The Chinese Perspective On The Daqing Pipeline Project

Does the Russian Pipeline project, slated to deliver oil to China, remain a source of controversy–or is it simply dead? According to some statements from the Russian Ministry of Natural Resources, and also from environmental organizations and various press reports, it is, at the very least, almost dead. Despite this general view, some Chinese officials and oil executives believe that there is still room for hope, given the lack of a definitive official statement from either government.

The Chinese media has continued to tout the pipeline project, although insiders in both Russia and China have remained silent on the issue. Given the political sensitivities surrounding it, the pipeline has ceased to be merely a delivery mechanism. It has become a potent symbol and a source of public debate that has tested the nerves of policy makers.

BACKGROUND

In 1994, China and Russia began feasibility studies on the project, and Yukos and China National Petroleum Corporation(CNPC) required nearly a decade to complete them. The findings of the studies received official support at the highest levels in both capitals, but concerns were voiced by Russian environmental groups and some Ministry of Natural Resources officials regarding the proposed southern route to Daqing. Most seriously, however, China’s counterpart, Yukos, was stung by the October jailing of its president, Mikhail Khodorkovsky.

It is clear that the Russian government has, on occasion, been less than enthusiastic about the project. President Vladimir Putin, in fact, declined to attend the signing ceremony between CNPC and Yukos on May 28, 2003. Given this atmosphere, China has demonstrated flexibility and shown a willingness to accept revisions to the initial agreement, though it will push for maintaining the trajectory of the route within its own borders. This new flexibility grows out of fears engendered by Japan’s increasingly generous lobbying efforts regarding a possible line to Nakhodka, which would scuttle the decade long work toward the Daqing line.

Japan has complicated the Daqing pipeline effort by plying influential Russians with a huge “soft” loan of US$7.5 billion for the Nakhodka project. These funds, far beyond the actual cost of pipeline construction, would go to local economic development projects, making the proposed deal politically attractive as well. Japanese scholars have waded into the fray, arguing that the Daqing pipeline is unreasonable because it would benefit only China, whereas the Nakhodka line would benefit the entire region. Recently, at the James Baker Institute in Houston, this author made the argument to his Japanese counterparts that their government was being disingenuous. This is because it seems clear that Japan ultimately wants to be the sole buyer, in view of the fact that it seeks a yield of nearly one million barrels a day from the pipeline. Given the estimated capacity, Japan would have to be the sole buyer to achieve these goals.

Clearly, the Daqing pipeline is economically viable given the availability of oil coupled with existing financing arrangements. It is equally clear that the project will benefit both China and Russia in the near future and in the long term. The Nakhodka pipeline plan, on the other hand, is rife with difficulties, not the least of which is that there are insufficient fuel and financial resources to make it a reality within the next decade. It is also unlikely that China and Russia will simply cast aside their decade-long feasibility studies. The challenge reflects the serious and simple fact that two consumers–Japan and China–are fighting for the same source from the same place (Russia) driven by the same strategy of oil supply diversification.

Russia, for its part, is waiting for the best offer to be anted up by the two sides. Add to this the fact that the most important man in Russia, Vladimir Putin, spends no time on the issue, choosing instead to focus on the impending presidential elections of March, 2004. There are, however, some signs pointing to an outcome in China’s favor. In October of 2003, on a visit to Beijing, Russian Prime Minister Mikhail Kasyanov specifically expressed confidence in bilateral cooperation in the energy sector. Despite this bright spot, cloudy weather lies ahead.

POSSIBLE IMPACTS ON CHINA

Considering the present complications surrounding the pipeline project, China has begun to consider a range of scenarios:

1) The pipeline may be suspended or postponed until March of 2004 at the earliest, at which time Putin would likely begin his second term as Russia’s president. Putin’s preference on the pipeline remains unknown but, given his recent strengthening of state power this becomes increasingly important. Whatever his final choice may be, however, he must know that Russia will be the biggest beneficiary.

2) The proposed route may be revised due to environmental and other concerns. Chita, an eastern Siberian city close to China, has become a possible route of trans-shipment, which may mitigate environmental concerns over the existing route. Such changes would likely be acceptable to China if no further costs are incurred in the process and the endpoint of the line remains Daqing.

3) The Daqing Line is canceled and/or replaced by the Nakhodka Line. The first two scenarios do not worry China as much as this third possibility. The delay caused by Putin’s indecision will prompt continued oil imports from Middle Eastern sources. In the absence of a Russian source, imports from traditional sources are projected to grow vastly; supplies would have to go from 2 million barrels a day (mbd) in 2005, to 3 million by 2010.

It is already a well-established fact that oil production (output) from Daqing, the largest oil field in China, will decline in significance as a source for sustainable development. A major foreign source will be required to maintain the current supply level for both Northern China and the Chinese market as a whole. Russia was (and still is) seen as the best source to balance the market.

The fact is, however, that China may be forced to forego Russian oil, and to rethink its domestic production scheme. Breaking from the Russian “pipe dream” will prove difficult though, as continued overdependence on Gulf oil makes China quite nervous about the security and dependability of its oil supply. It is likely that China’s search for fuel sources will lead it increasingly toward Central Asia. In short, China’s quest for oil supply diversity will require it to enhance cooperation with oil exporting countries, sea-lane littoral countries and neighboring countries in Northeast Asia.

POSSIBLE SOLUTIONS

The pipeline from Russia to China is significant for both countries. China has no real alternative to waiting on Russia’s final determination while doing its utmost to convince Moscow that Daqing is the best option. Having said that, China also recognizes the importance of the Nakhodka pipeline for the larger Asia-Pacific market, and realizes that it is necessary to imagine an alternative to Daqing in order to be engaged in the larger regional dynamic. Again, the Nakhodka Line is less feasible in the both the short term and the long term than the Daqing Line, and China would like to emphasize the near term benefits to Russia. Regardless of the outcome of the Daqing negotiations, China may also yet find itself in a position to pursue exclusive natural gas supplies from Russia.

At the same time, China is in the process of rethinking its second cross-border pipeline from western Kazakhstan to its own western border; the Atrau-Kenchyak section of the pipeline is complete, while the studies of the Atacu-Alashankou section are under serious review. The long distance pipeline, measuring 6300 km, is dependent upon the final linkage between the aforementioned sections, and China is waiting anxiously for a capacity of at least 20 million tons in order to feed development. The October 2003 acquisition of the North Buzachi field near Atktobe by CNPC hints at a promising future for a viable source in western Kazakhstan.

In addition, China would be well advised to follow the Japanese and Korean models, gleaned from their respective experiences in the establishment of a global trading and investment system. Doing so would allow China to compete effectively for more oil sources, and open a range of options. Some government agencies have begun to study the effects of a closer relationship with other oil consumers under an institutional framework, including the IEA, the Energy Charter Treaty, and other regional organizations.

Steven Shu is senior researcher at Boodc, a knowledge-based advisory firm in China.