Russian Oil Oligarchs Suffer from Overproduction Crisis

Railway works at full capacity, pipelines are packed

“A military ruse is used when one side wishes to mislead its enemy regarding the armed forces strength and their supposed actions. There are various ways for a military ruse: fake attack, temporary bridges, as well as pretended deployment of a military unit,” – small encyclopedic dictionary.

Russian oil company Surgutneftegaz had a limited access to the pipeline of another oil company Transneft. As a result, some 750 thousand tons of oil turned out to be undistributed. Several other Russian companies used that fact in order to prove to the government that there is a strong need to build new pipelines. They said that they were ready to build the Murmansk pipeline system at their own expense. However, the international corporation Transneft is certain that the companies are not going to build a pipeline. As Transneft believes, they simply want to make the state grant them the privilege access to the system.

Alexander Filipenko, the governor of the Russian Khanty-Mansiysk autonomous region was the first man, who touched upon the subject of overproduction in the oil field. The governor said at a press conference in January of the current year: “We will extract oil forever. However, there is a question - how much of that oil we need. We are ready to extract up to 240 million tons a year, although there is an issue of oil overproduction in the region already, for we extract 209.9 million tons at present.” The governor continued with an example: “Surgutneftegaz company can not cope with excessive 23 thousand tons of oil daily, that is why the company has to cut its extraction.”

Surgutneftegaz increased its oil output in January of the current year, for the company was intended to increase the capacity of its refinery in the Leningrad region. However, Transneft refused to accept excessive oil with a rather vague explanation of that: “The company Transneft rejected Surgutneftegaz offer, because the producer did not provide Transneft with the final recipient for this batch. As soon as the destination point is known, the reception will be retrieved. This is a work aspect, and it does not have anything to do with the export,” Transneft Vice President Sergey Grigoryev said. Grigoryev believes that Surgutneftegaz is guilty of the overproduction itself, since its commercial services failed to sell the company’s production.

Alexander Filipenko, the governor, has another point of view on the matter: “Russian exporting opportunities have been already exhausted. About one million tons of oil has not been delivered to consumers as of the beginning of the current year. This means that the budgets of all levels suffered losses of about 50 billion rubles.” The governor is sure that the state is guilty of this situation: “I am sure that the oil overproduction issue can be solved efficiently. There should be more flexible administering mechanisms set up in order to provide the state control over the oil field.”

Vice President of the Russian giant LUKOIL Leonid Fedun stated at a press conference that the situation with the company Surgutneftegaz (750 thousand tons of undistributed oil) is the indication of a possible deficit of oil transportation means. Mr. Fedun also reminded the project pertaining to the construction of a new port in the city of Murmansk, as well as the construction of Surgut-Murmansk pipeline. The managers of Russian oil giants Yukos, LUKOIL, TNK, Surgutneftegaz, Sibneft signed a memorandum at the end of the last year. The document was about the construction of an oil terminal at the Kola Peninsula. The memorandum also stipulated the construction of a pipeline that would connect West Siberia with the city of Murmansk. It is worth mentioning that it is a very expensive project. It is evaluated in the sum of 3.5-4.5 billion dollars. However, Russian oil companies are ready to spend this money, for they hope to start exporting oil to the USA and West Europe with the help of the Murmansk pipeline network, approximately in 2007. There is a certain impediment, though. According to the Russian law, all new pipelines of the Russian Federation belong to the state. Of course, oil companies hoped that the Murmansk pipeline would be a private system. When they were going to fund this costly project, they hoped that the access to the Murmansk pipeline would be granted in compliance with investments. That is why, after Prime Minister Mikhail Kasyanov gave it to understand that oil companies were not going to own the pipeline, LUKOIL, Yukos, Surgutneftegaz, TNK and Sibneft managers wrote him a letter, in which they set out their readiness to compromise. They wrote: “We think that it would be reasonable to consider the issue pertaining to the change of the common access to the state system of arterial pipelines for the Russian oil producers that are the investors of the pipelines that are being built in the country at present. We also think that one has to pay attention to the issue of a system to regulate tariffs for pumping oil in order to guarantee investments as it was scheduled.” In other words, they are ready to pay for the construction of the new pipeline system, which will then be owned by the state. Although, they want the state to grant them access to functioning pipelines at very low prices. They want it not some time later,  but now.

The reaction of the Russian government is not known yet. Most likely, governmental officials will say something about it soon. Leonid Fedun, LUKOIL Vice President, said that the managers of oil companies were going to discuss the issue at a session with Russian Vice Prime Minister Viktor Khristenko. The government has not released any official statements on the matter yet, but oil companies do not waste their time. Leonid Fedun informed that the contractor for the development of the economic and technical substantiation of the grand project had already been determined. Transneft is being rather sceptic about the project: “Oil companies do not have a project like that. All they have is a declaration of their intentions. They plan the development of the technical and economic substantiation for the period of 2003-2004. However, they want export preferences now. According to experts’ estimates, oil prices will  stick to the level of over $30 per barren in 2003, due to USA’s expected army action in Iraq. Export preferences promise huge profits to Russian oil oligarchs. However, experts believe that oil prices are likely to drop in the year 2004 – down to $14 per barrel. Cheap Iraqi oil will allow the USA to turn down its strategic plans to purchase oil from Russia. This means that such an expensive project like the construction of the Murmansk pipeline might become unprofitable. Oil companies will have a good opportunity to reject the idea of the pipeline too, for they will have very good profits in 2003,” Sergey Grigoryev, Transneft Vice President said.

This scenario seems to be rather real. However, as specialists say, it is impossible to increase the oil output at the moment, with the help of the company Transneft and its pipelines. The railway transportation works at its full capacity as well. That is why, it is not excluded that the situation with Surgutneftegaz will repeat. All oil companies planned to increase their outputs this year.

As far as Surgutneftegaz is concerned, the company has obtained its full access to Transneft's pipe this week. Sergey Grigoryev said that the company did not ask to pump the oil, which remained undistributed in January. Therefore, Transneft proved that it had some reserves in its pipeline system. This means that the pipeline access trouble happened over Surgutneftegaz’s guilt.

Irina Mokrousova


Translated by Dmitry Sudakov

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Author`s name Olga Savka