reinforce Russia’s quasi-monopoly on the transit of oil from Kazakhstan, defeat the U.S.-promoted east-west Caspian energy corridor, and create instead a Russian-controlled oil export axis stretching from Kazakhstan to Greece and farther afield.

(Moscow Times, July 5; Kommersant, July 13; IWPR Update Kazakhstan, July 19; Interfax, July 4, 12, 18, 19, 20)