Oil deals in the Far East

Today Russian President Vladimir Putin announced that Russia would begin construction on the Siberia-Pacific oil pipeline this summer.

"We will finish all coordinating work in April and in summer will begin the practical work to implement this project," Putin said in the eastern Siberian city of Yakutsk, quoted by the Itar-Tass news agency.

"Eastern Siberia has enormous potential and there are simply colossal prospects there," but this project will not be effective without developing the oil and natural gas deposits in eastern Siberia, said Putin.

The Russian government decided in 2004 to build the Siberia-Pacific pipeline in stages. Its length will span about 4,000 km, most of it underground. The pipeline is designed to shipup to 80 million tons of oil a year with the use of railway capacities.

Why should we be interested? Because this pipeline was seen as benefiting Japan, and given Japan's thorny relations with China, China has been a little miffed about the prospects of Russia providing its rival a potentially significant source of fuel. Interesting maneuvers are ahead as Russia continues to find a way to mollify China, and develop lucrative deals with China.

Transneft, the large Russian state-owned pipeline company, outlines the planned route. (See this map. The Pacific terminal, Perevoznaya, is in the lower right of the map, with the boat icon next to it. It is near Vladivostok.)

The route of the designed pipeline will go through territories of seven Russian Federation entities. They are Irkutsk, Tchita, Amur regions, the Republic of Buryatiya, Jewish autonomous district, Khabarovsk and Primorsk territories.

The length of the system via the route Taishet-Kazachinskoe-Skovorodino-Perevoznaya is 4130 km. For pipeline construction pipes of 1220 mm in diameter will be accepted.

Russia and China have for some time been discussing possible pipelines between the two countries. One significant project discussed was the Angarsk-Daqing pipeline, but Russia ultimately passed on the project, officially citing environmental concerns. China was very upset by the decision in early 2004.

Not so officially, it may be that Japan offered more assistance with the Siberian pipeline than China did with the Angarsk pipeline.

Russia's decision to build a Siberian oil pipeline to the Pacific port of Nakhodka will please Tokyo, but upset Beijing. Japan backed the Nakhodka route, while Beijing favored an alternative pipeline that would have brought the oil to Daqing in northwest China. Russia has been toying with both options, but in March 2004 indicated that it could favor the Japanese-backed project.

Tokyo has been lobbying for an oil pipeline route to the Pacific. To back up its lobbying, Japan reportedly promised up to $14 billion funding of the pipeline as well as $8 billion in investments in the Sakhalin-1 and Sakhalin-2 oil and gas projects, according to Russian media reports. The estimated cost of the oil pipeline from eastern Siberia to Nakhodka could reach $11-12 billion. The Taishet-Nakhodka route is seen as a strategic asset for Russia, allowing it to funnel crude not only to Japan but to Korea, Indonesia, Australia and the US west coast as well.

The Jamestown Foundation adds:

Tokyo has been lobbying for an oil pipeline route to the Pacific. To back up these efforts, Japan reportedly promised up to $14 billion in funding. Japan has apparently offered to fund the construction of the pipeline, and to give Russia full control of the pipeline. Hence fewer strings seem to be attached and Russia would not be forced to sell its crude to Japan only.

Compared to this, China has only promised to provide funds for constructing the section of the pipeline that is connected directly to the Chinese city of Daqing. Furthermore, China would own the pipeline on its territory and was supposed to become an exclusive buyer of the oil from the pipeline (China Business News, December 12). Therefore, the Taishet-Nakhodka route is seen as a strategic asset for Russia, allowing it to funnel crude not only to Japan, but also to Korea, Indonesia, Australia, and the western coast of the United States.

The breakdown of the Angarsk deal was a significant factor in China's pipeline deal with Kazakhstan. The pipeline opened last month, which I mentioned in this post. This pipeline a way of replacing what the Angarsk pipeline was going to bring.

There are thought to be enormous reserves of oil and gas in Siberia, and China, as discussed here, has enormous energy needs. China will continue to pursue deals with Russia for those resources.

For its part, Russia is doing what ambitious nations do. They look out for their own interests first. Russia is quite happy to form an alliance with China that is a counterweight to the US and its allies, but Russia certainly does not view itself as China's poodle. Or borzoi, I guess. Russia will leverage its resources in a way that best benefits Russia.

A year ago, when the Siberian pipeline was announced, Russia offered China part of Yuganskneftegaz, the assets the Russian government stole, I mean, confiscated in the Yukos affair. (Yukos had a strong presence in eastern Russia. Yuganskneftegaz was eventually subsumed by Rosneft, another Russian state-controlled oil company.)

From the Asia Times article linked to above:

In the past, Russian and Chinese officials have raised the possibility that a branch of Russia's Pacific pipeline could eventually be diverted to China. However, the December 31 announcement mentioned no China-bound branches of the proposed pipeline. As consolation, on December 30, Russia said it would offer China National Petroleum Corporation (CNPC) up to a 20% stake in a new state-owned entity that would control Yuganskneftegaz, the main asset of the collapsing Russian oil company Yukos.

