The odd couple: Israel and Russia challenge OPEC [Within Palestinian Range]
Pipeline becomes vital artery for shipments to far east markets
Moscow seeks to supplant Riyadh as world's top supplier ­ and 'Tipline'
across Jewish state fits into that plan
Ed Blanche Special to The Daily Star 18 February 2004
http://www.dailystar.com.lb/business/18_02_04_g.asp

[IMRA: The loading point of the pipeline is already within range of the
Qassam rockets that the Palestinians have developed. If and when Prime
Minister Sharon's retreat is executed, the Palestinians will be able to
easily import longer range missiles to put the Ashdod port under the same
threat that Israel's other main port, Haifa, faces from the 12,000 missiles
in South Lebanon - all formidable threats that will deter Israel from taking
action to prevent an IDF-free Gaza Strip from developing even greater
threats against the Jewish state (and even preventing Israel from responding
to attacks).]

BEIRUT: Israel's vice-premier and trade minister, Ehud Olmert, was in Moscow
last week with a particular message: "We want more Russian oil."

Moscow is only happy to oblige, because a 250-kilometer pipeline running
from Ashkelon on the Mediterranean to Eilat on the Gulf of Aqaba has become
a vital artery for Russian oil exports to the Far East, the fastest-growing
energy market in the world and one Moscow wants to dominate. By sidestepping
the Suez Canal, the Trans-Israel Pipeline, known as the Tipline, opens up a
shorter and cheaper route for Russian oil exports to Asia and thereby
threatens Arab exports from the Gulf.

The first tanker to sail from Israel with a cargo of Russian crude pumped
through the Tipline left Eilat, bound for Asia, in November. According to
British energy analyst Simon Henderson, an expert on the Gulf, that event
"has the potential to greatly impact the international oil market. Russian
oil exports are unconstrained by the quotas of the Organization of Petroleum
Exporting Countries, and a steady stream of expanded Russian shipments via
the Tipline could . lower prices worldwide."

The new route also puts Israel firmly on the oil industry map, but more
importantly it will strengthen Russia's position in the global energy
market, challenging Saudi Arabia's as the pre-eminent oil producer. These
days, Russia and Saudi Arabia are jockeying for the No. 1 spot as a world
oil supplier with around 8 million barrels per day (bpd). A confrontation
between Saudi-dominated OPEC and Moscow seems inevitable.

With oil hovering around $30 a barrel, the Russians have little interest in
aiding OPEC dampen prices, and it is expected to push up production this
year. According to French energy analyst Francis Perrin: "Russia has no
interest in collaborating with OPEC."

The Americans have long wanted to undermine OPEC and US control of Iraq's
oil, wealth could go far to achieve that. But the Russians seem to be ones
making the running right now, and want to overtake Saudi production levels
within five years. According to Simon Kukes, chief executive officer of
Russia's giant Yukos oil company, Russian output could reach 11 million bpd
by 2009.

The Tipline connection also cements Israel's relations with Russia, a mortal
enemy throughout the Cold War, at a time when many oil-consuming states are
growing nervous about the security of energy supplies from the Arab world
and are seeking ways to reduce their dependence on countries like Saudi
Arabia. The Japanese, for instance, get 85 percent of their oil from the
Gulf but want to cut that back to 65 percent.

It is possible that the Russians may at some point open another export route
to the Far East through Iran's Gulf terminal at Bandar Abbas, which could
also reduce Asian demand for Saudi crude. Russia, Iran and India signed an
agreement to develop a north-south transportation corridor in September 2000
that would also rival the Suez Canal. But that involves investing of
billions of dollars and years of work, and would thus seem to lie far in the
future.

For now, the Tipline is the testbed for Russia's ability to pump up the
volume of oil it ships to energy-thirsty Asia, where the market is being
enlarged by China's growing demand for oil to fuel its burgeoning economic
expansion.

