Shmatko Puts Bulgaria on Notice Over Pipeline

Russia may indefinitely delay construction of an oil pipeline across Bulgaria and Greece if Sophia does not complete its revision of the plan in the next few months, Energy Minister Sergei Shmatko said Wednesday.

Speaking to State Duma deputies, Shmatko also said his ministry supported raising the export duty for east Siberian oil to 45 percent of the standard duty, a policy shift that would squeeze profit margins in the industry.

The change could also send Russian oil output into a nosedive by discouraging investment in new fields lost in the wilderness. Rosneft and other oil producers have enjoyed a zero export duty on their east Siberian oil since January, although the Finance Ministry has been lobbying to tax the exports to help patch a budget deficit.

The possible demise of the Burgas-Alexandropoulis project would likely push Russia into the embrace of Turkey, which has been touting a competing pipeline to deliver Russian and Caspian Sea crude to the Mediterranean market, including to Southern Europe, Shmatko said.

Russia needs a pipeline to deliver its own crude and sell transportation services to Kazakhstan, which is planning to boost production from giant offshore Caspian fields now being developed by international oil majors.

Coupled with Turkey's intention to restrict tanker traffic through its narrow straits, which connect the Black and Mediterranean seas, due to environmental concerns, the imminent increase in oil trade makes building an overland line essential, Shmatko said.

Greece, which the European Union is saving from defaulting on its foreign debt, has also recently called for the plan to move ahead as soon as possible in anticipation of investment and future transit fees. Construction of the line has been on ice since Bulgaria's government, elected last year, balked at the potential environmental damage that the pipeline could inflict on its resort-dotted coastline.

"There has to be a decision on the future of the project no later than this fall," Shmatko told reporters at the State Duma after a speech on the situation in the country's energy industry. "It's quite possible that we will have to — not terminate — but freeze the project."

Rosneft and Transneft, the state-run Russian shareholders of the venture that would build the pipeline, will stop funding preparatory work and recall staff from the site, he said.

If that happens, Russia will invigorate its talks to join the Samsun-Ceyhan line across Turkey, Shmatko said.

"We need to understand how we will export oil," he said.

On the export duty for east Siberian crude, Shmatko confirmed a statement made by Finance Minister Alexei Kudrin last week that the government was planning to strip oil companies of their current exemption starting next month. Shmatko said his ministry agreed that a 55 percent discount would be fair, given the current international prices for crude.

The government is expected to make a final decision by Tuesday, which is the midmonth deadline for readjusting the oil export duty, he said. But the measure must not cause companies to wind up their development in the region.

"That's something we should prevent by all means," he said.

Oil companies should confirm that the duty will still allow for further investment, Shmatko said.

He was likely referring to the companies that now operate there, such as industry leader Rosneft; privately held TNK-BP, which is half-owned by BP and is Russia's third-largest oil producer; and Surgutneftegaz, which ranks as the country's fourth-largest oil company by output.

Fielding questions from Duma deputies earlier in the day, Shmatko downplayed the threat to Russia's gas industry from the explosive growth in production of shale gas in the United States, echoing previous official statements.

"It's definitely not an absolute and unconditional trend for the future development of the gas industry," he said, adding that shale gas production was environmentally unsafe and invoked large costs.

Russia does not need to borrow the technology or seek foreign assets in the shale gas business, he said.

Gazprom's export chief, Alexander Medvedev, had said Tuesday that the company was "looking for possibilities in the U.S." in response to a reporter's question.