Publication: Eurasia Daily Monitor Volume: 3 Issue: 210

Russian gas leaders have reiterated pledges to prioritize China in their long-term oil export programs for Asia, as Moscow seemingly plans to direct the bulk of its Asian-bound crude to the lucrative Chinese market. And even before its own pipeline to the Pacific and China is built, Russia appears to be rushing toward funneling Russian oil to Asia via Kazakhstan.

Russia’s total crude exports to the Asia-Pacific region could reach 140 million tons a year by 2030, according to a new report from the Oil and Gas Geology Institute at the Siberian branch of the Russian Academy of Science (known under the Russian acronym SO RAN). The country’s experts seem to assume steady crude exports to Asia, which are due to reach 135 million tons by 2020, according to the report.

In the shorter term, the SO RAN report estimates Russian oil supplies at 44 million tons a year by 2010, including 20 million from Western Siberia, 18 million from Sakhalin, and 6 million from Yakutiya.

The blueprint also indicated that Russia aims to supply China with roughly three-quarters of its crude destined to Asia. Russian oil supplies to China, including transit via Kazakhstan, were estimated to reach 32 million tons a year by 2010, 80 million by 2020, and 90 million by 2030, according to the report (Interfax, October 31).

During Prime Minister Mikhail Fradkov’s recent trip to China, Rosneft head Sergei Bogdanchikov announced that his company would be able to raise crude oil shipments to China up to 20 million tons a year from the estimated 12.5 million tons this year. He added that Rosneft could funnel up to 1.5 million tons a year via the Atasu-Alashankou oil pipeline (Interfax, November 10).

Given the size of the planned crude exports, Russian and Chinese officials regularly discuss progress in bilateral oil cooperation. Last month, Russian Industry and Energy Minister Viktor Khristenko and China’s State Development and Reform Commission head Ma Kai co-chaired a session of the energy sub-commission for bilateral cooperation. At the meeting Khristenko said that Russia prioritized not only oil and gas cooperation with China, but also cooperative projects to develop pipeline infrastructure.

At the meeting, Russia’s crude oil pipeline monopoly Transneft and the Chinese National Petroleum Corporation were told to speed up the realization of their agreement to set up joint ventures in both Russia and China. The meeting also indicated that Russian oil supplies to China by rail would reach 15 million tons next year, up from 10 million in 2006 (Regnum, October 17).

In the meantime, Transneft, the world’s largest pipeline operator, which controls the bulk of Russia’s oil pipelines, presumably would loose no time in funneling crude to China. The transit of Russian oil to China via the Atasu-Alashankou pipeline running through Kazakhstan could total 7 million tons (51.3 mln bbl) in 2007, Transneft head Semyon Vainshtok said (Interfax, RIA-Novosti, October 31).

Last December, Kazakhstan inaugurated the 1,000-kilometer Atasu-Alashankou oil pipeline to export crude to China. The $800 million pipeline is expected to pump 10 million tons per year. However, it would need Russian crude from Western Siberia coming via the Omsk-Pavlodar-Shymkent pipeline to reach its full capacity of 20 million tons by 2010. Now Transneft appears to be planning to use the Atasu-Alashankou and Omsk-Pavlodar-Shymkent pipelines to export crude to China.

Due to favorable market conditions, Transneft now has funds to maintain and upgrade its infrastructure. This year, the pipeline monopoly expects its consolidated net profit to reach 60 billion rubles ($2.2 billion) or up 6% year-on-year. In 2005, Transneft reported 57 billion rubles ($2.1 billion) in net profits and 44 billion rubles ($1.6 billion) in 2004. Transneft’s consolidated earnings in 2006 are expected to reach 183 billion rubles ($6.8 billion) (RIA-Novosti, October 9).

Transneft has also been put in charge of an Asia-bound mega-project, the Eastern Siberia-Pacific Ocean (ESPO) pipeline. It is expected to funnel up to 80 million metric tons a year (1.6 million barrel/day) from Taishet in Irkutsk region to Perevoznaya Bay in Primor region. The first stage of the pipeline’s construction is expected to be completed by the end of 2008, while its cost was originally estimated at $11.5 billion.

Adding to Transneft’s financial burden, Russian President Vladimir Putin has ordered the company to build the pipeline away from the shores of Lake Baikal. Changing the ESPO route northward would require $1 billion in extra spending, Putin admitted, but the decision to shift the ESPO route was based on the need to protect Baikal’s environment. However, he added, the additional expenses should not be significant because the pipeline would actually be built closer to the oil fields.

By the beginning of November, Transneft had built 367 kilometers of the ESPO pipeline, and there are plans to build nearly 1,300 kilometers in 2007, the company said in a statement. Transneft is due to spend up to $1.5 billion to finance the construction next year. Moving the pipeline away from Lake Baikal lengthened the route by 573 kilometers, according to Transneft (Interfax, November 10).

Yet despite its ambitious plans of crude exports, now Transneft faces warnings that its main asset, the trunk pipelines, are increasingly wearing out. On November 2 the Russian technical standards agency Rostekhnadzor announced that much of the country’s pipelines had deteriorated significantly. “Russia’s pipeline system is in an unsatisfactory state,” Rostekhnadzor head Konstantin Pulikovsky reported (Interfax, November 2).

Rostekhnadzor said most pipelines in Russia were built 30-40 years ago, and they are becoming unsafe due to corrosion. Since the beginning of this year, there have been some 30 pipeline leaks and other accidents, the statement said. Rostekhnadzor also dismissed safety measures taken by pipeline operators as inadequate.

Therefore, Transneft’s network of oil pipelines has been seen as a major vehicle of Russian efforts to shift the country’s oil exports from Europe to Asia. The strategy is understood to be capital-intensive, as Russia would need to spend billions of dollars to build new pipelines as well as to maintain existing facilities.