Russia is currently under pressure to choose between two projects. China is proposing a pipeline to bring oil from Angarsk in east Siberia to the Chinese city of Daqing while Japan would much prefer it to go to the Russian port of Nakhodka on the Sea of Japan. 

In December, 2003 then Russian Prime Minister Mikhail Kasyanov paid a three-day visit to Tokyo where he met with his Japanese counterpart Junichiro Koizumi. According to a joint statement issued after the talks the two leaders shared the view that, "The construction of a pipeline to the Pacific coast is important to the development of Eastern Siberia and the Russian Far East, to the effective use of energy resources in the region and to stability in the supply of energy in the Asia-Pacific region."

January 2004 saw a Russian-Japanese vice ministerial meeting take place in Moscow. It has been reported that Japanese Foreign Minister Yoriko Kawaguchi may visit Russia in the first half of this year with her Russian counterpart expected to pay a return visit in the second half of the year. The Interfax News Agency has also reported that this year might also see a visit to Japan by Russian President Vladimir Putin.

All these latest developments in Russian-Japanese relations might seem to indicate that all Japan's energetic lobbying for the Angarsk-Nakhodka route could be paying off. This view was further strengthened by then Russian Minister of Energy Igor Yusufov's statement in February, 2004 that due to economic considerations, the Russian government hopes to build the pipeline to Nakhodka rather than to China's Daqing.

However on March 3, 2004, Russia's state-owned oil transportation company announced that feasibility studies for a new pipeline in the Russian Far East would be completed by the beginning of 2005. The new plan could see not one but two pipelines built running from the hub of the Baikal-Amur Railway at Tayshet. As one would go to Nakhodka and the other to Daqing this new development has rekindled hopes for a Daqing pipeline.

Angarsk and Nakhodka

Angarsk with a population of a little over 30,000 lies roughly 60 km north of Irkutsk in Siberia. No oil is produced at Angarsk and it is over 2,000 kilometers away from the Tyumen oil field; however, it is well known as the home of the Angarsk Petrochemical Co., Russia's fifth-largest petrochemical company. The development of the petrochemical industry has brought economic prosperity to Angarsk.

In the 1960s, the former Soviet Union laid an oil pipeline with an annual capacity of 50 million tons from the Tyumen field to Angarsk. As the terminal of this "eastern pipeline", Angarsk would in turn become the starting point for the various pipeline options under discussion. It is however by no means certain that crude oil will eventually be piped to either Daqing or to Nakhodka.

Nakhodka on the western coast of the Sea of Japan is Russia's primary Pacific port. It is some 180 kilometers north of Vladivostok, the biggest city in the Russian Far East. Each year it handles up to 25 million tons of cargo representing some 40% of Russia's foreign trade.

Nakhodka's port complex consists of four ice-free, all-weather ports. The port of Vostochny, 18 km from Nakhodka, has a handling capacity of over 12 million tons a year. If the Angarsk-Nakhodka route were to be adopted, Vostochny would become the terminal of the new pipeline.

Japan has entered into an agreement with Russia that allows it use of the port of Vostochny for 49 years and is constructing facilities capable of handling 7 million tons of oil a year. They are expected to become operational in 2006.

The more feasible Daqing route

Back in 1994 China and Russia began their feasibility studies on the Angarsk-Daqing pipeline. It was to be the best part of a decade later on May 28, 2003 that the China National Petroleum Corporation (CNPC), the country's largest crude oil producer and refinery operator finally sat down to sign an agreement with Yukos, Russia's second-largest oil company.

However China now faces competition for the Russian oil. In a bid to swing Moscow's decision in its favor, Japan has promised a huge loan of US$7 billion for the Nakhodka project. According to then Russian Minister of Energy Igor Yusufov, the loan would come in two parts. US$5 billion to fund the pipeline construction and US$2 billion to help Russia explore for crude oil in the eastern Siberian oil fields near Lake Baikal.

With Japan stepping up its lobbying for a pipeline to carry crude oil from Angarsk to Russia's Pacific coast, a decade of joint effort working towards a US$2.8 billion Daqing line is at risk. However China's response has demonstrated flexibility and a willingness to revise the original agreement while keeping the pipeline through China alive.

"At 2,400 kilometers the Angarsk-Daqing route would clearly be shorter than the 3,765 kilometers to Nakhodka. What's more a Daqing pipeline would be economically viable given the availability of oil coupled with financial arrangements that are already available," points out Steven Shu, a senior researcher with Boodc, a knowledge-based advisory firm in China, "Meanwhile, the Daqing project would bring near-term and long-term benefits to both countries."

