Mostly: Classical

[Frank Pembleton]

Four Russian Companies Plan
Arctic Port to Speed Oil to U.S.

By JEANNE WHALEN and THADDEUS HERRICK
Staff Reporters of THE WALL STREET JOURNAL

Four of Russia's biggest oil companies are planning to build a $1.5 billion Arctic oil port that could eventually help ease U.S. reliance on Mideast oil by supplying as much as 10% of American crude imports, company officials said.

The announcement Wednesday of the preliminary agreement comes just days after President Bush and Russian President Vladimir Putin pledged to strengthen energy ties. The U.S., contemplating possible military action against Iraq that could destabilize an already tense Middle East, is eager to increase oil deliveries from Russia, an increasingly friendly ally that currently supplies less than 1% of U.S. oil imports. Russia is the world's second-biggest oil exporter but sends most of its crude to Europe.

Plans for the Russian port in the northwestern town of Murmansk are still at an early stage. The companies haven't yet arranged financing or conducted a feasibility study but will sign a memorandum of understanding declaring their intentions to pursue the project, officials at several of the firms said. The port and a 935-mile pipeline leading to it would be ready by 2005 at the earliest and could export as much as one million barrels of oil a day.

U.S. officials welcomed the accord but cautioned that the port wouldn't be built in time to compensate for any sudden shortfalls in Mideast oil supplies tied to a war in Iraq, where Russia has business interests, many oil-related. "It's naive to think that if that happened Russia could somehow save us," said one U.S. official. Still, Washington is keen to gradually increase supplies from Russia over time. "We see Russia as playing a pivotal role in global energy security," Secretary of Energy Spencer Abraham said during a visit to Moscow this summer.

Energy policy was a big focus of last week's 90-minute meeting in St. Petersburg between Messrs. Bush and Putin, U.S. officials said. The presidents issued a joint communique vowing closer cooperation between their two countries, and Mr. Bush stressed the importance of developing internal Russian laws that better protect foreign investors, officials said. In the communique, the two leaders said they "strongly support the efforts" of Russian and U.S. corporations to "identify new and mutually beneficial commercial opportunities."

Washington wants more than increased Russian oil imports out of its new energy relationship with Moscow. It is equally keen to open Russia's vast oil reserves to U.S. investors, a goal still proving elusive despite talk of growing energy ties. U.S. companies have been reluctant to invest there because of shifting tax codes and regulatory policies and have called for binding legislation before investing more money in the country. Conoco Inc., for example, which recently merged with Phillips Petroleum Inc., invested $400 million in a 1991 joint venture with two Russian companies: a subsidiary of Lukoil and Rosneft. While the project has produced more than 90 million barrels, ConocoPhillips says constantly changing tariffs and tax laws have made the project only marginally profitable.

After a long post-Soviet slump, Russia's oil industry has been on the rebound in recent years, boosting investment and sharply increasing output. Production is growing much faster than Russia's ability to export the oil, requiring construction of new pipelines and ports. Washington has said it is prepared to help finance construction of Russian export infrastructure.

But, flush with cash after several years of high oil prices, Russian companies oppose giving up their market to outsiders and continue to block passage of legislation that would protect overseas investors.

U.S. energy officials visited the Moscow offices of OAO Lukoil, the oil giant leading the Murmansk project, during the Bush-Putin meeting, and a Lukoil spokesman said that warming U.S.-Russian political ties are encouraging the Russian companies' commercial aim of boosting exports. "This is a private project, of private oil companies, but I think all of our companies are mindful of supporting the [Russian] government ... and activity in the political sphere without doubt helps promote economic ties," he said.

The route across the ice-bound Arctic to the U.S. is considerably shorter than the distance from the Persian Gulf to the U.S. And unlike the rest of Russia's mostly shallow ports, the Murmansk terminal would be located in deep enough water to handle the kind of supertankers that make trans-Atlantic voyages economical for Russian producers. In the early 1980s, the Soviets considered building an oil terminal in Murmansk, a seaport on the Barents Sea, but deemed it too dangerous because a fleet of nuclear submarines was already in the port. The subs have since been moved.

The steep expense of the Murmansk project is forcing Russia's normally cutthroat companies to cooperate and share costs for the first time. Oil tycoons who have spent years battling one another for control of Russia's formerly state-owned oil reserves are scheduled to sign the agreement at a news conference Wednesday. Set to attend are Vagit Alekperov, president of Lukoil; Mikhail Khodorkovsky, chief executive of OAO Yukos; Evgeny Shvidler, president of OAO Sibneft; and German Khan, executive director of Tyumen Oil Co.

Together, the firms produce more than half of Russia's daily output of eight million barrels of oil. Russia exports about 5.1 million barrels of oil a day.

Extra ports would make the Russians more competitive with Saudi Arabia, the world's largest exporter with an average of 6.13 million barrels a day between January and September. But in the short term, Saudi Arabia has much greater influence on oil prices because it has spare production capacity of as much as 2.5 million barrels a day. Russia already is producing and exporting oil at full throttle.

The Organization of Petroleum Exporting Countries, which cut production last year to support prices, has been ignoring its quotas and leaking considerably more oil onto the market. The result: Prices have hovered at about $30 a barrel, even amid jitters over a possible war with Iraq, relatively low inventories and the onset of increased seasonal demand.

This year, U.S. domestic crude-oil production has averaged 5.8 million barrels a day, according to the Energy Department's Energy Information Administration. U.S. oil imports, meanwhile, have averaged nine million barrels a day for the year, according to the EIA, though they surged in October to 9.4 million barrels daily.

In the meantime, the business climate remains unpredictable. Earlier this month, ChevronTexaco, Exxon Mobil and other involved in an oil pipeline running from the Caspian Sea to Russia's Black Sea coast were thrown for a loop when Russia's federal energy commission threatened to put the private export pipeline's tariffs under state regulation. That matter remains unresolved.

-- Greg Hitt contributed to this article.
http://online.wsj.com/article/0,,SB103834947924906548,00.html?mod=home_whats_news_us