New $3.6 Billion Pipeline to Deliver Oil from Russia's Arctic Fields

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--The approval for a plan to build a $3.6 billion Arctic oil pipeline has been signed by Russian Prime Minister Vladimir Putin. Reports say that the new Arctic oilfields in Yamal could produce a large amount of the country's output by the end of the decade. The Zapolayre-Purpe link of the pipeline will be completed by 2017 and will be constructed by the state-owned pipeline monopoly Transneft (Moscow). Construction will begin before the end of the year.

Transneft President Nikolai Tokarev said the oil fields could produce a minimum of 74 million tons annually by 2020. That would represent 15% of Russia's current oil output of about 500 million tons. The 500-kilometer pipeline will connect the country's existing pipeline network and allow for exports to Europe and Asia. Industry experts believe that Asia might offer the best prices if current price levels are maintained.

Lukoil (OTC:LUKOY.PK) (Moscow, Russia), TNK-BP (MCX:TNBP.ME) (Moscow) and Gazprom Neft (MCX:SIBN) (St. Petersburg, Russia) will use the pipeline, which will have an annual capacity of 45 million tons. Transneft will be the sole funding provider for the project, which is a change from initial plans in which the three user companies were also to make investments. A government decree, the Federal Tariffs Service, will allow Transneft to recoup rising expenses by increasing pipeline fees.

In another move to boost oil output, with an emphasis on the Arctic regions, the government is considering shifting the tax burden for high-cost offshore drilling operations from taxes on revenues to taxes on profits.

This is seen as a move to encourage Arctic development in supporting companies that are prepared to operate offshore. Companies have hitherto complained that because of the relatively high cost of drilling offshore, taxing revenues rather than profits makes the proposition unattractive.

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