Pipeline Pirouette In Northeast Asia

Competing oil pipeline projects in the Russian Far East were the topic of a lively symposium among specialists from Russia, China, Korea, Japan, and the United States at the Slavic Research Center in Sapporo, Japan, on July 14-16.

Last year the Russian government surprised observers by withdrawing support for a $2.8 billion 2,200 km pipeline to carry oil from Angarsk in Siberia to Daqing in northeast China. Instead, Moscow expressed interest in a longer pipeline that would be laid through Russian territory to the port of Nakhodka, from which oil could be shipped to Japan and other Asian customers. That route is 4,000 km long, would cost $5 billion to build, and would require 50 million tons in annual capacity to be viable (double the amount planned for the Daqing pipeline). As a concession to China, Moscow suggested that a branch line could be built from the Nakhodka route down to Daqing.

China recently overtook Japan as the world’s number two oil importer, with oil imports surging 30% in 2003. Given that Russia is the world’s number two oil exporter, the idea of a pipeline linking the two seems logical, all the more so given the strategic partnership that the two countries affirmed in 1996. In 1999 Prime Ministers Yevgenii Primakov and Zhu Rongyi signed a framework agreement to investigate the export of oil and gas. The feasibility study for the Angarsk-Daqing pipeline was finished in July 2002, and in May 2003 President Hu Jintao signed an agreement with Vladimir Putin that seemed to seal the deal. China is also interested in building a 4,000 km line to import natural gas from the Kovykta fields, being developed by the BP/TNK consortium.

However, two forces derailed the China plan, one domestic and one international.

The partner for the Chinese National Petroleum Company in the Daqing pipeline was none other than Mikhail Khodorkovsky’s Yukos. Later in the summer of 2003 the Kremlin launched an assault on the company that led to the arrest of its top owners and its near-bankruptcy. Yukos’s Daqing project also stimulated a powerful counter-proposal from a coalition of rival energy companies. Keun Wook Paik, a scholar at London’s Chatham House, explained how state-owned Transneft, whose monopoly on oil export pipelines was threatened by the Yukos project, first raised the idea of a pipeline to Nakhodka in August 2002. In February 2003 Gazprom and Rosneft joined forces to propose building parallel oil and gas pipelines to Nakhodka. Gazprom planned to tap their Chayandinskoe field in the republic of Sakha — and not the BP Kovykta field.

Second, Japan entered the game. During his visit to Moscow in January 2003, Prime Minister Junichiro Koizumi promised Japanese financial support for the $5 billion Nakhodka pipeline. Bargaining continued through the spring. In May Japan dropped its request for Russian government financial guarantees and agreed to contribute another $7 billion to help develop the oilfields. By September 2003 the Russian government was signaling its withdrawal from the Daqing plan. On May 14, 2004, the heads of Gazprom and the two oil companies Rosneft and Surgutneftegaz reaffirmed their commitment to common routes for oil and gas pipelines to Nakhodka.

Tsutomu Toichi from the Institute of Energy Economics in Tokyo argued that the Nakhodka project makes economic sense because it does not lock Russia into a single buyer, China. However Viktor Kalashnikov, an economist from Khabarovsk, noted that China and Russia had reached a mutually acceptable agreement on pricing as part of the deal. Jianping Yin from the Academy of Social Sciences in Harbin suggested that politics was getting in the way of economics. He was confident that the Daqing project is more cost effective and that, once the political maneuvering subsides, the logic of the market will prevail.

Princeton University’s Gilbert Rozman underlined the role of energy bargaining in the context of jostling for influence between the powers in the region. Although the countries of the region have a clear common interest in securing cheap and reliable energy supplies, there is a complete lack of multilateral institutions to promote such cooperation. Instead, projects are mainly driven by a bilateral bargaining process that triggers much mutual suspicion. (The most robust multilateral forum is the six-party talks over North Korea’s nuclear program.)

There are still many economic and political risks surrounding the Nakhodka project. Economists question whether enough oil reserves are there to justify the 50-million ton Nakhodka pipeline, especially given uncertainties about extraction costs in the new and geologically difficult fields of East Siberia.

Japanese political scientist Hiroshi Kimura warned that the Russian government might be in for a rude awakening, since the Japanese government might raise the return of the Northern Territories (the southernmost Kuril islands) as a precondition for concluding the deal. Moscow assumes that Tokyo has given up on getting the islands back, but that is erroneous.

With Yukos now out of the way, perhaps Moscow will shift its attention back to the Daqing route. The Chinese government has refrained from public criticism of Russian dithering, although it has stepped up its interest in securing alternative supplies from Kazakhstan. If Russia does drop the Daqing pipeline, it would be a serious snub to Beijing. It looks increasingly likely that this is a deliberate reflection of a strategic decision by Moscow to balance the growing power of China, and not simply accidental fallout from the Yukos affair.

With the increasing influence of siloviki bureaucrats inside the Kremlin and geopolitical thinkers on the outside, it looks like Moscow is treating the Russian Far East more as a source of strategic vulnerability than a region of economic potential.