China Not Giving Up On Russian Oil And Gas

The competition between Beijing and Tokyo for Eastern Siberia’s natural resources has garnered increasing world media attention over the last six months. The latest iteration of the story has Japan prepared to supply nearly $10 billion to help support construction of an oil pipeline from Taishet, northwest of Lake Baikal, to the Pacific port of Nakhodka. The Chinese, seemingly put off by the late Japanese bid and by the Russian government’s failure to honor a tacit pledge it made in the spring of 2003, have meanwhile begun an earnest dialogue with Kazakhstan over the feasibility of constructing oil and gas pipelines linking their two countries.

Several high-profile incidents that touch on this region have adding further drama to the story. Yukos CEO Mikhail Khodorkovsky, now in prison awaiting trial, had championed a shorter (and cheaper) pipeline to the Chinese city of Daqing. The state-owned Chinese oil company, China National Petroleum Corporation (CNPC), was strongly dissuaded by “friends” in the Russian government from making a bid for the Russian oil firm Slavneft, which was put up for auction early last year.

Nevertheless, it appears that China is not quite out of the picture yet. In a trip to Beijing in late August, the Russian Minister for Industry and Energy, Viktor Khristenko, announced that the ultimate question of the pipeline destination has still not been decided, and he suggested that Russia hopes to provide China with Siberian oil, shipped first by rail (up to 10 million tons annually), and then eventually by pipeline. This visit will be followed by a visit to Beijing by Russian Prime Minister Mikhail Fradkov in September. Reportedly, Fradkov has also put energy cooperation high on his agenda for China (Nezavisimaya gazeta, August 26).

Beijing has been keeping close tabs on the Yukos situation. China has been receiving oil shipments by rail (about 124,000 barrels per day), thanks to an agreement with Yukos. That agreement is now under threat, due to Yukos’ legal and financial problems. The Chinese government has promised to pay for the rail shipments needed to transport the oil, if necessary. “China will pay for [the shipments] if Yukos encounters payment problems,” according to the President of the Russian Railways Company, Gennady Fadeyev (Interfax, August 18). Meanwhile, China’s largest oil and gas producer, PetroChina, has decided not to pursue a bid for the troubled Yukos oil unit Yuganskneftgaz. According to a Chinese official from the embassy in Moscow, “The problems of Yukos are the internal affairs of Russia, and China has no intention of getting mixed up in them,” (Izvestiya, August 25). China not only wants to avoid getting mixed up in this ugly affair, but it also wants to avoid the stigma of being coerced out of the bidding once again, as happened with Slavneft in 2003. The Chinese government, however, has offered to extend a loan for $3 billion to help keep the beleaguered company afloat, and hence capable of continuing the rail shipments of oil.

During Khristenko’s visit, representatives of the Russian gas monopoly Gazprom and CNPC discussed the joint development of the Kovyktinskoe gas fields, also northwest of Lake Baikal. Additionally, it was announced that the China Petroleum and Chemical Corporation (part of the Sinopec Group) is interested in purchasing liquefied natural gas (LNG) from the $10 billion Sakhalin -2 project (Izvestiya, August 27). The Sakhalin-2 consortium includes Royal-Dutch Shell, Mitsui, and Mitsubishi. Apparently, Gazprom is also seeking to get in on this deal.

The Chinese government is obviously not going to roll over and allow Japanese commercial interests and Japanese money to dominate the development and procurement of Eastern Siberian oil and gas resources. Chen Geng, chairman of PetroChina, stated, “The stable supply of oil is a major concern for China. There have already been three meetings chaired by Premier Wen Jibao to study this issue since May,” (Wall Street Journal, August 27).

The race for Siberian oil and gas is far from over. Given the Japanese government’s penchant for bringing up the territorial issue, Russia might be looking to diversify its sources of funding for energy projects in the Russian Far East. However, Russian leaders are acutely aware of the need to maintain a delicate balance between the looming giant that is China, and the pesky neighbor that is Japan.