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Outside View: Russia pipeline reach grows

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by Oleg Mityayev
Moscow (UPI) May 19, 2008
On May 14 Russian Prime Minister Vladimir Putin ordered the construction of the second stage of the Baltic Pipeline System (BPS-2), an offshoot of the Druzhba pipeline built in Soviet times to pump oil to Europe through Belarus and terminals in the Baltic countries.

BPS-2, which will run across Russia to the port of Ust-Luga on the Gulf of Finland, is Putin's way to enhance Europe's energy security.

Russia has opted to develop its own infrastructure for transporting hydrocarbons to Western Europe, bypassing former Soviet transit countries. The main goal is to protect Russia and its partners from the transit countries' possible decisions to raise tariffs or siphon off hydrocarbons.

Russia appears to be ready to pay as much as necessary to guarantee that oil and gas consumers in Western Europe receive commodities in full and on time.

This is why it is advocating the Nord Stream pipeline along the Baltic Sea bed and the South Stream project across the Black Sea. BPS-2 is one more route for delivering Russian oil to Western Europe bypassing transit countries.

The first phase of the Baltic Pipeline System connected the Timan-Pechora, West Siberian and Urals-Volga deposits with the port of Primorsk in the Vyborg district north of St. Petersburg. In 2007 its capacity was increased to 74 million metric tons (543.9 million bbl).

After the port's oil terminals are completed, Russia will be able to export oil to Northern Europe, including Rotterdam, the largest oil trade and processing hub, bypassing the ports of the former Soviet Baltic countries of Estonia, Latvia and Lithuania.

Russia first considered building BPS-2 in early 2007, when Belarus introduced a transit duty of $45 per metric ton of Russian oil pumped through the Druzhba pipeline to Poland and Germany. Moscow accused Minsk of siphoning off oil from the pipeline and suspended crude deliveries to Europe via Belarus for several days.

BPS-2, an offshoot of the Druzhba pipeline starting near Unecha, in Russia's southern Bryansk region, will bypass Belarus on its way to the Gulf of Finland, and should preclude a repetition of such problems.

However, it may turn out to be unprofitable, not carry enough oil, and be viewed negatively by Germany and Poland. In April 2008 Russia's Ministry of Industry and Energy submitted to the government its negative conclusions regarding the pipeline.

But on May 14 Putin ordered the construction of the pipeline toward Ust-Luga, which will be expanded into a major port. Neighboring Primorsk, which receives oil from the first phase of the pipeline, has a large terminal, which Putin visited later that day. He proposed increasing its capacity and building a new super-large terminal in Ust-Luga so as to handle the oil and petrochemicals transit exports currently delivered via the Baltic countries.

This will cost Russia dearly. The estimated cost of BPS-2 has grown from $2.5 billion to $3.8 billion since last year. The construction of the super-port in Ust-Luga will cost $27.3 billion, of which $12.6 billion will be provided from the federal budget and $14.7 billion by private investors.

Putin does not accept the argument that there will not be enough oil for BPS-2, whose annual capacity is 50 million metric tons (367.5 million bbl). According to revised estimates, and taking into account the promised incentives for oil companies such as a reduced severance tax, he expects Russia to produce an additional 60 million metric tons (441 million bbl) of oil by 2015, more than enough for BPS-2.

But these are questionable calculations. They depend on the oil companies commissioning all their planned projects on time -- not an impossibility, but definitely not a certainty. Furthermore, Russia is also building the East Siberia-Pacific Ocean pipeline, with a capacity of 80 million metric tons (588 million bbl), and oil companies are considering increasing oil refining at their domestic facilities. That would be bad for the BPS-2 project, which is meant to carry crude.

Even Putin does not seem entirely convinced that there will be enough oil for BPS-2. He has said that Russia's partners, apparently referring to Kazakhstan, could contribute to BPS-2 and even become its shareholders.

One thing is certain, though -- the energy with which Putin has addressed the task of diversifying Russia's hydrocarbons export routes and increasing production shows that the fuel and energy sector will remain the key priority of the new Russian government.

(Oleg Mityayev is an RIA Novosti economic commentator. The opinions expressed in this article are the author's and do not necessarily represent those of RIA Novosti.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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