Russia's state-owned Rosneft bought 100% of Baikal Finance Group, the company that won the December 19 auction to acquire a 76.79% controlling stake in Yuganskneftegaz. The Russian government indicated that Yuganskneftegaz assets would eventually be transferred from Rosneft to a new fully state-owned entity. An offer of a sizable stake in Yuganskneftegaz, a business that pumps about 1 million barrels of oil a day, could have sounded impressive. But Russia has refrained from offering CNPC a blocking, let alone controlling, stake in Yuganskneftegaz.

The Chinese state oil company is yet to comment on the proposed acquisition. However, Yukos has reiterated its readiness to go ahead with its legal action. "Whoever would eventually become a formal owner of Yuganskneftegaz, Yukos would continue to use all legal means to seek damages caused by forceful confiscation of this asset," said a Yukos spokesman. Yukos earlier indicated that it would sue to recover more than $20 billion of damages from all participants of the Yuganskneftegaz auction. Hence a possible acquisition of a stake in Yuganskneftegaz could be a double-edged sword for the CNPC.

So, that was obviously not a plum consolation prize.

In 2005 then, Russia decided that this pipeline would first provide oil to China by rail from Skovorodino.

An additional 10 million tons (192,000 bpd), Putin said, will be sent on by rail to the new tanker terminal planned near Nakhodka. Construction will take "around three years", the president noted. The president's remarks rejected wishful thinking from Tokyo that a Japanese government offer to finance a pipeline all the way to Perevoznaya Bay, near Nakhodka port, would tempt the Kremlin over Chinese insistence that deliveries to Beijing take priority. "As the oil in this [first-stage] pipeline increases through the development of new sources and fields in eastern Siberia," Putin said, "we will build a second section of the pipeline that will run right to the Pacific coast. This system will then be pumping 50 million tons [972,000 bpd]..."

This number is a discreet way of rebuffing the Japanese government, whose multi-billion dollar financing proposal for the Nakhodka-first pipeline has assumed a capacity of 80 million tons annually (1.5 million bpd). The pay-back terms may also have required such a large volume, despite the fact that, as Russian industry sources have repeatedly pointed out, the eastern Siberian oilfields are far too underdeveloped to fill the pipeline to that level within the next decade or longer. Niether the Russian government, nor the commercial Russian oil companies, have any intention of diverting crude from western Siberia in order to make up the difference for Japan's benefit.

Thus Putin's remarks ought to be read in Tokyo as marking a colossal failure on the part of Japanese interests who have promoted and lobbied for the Nakhodka plan for years. Like the Indians, whose failure to link billion-dollar investment promises to commitments of Russian crude oil supply have resulted in a comparably spectacular failure, the Japanese ought to be auditing how the money allocated to this task was spent; and blaming themselves for the dead end their tactics have now brought them.

(An interesting side effect of what's going on in the Far East is that the China-Japan rivalry spills over into Africa.)

In November, Putin tried to reassure Japan that the pipeline would go to the Pacific.

Speaking on Monday at a forum in Tokyo for Russian and Japanese investors, Putin announced that Moscow intends to build the pipeline all the way to Russia's far east coast: "Construction of the pipeline from East Siberia to the Pacific Ocean opens up great prospects. We plan to build the pipeline to the Pacific coast with eventual supplies to the Asia-Pacific region, including Japan."

Under the scenario that Tokyo officials consider ideal, the pipeline would carry up to 1.6 million barrels each day to a port close to Japan. Putin says the project will benefit all countries in the Asia-Pacific that become involved: "I'm sure the project will consolidate the energy infrastructure of the entire [Asia-Pacific] region and will give the national economies here new competitive properties."

Dave Ernsberger is the editorial director for Asia at Platt's -- a global information service for the energy industry. Ernsberger told RFE/RL from Singapore that Japan has sought guarantees that the Russian pipeline would go to the far east coast rather than end in oil-hungry China.
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Putin made it clear at today's economic forum that in return for extending the pipeline to the far east coast, Russia wants Japanese firms to invest more money in Siberia's oil industry infrastructure -- as well in Russia's fast-growing machinery and high-tech sectors. But Ernsberger says Moscow also is looking for more than just financial support for its oil sector: "In this day and age, Russia plays this scenario much like any other country that has large amounts of resources that it can sell profitably but relatively few outlets to actually take it to the market. Like any other country in that position, what Russia is really looking for is the best possible deal of all. That's not just cheap financing from Japan. But it's also a whole host of other things -- like support in the United Nations, support in their positioning on World Trade Organization issues. Basically, an alliance of sorts, that goes beyond just the pipeline itself, both financially, politically."

Shortly after Putin's announcement on the pipeline, Japanese Prime Minister Junichiro Koizumi announced that Tokyo will support Russia's bid to join the World Trade Organization. It was a move welcomed by Putin, who said: "I'm absolutely confident that Russia's accession to this influential organization [World Trade Organization] will help strengthen our business ties with Japan and make them more stable and more predictable."