Caspian Pipeline Consortium: Moving Towards Russian Control

Via Stratfor (subscription required), a report that Russia is on the cusp of acquiring BP’s stake in the Caspian Pipeline Consortium pipeline, which would give Moscow majority ownership of a vital energy asset.  As the article notes:

“…Vagit Alekperov, president of Russian oil firm LUKoil, is in Kazakhstan until May 1, meeting with officials from the Kazakh government and BP to negotiate on the acquisition of BP’s 6.6 percent stake in the Caspian Pipeline Consortium (CPC) oil pipeline. According to STRATFOR sources in Moscow, Alekperov will finalize a deal to acquire BP’s share of a joint venture it holds with LUKoil known as LUKARKO B.V. The joint venture has a 12.5 percent stake of the total pipeline; LUKoil’s acquisition would give Russia majority ownership of the strategic energy asset.

Map - FSU - CPC Pipeline

The CPC pipeline has a history of garnering significant attention from regional and global players in the energy industry, and for good reason. First commissioned in 2001, the CPC was designed to bring Kazakhstan’s hefty oil resources from the Tengiz oil field to the export terminal in Russia’s port city of Novorossiysk on the Black Sea coast. With a capacity of around 700,000 barrels per day flowing from the Caspian across the Caucasus, this pipeline is of vital strategic importance. Furthermore, the CPC is the only major pipeline traversing Russian territory that is not majority-owned by the Russians; rather, it is split among a hodgepodge of governments and businesses.

Chart - Division of CPC ownership

This lack of majority ownership has long been a thorn in Moscow’s side, as much of Russia’s strategic strength and foreign policy decisions are driven by its dominance of energy resources. Consequently, Moscow has been working to block any progress on the CPC pipeline and to eventually become a majority owner. Russia used heavy-handed tactics, such as charging enormous taxes and transit fees on the pipeline, to block any effort to expand it. In addition, Moscow sought to increase its ownership in the consortium in order to have more decision-making power regarding the pipeline. Russia purchased a 7 percent stake owned by Oman in November 2008, but this only gave Moscow 31 percent outright ownership of the pipeline — not a controlling stake. Moscow also gained partial ownership in the Rosneft-Royal Dutch/Shell joint venture (which holds a 7.5 percent stake) and the LUKoil-BP LUKARKO joint venture, but still failed to surpass the 50 percent threshold needed for majority ownership.

That will now change. If the meeting between Alekperov and Kazakh and BP officials produces an agreement, which is all but guaranteed, LUKoil (a private company that is not directly owned by the Kremlin but is frequently used to the Kremlin’s advantage), will own LUKARKO’s entire 12.5 percent stake in the CPC, giving Russia majority ownership. This likely will have enormous consequences, as Russia will be in control of decision-making for the pipelines, and the pipeline expansion plans the Kremlin has blocked up until now could change or move forward with the Kremlin as the primary overseer.

It will not be all smooth sailing, however. After the completion of the LUKoil-BP deal, Russian ownership of the CPC will be split among three major constituencies: LUKoil, state-owned oil giant Rosneft and pipeline monopoly Transneft. The Kremlin masterminded this arrangement so that Russia would not appear to have overwhelming influence in the consortium, as ownership would be divided among an independent player that happens to be based in Russia (LUKoil) and government-owned firms. But these companies are not just competitors; they are actually adversaries, in that they are involved with different oligarchs’ clans that are vying for power within the Russian elite.

Moscow understands this and has been consolidating power massively, nationalizing and taking control of assetshit Russia quite hard, has actually facilitated this process, allowing Moscow to keep all the important players within its borders and beyond in check. Thus, the Kremlin has made plans to consolidate the CPC shares held by Transneft, Rosneft, and LUKoil under one umbrella, though this will not be easy, as none of these companies will want to relinquish its portion of the pipeline. Moscow will have to either fight or accept that its control over the shares is weakened, as the shares are split up — though they are still in Russian hands. from a wide range of strategic industries — from banking to energy and everything in between —that were once solely under the oligarchs’ control. The ongoing economic recession, which has

Ultimately, the move to acquire BP’s stake in the CPC pipeline will strengthen Russia’s dominance, giving it ownership of all the major energy infrastructure that touches its soil. As seen in the recent deal to take over Turkmenistan’s strategic pipeline to Iran, Moscow is vigorously reasserting itself in the region through energy deals. The most important intended audience for these moves are the Europeans, who must sit back and watch as their plans for energy diversification away from Russia take another blow.

This entry was posted on Thursday, April 30th, 2009 at 2:05 pm and is filed under Kazakhstan, Lukoil, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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