The Baltic Course  

Who stands to gain from an economic blockade?

Yelena Narushevich, Ventas Balss

Ignoring Ventspils will not only harm the transit business in Latvia, but could also cause Russia over a billion dollars in federal budget losses for 2003.

Polotsk-Ventspils oil pipeline closed off

Photo: Ventspils Nafta

The fact that this year Russian oil exporters will not be able to use the Polotsk-Ventspils oil pipeline for export of crude oil through Latvia and its largest port of Ventspils will undoubtedly bring harm not only to the Latvian-Russian pipeline operator LatRosTrans, but also Russian companies themselves – firstly oil exporters and the pipeline operator Transneft. Russian sources have already come up with an approximate estimate for losses set to be incurred by the state budget as a result of administrative interference: over 1 billion US dollars in export revenues, including more than 400 million US dollars in export duties and customs dues.  

The decision on removing the ice-free port of Ventspils from the schedule for Russian crude oil export deliveries was passed by authorities of the Russian Federation at a time when the world's crude oil markets are enjoying a most favorable time in terms of high prices. It looks like the decision was lobbied for by Transneft, the Russian oil pipeline system monopoly, including the newly-built Baltic Pipeline System (BPS) along with the year-old oil terminal at Primorsk on the Gulf of Finland, a major rival for Ventspils.

Transneft unilaterally determines export routes for Russian companies, the total amounts for oil exports and amounts for each separate route. Seeking to fill the capacities of the BPS and Primorsk, Transneft started to re-direct a substantial amount of oil exports in the second quarter of 2002 from Ventspils to Primorsk by administrative methods. As a result, total crude oil handling at Ventspils port fell by half in 2002 over results of 2001 and the Russian budget in the last quarter of 2002 alone thus lost 520 million US dollars, according to certain estimates. In 2003 Ventspils port has not yet received any crude oil at all through the Polotsk-Ventspils pipeline.


Russia ignoring its stake in LatRosTrans

Russian oil companies are more than ready to increase oil production and exports this year. Moreover, the transit of Kazakhstan export oil through the Russian pipeline systems this year will grow considerably reaching 19 million tons, compared to 15.5 million tons in 2002. But the administrative approach taken by Transneft and the respective Russian government committee on distribution of quotas for access to export pipelines may get in the way of these plans.  

The very cold month of December and a deep freeze in early January caused major complications for operations at Primorsk, just north of St.Petersburg, as the entire Gulf of Finland froze over with at least 60 centimeters of ice. Ice-breakers did not cope with the task of bringing tankers to the port on time. Meanwhile the Ventspils route was closed for Russian oil exporters.

In these conditions, on January 09, 2003, heads of top Russian oil companies – LUKoil, YUKOS, Rosneft, Surgutneftegaz, Тyumen Oil Company – sent a letter to Russian Prime Minister Mikhail Kasyanov, requesting him to "look into the current situation and increase the load on all export routes to maximum". But the Russian PM ignored this request by its local oil businesses.  

On January 14 Russian vice-premier Victor Khristenko, who chairs the government committee that distributes quotas for export pipelines, gave a negative reply to the request, saying that the government would not change the approved schedule. "To date it [the schedule] is consistent with our technical and technological abilities in meeting set-out targets for the first quarter of this year," was the answer he gave through the mass media.

Speaking on the Baltic direction, Khristenko said: "The Russian pipeline system is loaded to 100 percent." He also added that the use of terminal systems, including those in the port of Ventspils, depended only on Russia's direct involvement in the prospects of any oil pipeline route. One can assume from the deputy PM's comments that the Russian government is not interested in developing routes that do not include the involvement of Russian capital. At the same time, the Russian vice-premier chose to ignore that the LatRosTrans pipeline system used to deliver oil and oil products to Ventspils port is jointly owned by Latvian and Russian companies. Russian capital in the joint venture amounts to 34 percent, held by the Transnefteprodukt oil product pipeline operator.


Ventspils closed for Russian oil exports

Transneft vice-president Sеrgei Grigoryev explained the removal of Ventspils from the oil export schedule in the first quarter of this year by a lack of technical capacity: "to fill Ventspils we will have to take away part of the shipments headed for the port of Primorsk. Pipeline capacity does not permit loading both routes at the same time, but investing money in expanding the capacity for a pipeline located on the territory of another country would not be rational, considering plans for expanding the Baltic Pipeline System".  

