The government has decided to renege on its promise to give major oil companies shares in the Baltic Pipeline System.


Instead, BPS will be owned by state-owned national pipeline monopoly Transneft, and the oil companies will be hit with even higher transportation tariffs to fund its construction.


The BPS project proposes the construction of new major oil routes from Kirishi near St. Petersburg to the port of Primorsk on the Baltic Sea and from Kharyaga in the Komi republic to Usinsk as well as repairing the Yaroslav-Kirishi, Usinsk-Ukhta and Ukhta-Yaroslavl routes.


The first BPS pipeline will come into operation before the end of 2001 and will be able to carry 12 million metric tons of export oil per year. The second will be built from 2002 to 2003 with a capacity of up to 30 million tons.


Prime Minister Mikhail Kasyanov finally signed Friday a government resolution on financing the BPS, which oil companies and Transneft have been waiting for since December.


"We are pleased that our main proposals have passed through the government," said Transneft vice president Sergei Grigoryev.


The government has agreed that Transneft will be the project's contractor. This means that there will be no BPS construction consortiums, no proposed participation of oil companies and all new oil pipelines will belong exclusively to Transneft.


Major oil companies had expected a stake in BPS in exchange for $46 million, which they paid Transneft in 1999 in the form of an investment tariff. Now these monies are located in a special bank account, which Grigoryev said will not go toward construction. "The state will decide what to do with [the money]."


Although BPS will be wholly owned by the state, oil companies will foot almost all of the bill for its construction.


Analysts have estimated the first pipeline will cost $460 million. But Deputy Prime Minister Viktor Khristenko announced Friday that only between $20 million and $30 million could be allocated from the 2001 budget to this end. Loan funds may be added. According to sources who did not want to be identified, Transneft intends to attract bank credits of over $70 million.


Transneft will receive the remaining funds for the pipeline by raising the oil export transportation tariff. Kasyanov's resolution includes an instruction to the Federal Energy Committee to this effect.


"We have not yet provided the FEC with our calculations but will do so soon," said Grigoryev. The oil export transportation tariff might be raised by as much as 12 percent, Khristenko said Friday.


The increased tariff will not significantly affect expenses for the oil companies, which receive $10 net per barrel of export oil. The oil companies are far more upset that the government has completely ignored their proposals for BPS.


The president of oil major Surgutneftegaz, Vladimir Bogdanov, said, "the pipeline should belong to the state and the port to the shareholders."


LUKoil management has often announced that BPS capital should be divided between those who finance its construction in proportion to their investment.


Now the oil companies are very concerned about increasing pressure from the transport monopoly. "Companies must work on a new draft of the oil pipeline law aimed at liberalizing the market," a Yukos representative said.


However, Gennady Krasovsky, an analyst with NIKoil, is certain that the oil companies will be unable now to control the way the funds and tariffs are used.


"For the second time this year, tariffs are increasing with the result that private companies are, in effect, subsidizing the investment projects of state-owned Transneft. The [oil companies are] forced to do this and have no chance to fight for their interests," Krasovsky said.