Worries that a drop in oil prices after the Iraq war would bode ill for Russian companies have yet to make them change their plans

The end of military action in Iraq and the safe capture of oil production facilities there helped bring down global oil prices. But that hasn’t changed the strategic plans of Russia’s leading oil companies, at least when it comes to exports.

Industry experts say that the high prices of the past three years were an anomaly and that things now are only just getting back to normal. So, they add, don’t expect major cutbacks in the amount of oil exported by the Russian oil giants because of the lower prices. In fact, they add, exports should continue to rise.

But increasing those exports won’t be easy, as the industry is still suffering from underfinancing and poor infrastructure. As a result, promising Russian oil deposits have gone undeveloped.

For years, the industry was eagerly awaiting the arrival of major foreign companies with funds available to make necessary investments and to help implement the modern technology needed for effective work in difficult conditions. But the investors, knowing that Russia could not get by without them, put heavy demandson themand sought preferential conditions, which only served to slow any big deals.

Things are starting to change, as foreign oil giants are now desperately in search of stable oil supplies and as the Russian companies themselves have begun to grow, which is making them players in the global market.

One of the new Russian giants is YukosSibneft, which was announced in a merger in late April. "The size of our company means we can do many things that would be beyond the power of or too risky for smaller companies," said Alexander Korsik, first deputy president of Sibneft, at a press conference to announce the merger of Yukos and Sibneft.

"The new company will be able to become a serious competitor on the international market. And not just from the point of view of selling oil and petroleum products, but also as concerns entering new regions and developing new deposits," he added.

So far, even the biggest Russian oil companies have lagged behind foreign competitors in terms of finances and technology

Analysts here are hoping that the new oil powers in Russia will focus their attention on developing domestic resources rather than starting up operations abroad. "I wouldn’t welcome any attempt by YukosSibneft to expand into other countries in the immediate future," said Erkin Nusurov, an analyst with NIKoil. "The company should concentrate on further increasing production and refining capacity within the country and on exporting oil to China and the Asia-Pacific-region countries."

The falling prices in the aftermath of the cessation of major hostilities in Iraq are not the main problem for oil companies. Even if all the new companies do develop domestic oil reserves, analysts stress that existing pipelines and oil terminals are operating at full capacity, meaning the new output may have nowhere to go.

State officials say they are aware of the problem. In fact, nearly everyone agrees that existing pipelines must be expanded and new ones must be built, althlough state- and private-sector companies are still divided as to who should have ownership of export pipelines being planned.

The Energy Ministry has proposed that the initial focus be put on a pipeline that would run from Kharyaga through Usa and Ukhta to Yaroslavl and then join the Baltic Pipeline System, which currently carries up to 12 million tons of oil a year. But this does not represent a very high capacity, given plans to increase production at the Timano-Pechyorsky deposit, and so there are also plans to build a second Baltic Pipeline System route.

Transneft, the state company that operates the oil-transport network, plans to build a new oil-export terminal at the port of Primorsk that will have a capacity of 30 million tons of oil a year. The terminal is expected to cost $1.2 billion, but the money has yet to be found. Transneft raised money for the construction of the Baltic Pipeline System largely by including an investment component in the tariffs it charged for oil transport. This practice was later abandoned, however.

Also on the agenda is the idea of building an export pipeline to Murmansk. What is more, there are signs that the pipeline might become privately owned. Energy Minister Igor Yusufov said the state no longer expects to have full ownership of pipelines but does want to keep a degree of control and influence over transport infrastructure.

It is not yet clear just how and with whom the government would be willing to "share" the pipelines, but the idea would probably be to set up some kind of consortium in which state-owned Transneft would have the leading role.

The government still has not decided whether to build a planned new pipeline from Irkutsk to Datsin in China or to Japan. On April 29, Prime Minister Mikhail Kasyanov said the Far East export pipeline would be built from Angarsk to the Pacific port of Nakhodka and that there would also be a branch going to Datsin. "The question of building the pipeline section to Nakhodka will be decided as the question of the volume of oil resources needed to fill the pipeline becomes clear," Kasyanov said.

This means, essentially, that work on the pipeline will be put off for another decade. Although there is no official government decision yet, it seems clear that Rosneft, which lobbied in favor of the Japanese route, has lost out to Yukos, which supported the Chinese option.

But Rosneft has already struck back. On April 25, the company’s board approved plans to spend $18 million on purchasing an unfinished oil terminal in Nakhodka’s Vostochny Port. Rosneft will first have to spend an estimated $30 million completing construction work, and then in a couple of years will be able to almost double its oil exports.

Rosneft plans to have the first section of the new Nakhodka terminal, with a capacity of 4 million-5 million tons a year, in operation by 2004. By 2006, it plans to increase this volume to 7 million-8 million tons a year, which will enable it to attract other exporters to the terminal. The most probable clients would be the Alliance Group’s Khabarovsk oil refinery, Sibneft’s Omsk oil refinery and companies owned by Bashneftekhim, as well as Yukos’ Achinsk and Angarsk plants.

A year ago, Yukos also declared its intention to join in developing this new terminal, but then it shifted its priority to the Chinese market and never went beyond negotiations with the unfinished terminal’s owner, Severstaltrans.