It becomes fairly obvious from the statements by high-ranking state officials that for now the Russian government has no intention of using the Latvian-Russian pipeline system for oil exports regardless of its own oil companies still increasing oil production in the presence of current high prices. Russian companies are thus simply denied access to the idle Polotsk-Ventspils crude oil pipeline, an export capacity of 16 million tons a year.

Having expected the current growth of oil extraction and a boost in exports of Russian hydrocarbons, the LatRosTrans pipeline operator completed vast upgrading of its infrastructure and technologies at pumping stations in September 2002.  

LatRosTrans director general Jadviga Berzina referred to this upgrading in a letter that was sent to Transneft president Sеmyon Vainshtok on January 15 this year. In her letter Berzina assured the Transneft president that “the technical capacity of the main oil pipeline in the direction of Ventspils reaches up to 16 million tons per year," and this has been reported regularly to Transneft. Berzina asked that the technical capacity of the pipeline be taken into consideration when planning Russia's oil exports.

Russian oil companies had counted on the Polotsk-Ventspils pipeline with its annual capacity of 16 million tons for exports this year. After all, current oil loads pumped by the BPS and Primorsk have already been pushed to the limit. Russia's port of Novorossiisk is also loaded to the brim with export oil (including also Kazakh oil). And the ice-free port of Ventspils with its up-to-date terminal infrastructure has always been Russia’s main export gate for the western direction.


Greatest efficiency and safety on Ventspils route

Ventspils is the only deep-water port on the Baltic Sea's east coast that does not freeze over in winter. The port harbors the Ventspils Nafta oil terminal, capable of receiving crude oil deliveries both through pipeline and by railway. In January this year when the Polotsk-Ventspils oil pipeline was closed off under Russian government decision, Ventspils handled quite a lot of crude oil via railway tank cars. It looks like the port will be handling a record large amount of railway shipments for January this year.  

Moreover, estimates show that the Ventspils route offers the greatest benefits and efficiency for Russian oil exports (see Table on adjusted comparison of crude oil export costs from Nizhnevartovsk through maritime ports). Ventspils has the advantages of being ice-free (in Primorsk export costs from January to March grow by increased freight of ice class tankers, an average increase of 5.69 USD per ton) and is situated in an extremely favorable geographical position.

One should also take into account the situation on the Black Sea where much tougher rules were recently introduced for tanker traffic through the Bosphorus and the Dardanelles. By a Turkish government resolution, oil tankers over 200 meters of length with cargo capacity of 50,000 tons or more are allowed to cross these straits only during daylight hours.  

According to estimates by the Russian Transport Ministry and the Russian Union of Shipowners, losses from toughened rules for navigation through the Bosphorus and the Dardanelles may reach an average USD 400 million a year. In other words, the cost per ton of oil exports reloaded at Black Sea ports will grow by USD 6.20 on average.

The safety and reliability of Ventspils is also not an insignificant factor in the eyes of Russian oil exporters. In the protected harbor of Ventspils tankers can be loaded with oil practically in any weather, while, for example, in Lithuania's Butinge port, loading at the floating platform 7.5 kilometers from the coast very much depends on weather conditions and involves a constant risk of environmental damage to the Baltic Sea.


Violation of free trade principles

Apart from economic losses, the current blockade of port Ventspils on behalf of Russia's pipeline operator Transneft also undermines the political image of Russia. First of all, because this major oil producing country is breaking important principles of international trade and internal policies.  

This is about principles of free trade and non-discrimination in transit, all declared under the General Agreement on Tariffs and Trade (GATT) and documents of the World Trade Organization (WTO), to which Russia is also seeking membership. Administrative interference by Russian governmental agencies in the transit of energy carriers through the territory of Latvia is likewise against the European Energy Charter, which declares the right to free transit and free access to infrastructure, signed but not yet ratified by Russia. 

Finally, the blockade of port Ventspils initiated by the Russian government is inconsistent with recommendations by the Russian State Duma passed in November 2002, which expect to develop trade and economic relations with Baltic states in the interests of Russian compatriots living there. In Latvia, transit companies such as LatRosTrans, the port of Ventspils, and Ventspils Nafta, all employ mainly members of the Russian-speaking minority, but now find themselves under an economic blockade on behalf of of the Russian government.