Russian Pipeline Projects Shifting To Favor Tokyo Over Beijing

While the battle for Yukos plays out in Moscow, another oil-related struggle continues to unfold on Russia’s eastern frontier.

China is currently facing energy shortages and brownouts at a time when imported energy is critical to its economic and overall security. But as China’s demands increase, its energy relationship with Russia is on the verge of collapse. Inasmuch as bilateral energy cooperation is one of the priority directions of the relationship, according to China’s ambassador to Russia, (Itar-Tass, July 29), a breakdown in this cooperation could explode Sino-Russian ties and represent a fundamental reorientation of Russian foreign relations (Russian Oil and Gas Report, July 14).

For several years the proposed Angara-Daqing pipeline, sending Siberian oil to China’s terminus at Daqing, was the centerpiece of the bilateral energy relationship along with the Kovytinskoye gas project that sent Siberian natural gas to China and South Korea. That latter project has virtually ground to a halt (Prime Tass Business News, July 27).

Worse, from China’s standpoint, Russia apparently is about ready to accept Japanese money to launch a feasibility study of the proposed pipeline from Taishet in Siberia to Nakhodka. That decision would signify Russia’s decisive choice of that route, which is 60% longer and vastly more expensive (anywhere from $13-16 billion) than the proposed Angara-Daqing pipeline (Russian Oil and Gas Report, July 14; Itar-Tass, July 10; EDM July 16).

There are several reasons for Russia’s change of mind. First, the Angara-Daqing project is tied to a single customer, and Russia has had bad experiences with such projects in the past, notably the Blue Stream project with Turkey. The Nakhodka pipeline, however, will pump oil to Japan, America, and other customers. In addition Russian energy leaders and especially the government are generally scared of Chinese economic power and have denied China access either to the privatization of the Slavneft oil company in 2002 or to Central Asian assets whenever they can (Prime Tass Business News, July 27).

This pipeline was built and owned by Yukos, which held it up as a prime justification for its argument about privatizing the pipelines, a proposal that the government firm, Transneft, violently opposed. Yukos eventually won, which probably contributed to the events leading to the imminent destruction of the company. While everyone involved tries to downgrade the importance of this domestic struggle in the equation, that is unlikely to be the case (Itar-Tass, July 29).

Second, while China is evidently unwilling to pick up the cost of construction from Angara-Daqing, Japan is offering $77 million for the feasibility study, to finance the pipeline to the tune of $7 billion, to invest $5 billion in developing Siberian oil fields over time, and another $2 billion for “social projects” (Windsor Star, July 16).

Finally, China has backed away from internationalizing the gas pipeline that Petro China had planned to build from Western China to Shanghai with Exxon-Mobil, Shell, and Gazprom. Claiming that it could not reach agreement with its partners on pricing, Petro China pulled out and said it would finance the entire project on its own (Daily Telegraph, August 3; Agence France Presse, August 3). This decision might also signify China’s impending or threatened retaliation for a decision to launch the pipeline to Nakhodka.

These decisions culminate a series of bitter disappointments for China regarding Russian energy. Zha Baojoing, Director of the Center for International Energy Security at People’s University in Beijing, told reporters that there is considerable skepticism in China about Russian and Central Asian energy claims (South China Morning Post, July 5).

Meanwhile, the stakes of this rivalry are extremely high. Given the huge demand for Russian oil and gas, many analysts suspect that China seeks to pressure Russia into giving it preferential treatment in return for Beijing’s approval of Russian entry into the World Trade Organization (Prime Tass Business News, July 27). A breakdown in energy supplies, however, could conceivably cause China to blackball Russia’s entry into the WTO, which would be a catastrophe for Russia.

At the same time the British expert on Russian foreign policy, Bobo Lo of the Royal Institute of International Affairs, observes that China has already indicated that a breach of the contract for the Angara-Daqing pipeline would be regarded as “Undermining of confidence with serious consequences for bilateral relations — disputes about the pipeline issue threaten to grow into the harshest crisis in relations with China after the breakup of the Soviet Union” (Russian Oil and Gas Report, July 14).

Despite both sides’ very close military ties, such a process would destroy those relations and lead to bitter recriminations and unforeseeable policy consequences throughout Asia. But although China’s ambassador publicly professes optimism that Russia will honor its obligations, such statements appear to be merely for public consumption (Itar-Tass, July 29).

But if Russia chooses either pipeline, it will still have to find financing. Even Japan’s offer only covers half the estimated cost of the Taishet-Nakhodka pipeline. It is by no means unthinkable that in trying to outsmart everyone and strike at Yukos and Mikhail Khodorkovsky, Moscow might end up with no pipeline and everyone’s enmity. But that will neither repair its relations with Tokyo nor Beijing nor do anything to improve conditions in Siberia or in China.