Global Insight Perspective

Significance

After months of arguing that economic development priorities must not be trumped by environmental protection concerns, President Vladimir Putin bowed to the unprecedented uproar over the approved route for the 2,550-km Eastern Siberia-Pacific Ocean (ESPO) pipeline, which was slated to pass within 875 yards of Lake Baikal in one section.

Implications

Environmentalists were quick to claim victory after Putin ordered Transeft, the Russian crude oil pipeline operator in charge of building the pipeline, to re-route the 1.6-million-b/d-capacity pipeline at least 25 miles north of Lake Baikal. Transneft president Semyon Vainshtok said that the new route would add length and cost to the pipeline and make the project uneconomical.

Outlook

Rather than scrap the project in the face of additional costs from Putin's diktat to re-route the pipeline, construction of the ESPO route is more likely to move forward now that environmentalists have been placated and international financial support for the project will be more easily secured; moreover, given Russia's determination to supply oil and gas to Asian markets and diversify its customer base away from over-reliance on Europe, the ESPO project has a strong strategic rationale for the Russian government.

Listening At Last

In a move that environmentalists would not have believed had they not seen it on Russian state television, President Vladimir Putin made an executive decision yesterday to order that the construction of Russia's planned Eastern Siberia-Pacific Ocean (ESPO) pipeline be re-routed to minimise the risks of a pipeline rupture endangering Lake Baikal. In a meeting with regional governors in Tomsk to discuss the pipeline and economic development of the Siberia region, Putin issued a surprising directive to the Russian government and Transneft, the state oil pipeline company that is in charge of building the 1.6-million-b/d-pipeline, to ensure that the pipeline is moved more than 25 miles north of Lake Baikal, the world's largest and deepest freshwater lake and seen by environmentalists as a Russian national treasure. "If there is even the smallest, the tiniest chance of polluting Baikal, then we must think of future generations", Putin said, delighting environmentalists. "We must do everything to make sure this danger is not just minimised, but eliminated."

Putin's comments surprised environmentalists and energy officials alike, although the latter group was also dismayed at the prospect of adding further length and cost to the pipeline, which is already estimated to cost upwards of US$11 billion for the first phase – to Skovorodino near the Russian-Chinese border – alone. Putin's comments marked a major U-turn for the Kremlin (Russia's presidential administration), which had previously downplayed the environmental risks of the pipeline to Lake Baikal. Putin himself had stated that environmental protection concerns should not stand in the way of Russia's economic development priorities in Eastern Siberia and the Far East, even as environmental groups argued that a potential oil spill from the pipeline – not a far-fetched scenario, given the seismically active region – would almost certainly contaminate Lake Baikal and have devastating effects on the ecosystem of the lake.

Over the past six months, the Russian government had been stubbornly pushing the project ahead, despite environmental opposition at each step of the way – even from within the government itself. Russia's Natural Resources Ministry and Rostekhnadzor, the government's environmental watchdog agency, both initially objected to Transneft's proposed route, only to back down and sheepishly support the ESPO route under intense pressure. Rostekhnadzor's vote to approve the pipeline route last month was awash with controversy after several scientists on the panel complained that the commission was stacked with pipeline supporters to ensure a vote in favour of Transneft's favoured route, and several commission members said that they were threatened with the loss of their jobs and future funding for research if they did not toe the government line.

One Step Backward In Order to Move Forward

Even after the pipeline was approved by all vested parties, however, the environmental opposition failed to sit quietly and idly by. Not only did environmental groups such as Greenpeace announce plans to target any potential international banks that would be interested in financing the route, but regional officials in Irkutsk reiterated their objections to the planned route. With the Chinese government eager to see Russia make progress on the pipeline – the first stage of which Transneft has promised will be operational by the end of 2008 – construction of the ESPO pipeline was clearly going to be delayed over the environmental concerns, especially with Transneft stating that it would seek to draw monies for financing the pipeline from international as well as Russian banks. With this in mind, Putin appears to have decided to order a new route for the pipeline, reversing course and heeding environmentalists' calls at long last.

Semyon Vainshtok, Transneft's president, was clearly annoyed by Putin's surprise announcement, sticking to his belief that the already-approved route was environmentally safe. Transneft had threatened to sue environmentalists for seeking to block the pipeline, and Vainshtok argued that oil from the pipeline would end up in Lake Baikal only "if something unbelievable happened". Vainshtok said that re-routing the pipeline further north would add to the length of the pipeline and cost an estimated US$900 million more to construct, which would make the project uneconomical. "Fifteen minutes ago, a decision was taken that fundamentally changes the economics of the project," Vainshtok told reporters, clearly surprised by Putin's directive, although the Transneft president conceded, "I don't question orders."

Outlook and Implications

Environmentalists can claim a temporary victory, but any who thought that re-routing the pipeline would kill off the project entirely are sorely mistaken. While Vainshtok may argue that moving the pipeline makes it uneconomical, the government is determined to proceed with the construction of the pipeline, cost overruns be damned. In the context of Russia's emerging feud with the European Union over energy security, the ESPO pipeline has taken on additional "strategic" importance for the government as a means for the country to diversify its customer base for oil exports. Putin has long talked about the ESPO pipeline as a strategic project necessary for Russia to reduce its reliance on Europe as a market for Russian oil exports; Putin yesterday reiterated Russia's determination to tap Asian oil markets via the ESPO pipeline.

The decision to re-route the pipeline represents a small victory for another "single issue group" in Russia, indicating that the Kremlin is weary of a snowballing effect of potential protests in the lead up to the 2008 presidential election when Putin will step down (but likely orchestrate the election of his successor). At the same time, re-routing the pipeline is likely to help speed construction of the pipeline along (even if it lengthens the overall route) as it will make the project more marketable by Transneft when seeking out loans from international banks. Foreign commercial lenders and development banks will come under less pressure from environmental groups now that the risks to Lake Baikal have been minimised (although Greenpeace said it would be preferable if the final route is outside Lake Baikal's watershed rather than a somewhat arbitrary 25-mile border north of the lake), a situation which should make it easier for Transneft to attract foreign loans to complete the project.

Contact: Raul Dary

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