Eva Chu, a Hong Kong-based analyst with BNP Paribas Peregrine Securities said, "The oil pipeline to Daqing would be a landmark agreement for both countries allowing for closer economic ties. If China and Russia simply cast aside their decade-long feasibility studies, it might become a barrier to future collaboration both economically and politically."

"The Nakhodka pipeline plan is rife with difficulties, not least because there is neither the oil production capacity nor the financial resources necessary to make it a reality within the next decade," said Steven Shu.

In fact according to respected economist, V. Zausayev in the Russian Ministry of Economic Development and Trade, from a financial perspective it could actually be well beyond Russia's capacity to construct the Nakhodka pipeline. Experience over the years with Russia's major construction projects would suggest that the real cost of the Nakhodka line would far exceed the US$5 billion estimate. For instance, compared with its design budget of three billion rubles, the Baikal-Amur Railway came in with a final price tag of 13 billion rubles. Prof. Zausayev suggests that at a conservative estimate the final cost of the Nakhodka project might soar to US$8 billion.

As for the "mammoth" loan of US$7 billion promised by Japan, Prof. Zausayev said that at most only several hundred million dollars could be considered as firmly committed since the money is projected as coming from Japan's private sector rather than from the government.

As Prof. Zausayev explained, "Shrewd Japanese businessmen will simply not be prepared to gamble huge amounts of their own money in the less than ideal investment environment of the Russian Far East." What's more, Japan is currently focusing its attention on the exploitation of oil fields on Sakhalin Island where total investment is expected to reach tens of billions of dollars. Much as it might want to, it would obviously overstretch Japan to try to make a massive investment in exploiting oil fields in eastern Siberia at the same time. In addition except for Japan itself, none of the big oil consumers in the Asia-Pacific region such as China, the Republic of Korea or the United States has given any sort of undertaking to import crude oil through Nakhodka. This has further shaken Russia's confidence in the Nakhodka project. In any case, the construction of the Angarsk-Daqing pipeline is the subject of a written agreement signed by China and Russia. If Russia were now to scrap the contract unilaterally, it would not only harm Russia's commercial reputation but also cause significant damage to bilateral economic and political relations. So whatever else happens, at the end of the day Russia will stand by the Daqing route. "As far as Russia is concerned, the best option would be to build the pipeline to Daqing first, and then the pipeline to Nakhodka," concluded Prof. Zausayev.

A long-running issue

It has been widely believed that the long-delayed pipeline issue won't be settled until after Russia's presidential elections on March 14, 2004. There are two reasons:

First of all, President Vladimir Putin has been under considerable pressure on the pipeline issue from several different directions. Thus he wouldn't wish to make an early decision lest his likely re-election be affected.

Domestically, the most vocal opposition to the Angarsk-Daqing pipeline comes from Russia's Far East through which the proposed Nakhodka line would pass. Alexander B. Levintal, deputy chairman of the Khabarovsk Krai government, points out that the construction of the oil pipeline would be of major significance to the development of the local economy. So almost all the leaders in that region are in favor of the Nakhodka project. Vladimir Zhirinovsky, chairman of the Liberal Democratic Party of Russia (LDPR), which has its power base in the Russian Far East, is also a steadfast supporter of the Nakhodka line. In last December's Russian parliamentary elections, the LDPR finished third with 11.6 percent of the votes for the 450-seat State Duma. As a result, Zhirinovsky's personal influence has increased greatly. In order to secure his own re-election, Putin will have to take account of these views in reaching his decision.

And secondly, Russia has on its part deferred making a decision for months, apparently hoping to benefit from the fierce competition between China and Japan and strike the most favorable deal.

"Japan has not only promised a loan for the pipeline construction itself but agreed to invest heavily in Russia," Levintal said bluntly. "China should look beyond the confines of the pipeline project. It is just as important for China as it is for Japan to view investment in Russia as the means of swinging the balance in its own favor."

The pipeline dispute heralds keen competition in the energy sector in East Asia, a region that is set to witness significant increases in the demand for oil over the next few decades. There is a precedent in Europe where, facing fierce competition for sources of energy following World War II, the European countries established the European Coal and Steel Community (ECSC) in 1952. This not only brought a settlement to the issue of competition for energy but also laid the foundations for the future integration of Europe. East Asian countries should follow postwar Europe's example and map out a rational plan for exploiting and distributing natural resources among themselves.

(China.org.cn by Shao Da, March 11, 2004)