Last May, the Russian government decided to build a 2?400 kilometer-long crude pipeline in order to transport Siberian oil to Daqing in China, which is the world?s third-largest oil consumer. A plan to construct a 1 million barrel per day extension to the Russian port of Narkhodka, from where oil could be shipped to Japan was put on hold until there would be more oil discoveries in Siberia.
Last May, the Russian government decided to build a 2?400 kilometer-long crude pipeline in order to transport Siberian oil to Daqing in China, which is the world?s third-largest oil consumer. A plan to construct a 1 million barrel per day extension to the Russian port of Narkhodka, from where oil could be shipped to Japan was put on hold until there would be more oil discoveries in Siberia. Yukos, Russia?s second largest crude producer, already signed delivery contracts and agreed on a price formula with the Chinese government. But that was before the Kremlin fell out with Yukos, the main backer of the China pipeline. And it was before Japan, keen to compete with China over energy resources, stepped up the pressure on Russia to construct the Japanese link.
The prospect of the China pipeline receded further when a Russian-Chinese subcommittee on energy cooperation met in Moscow last week and failed to agree to a protocol which should be signed during Prime Minister?s Mikhail Kasyanov?s visit in China in the coming week. Because of the disagreement, the final document contains only a vague reference to energy cooperation. It states that the sides will continue to support Russian and Chinese companies in building oil pipelines, development of oil fields, and crude deliveries to China by rail. The sides will also encourage the corresponding companies to develop further cooperation in the gas sector. China seems heavily disappointed that the construction of the pipeline will not start in November but will have delays. The country already accounted for the expected 400?000 barrels per day of Russian oil, which should start flowing in 2005 and gradually increase to 600?000 barrels per day. The head of the Chinese delegation Ma Kai mentioned after the meeting that Russia's refusal to adhere to earlier agreements has sent relations between the two countries back to the early 1990s. The dismantling of the Russian-Chinese relationship would be a blow for President Vladimir Putin who has tried to foster closer political and economic ties with Russia's biggest neighbor since taking office four years ago.
Supporters of the 3?800 kilometer Narkhodka link argue that only this pipeline will help to develop the Russian Far East. It would also enable the involved companies to sell their crude freely on Asian or US markets to the highest bidder and not being dependent on a single purchaser like China that could end up dictating the prices. A disadvantage of the Narkhodka link is the price of $5 billion which is $2.8 billion more than the Chinese pipeline.
The latest development was then an announcement of the Ministry of Natural Resources in Moscow, which signaled that it may block the planned route for the Daqing pipeline on environmental grounds. An environmental impact commission, set up by the ministry, has come down against laying the pipeline through Tunkinsky National Park in eastern Siberia, as well as along the coast of Lake Baikal. Seismic risk is also an issue in several planned sections of the route.
But the Japanese government did also its part in order to have Russia revisited the earlier decision. There were several high-level meetings of Russian and Japanese officials who discussed the issue, including the Russian Deputy Prime Minister, Victor Khristenko and the Japanese Foreign Minister Yukio Kawaguchi, who met in Vladivostok last week. It seems that Japan offered $7.5 billion in low-interest loans to finance the pipeline. The problem with the loan is only that Russia would have to deliver crude only to Japan until the loan is repaid. Another issue is the today?s insufficient oil production in Siberia to fill the pipeline.
China is already threatening with dear consequences if the pipeline project would not be realized. A first victim could be a proposal from a BP-led consortium to construct a gas pipeline from the Eastern Siberian Kovykta field to China. This is a key project for BP and its Russian partner TNK. But it is already identified that for the success of the venture, trade relations between Russia and China have to increase. To compensate China, Russia is prepared to boost crude rail shipments to China to 110?000 barrels per day in 2004-2006 from the current 80?000 barrels per day. But a lot of damage might already be done. Last week, Beijing bought higher-priced US-made coal-moving equipment for the state-owned coal company, rejecting the lower Russian bid. Russian companies lost over $49 million and Chinese officials said that the main reason not to buy from Russia was the government?s disappointment of the low progress in the pipeline issue.
At the end, the delay in the whole pipeline issue shows only that there is still serious lobbying going on behind the scene by China and Japan. The mentioned environmental reasons seem only a camouflage for the underlying failure of the Kremlin to decide what direction the pipeline should take.