The Tipline was built in 1968 to carry oil shipped up the Red Sea from Iran,
then still ruled by Shah Mohammad Reza Pahlavi, to Eilat and on to the
Mediterranean for transshipment to Europe. At that time, the Suez Canal was
still closed following the 1967 war, with the Israelis holding the eastern
bank and the Egyptians the western bank, so the Tipline saved tankers having
to make the long and costly haul around Africa to reach markets in Europe
and the US.

Israel took what it needed of the Iranian oil for its own consumption. But
the 1979 revolution in Iran changed all that. The new regime cut off all
links to Israel. The surge in Russian oil exports following the collapse of
the Soviet Union in 1991 gave the Tipline a new lease on life. By reversing
the flow, with Eilat instead of Ashkelon as the loading terminal, the
Russians found a new outlet as they drove to develop new markets.

So now tankers from the Black Sea carry the oil to Ashkelon. These are of
necessity not large supertankers because Turkey prohibits ships of that size
using the Bosphorus Straits. But big tankers can be used to carry shipments
from Eilat. The Tipline has the capacity to handle 55 million tons of oil a
year.

According to the Russian media, Moscow is expected to pump 20 million-30
million tons through Israel this year, as well as provide most of Israel's
requirement of 240,000 bpd that formerly came for such diverse sources as
Egypt and the North Sea.

"Even if the pipeline route was used to its full potential," Henderson says,
"Russian oil transported to Eilat would only be enough to fill one
Asia-bound oil tanker every two or three days." But boosting the line's
capacity would increase exports.
Henderson noted that Russian oil shipped through Israel is made more
attractive to Asian buyers because it eliminates the so-called "Asian
premium," the extra $1 per barrel arbitrarily imposed on Asian consumers by
Gulf producers. This has caused considerable resentment against the Gulf
exporters, and provides another incentive to reduce their dependence on Arab
oil.
Crown Prince Abdullah bin Abdel-Aziz of Saudi Arabia, the country's de facto
ruler since King Fahd fell ill six years ago, made a landmark visit to
Moscow in September 2003 hoping to improve relations, in large part because
of the strains in Riyadh's relations with the US since Sept. 11, 2001. The
Saudis signed a five-year oil and gas cooperation agreement, but the
Russians, while cordial enough, were not inclined to curtail their campaign
to boost oil exports that are the main driver of Russia's economic boom or
to see prices cut back.

The Russians have not forgotten how in 1985 the Saudis used their excess
production capacity to flood the market and drive down oil prices to $12 a
barrel, which wrecked any hopes that the then-Soviet Union had of an
economic revival and contributed to the collapse of communism soon after.

Yet the Saudis remain increasingly desperate for Russia's help, especially
as the US agenda becomes more belligerent and insistent upon speedy
political reform that the House of Al-Saud is reluctant to introduce.

Just how desperate Riyadh is was evident in January, when the pro-Moscow
president of Chechnya, Akhmad Kayrov, said after visiting the Saudi capital
that Riyadh had halted all funding for Islamic rebels in the war-torn
republic and recognized his government. That can only bolster Al-Qaeda in
its campaign inside the kingdom by convincing many Saudis that their
government is collaborating with those who seek to crush fellow Wahhabis
fighting the infidel.

Moscow's improving relations with Israel, despite some tensions, underline
how Russia's policies in the region are changing. Israeli Prime Minister
Ariel Sharon has visited Moscow three times since his election in early
2002. Commercial relations are flourishing with trade running at several
billion dollars a year. Russia and Israel are collaborating on programs that
have strategic and military implications. Both states are threatened by
Islamic extremists, and the Israelis, busy fighting suicide bombers, have
been uncritical of Moscow's harsh measures against the Chechen separatists.

With Israel as a vital artery for oil exports, the relationship is bound to
consolidate, undoubtedly at the Arabs' expense.

Ed Blanche, a member of the International Institute for Strategic Studies in
London, is a Beirut-based journalist who has covered Middle Eastern affairs
for three decades. He is a regular contributor to THE DAILY STAR