Russia: Pipeline to China or Japan?

Oct 10, 2004 02:00 AM

Russia has hedged for years on a promise to build a pipeline to either China or Japan, as it weighs economic benefits against diplomatic and ecological considerations.
A pipeline to China would run 2,400 km from the Siberian city of Angarsk -- the easternmost point in Russia's massive oil pipeline network -- to China's Daqing over 1,700 km of Russian territory. A pipeline supplying Japan would cover 4,130 km from the Siberian city of Taichet to the Russian port of Nakhodka.

Russian officials and oil executives have added to the confusion over which plan Moscow prefers by making conflicting promises to both countries over the past several years. According to Vladimir Milov, Russia's former deputy energy minister, the Chinese route is economically viable, saying "there is enough oil to fill the pipeline" in the fields of central Siberia and in the Irkutsk and Tomsk regions.
Other factors, however, work against this route, such as the fact that the pipeline would only supply China, which could try to negotiate a lower price for the oil, Milov said.

Talks with China to develop the Kovykta gas field have shown what an unyielding negotiator Beijing can be -- it is offering $ 30 for 1,000 cm, much lower than the $ 75 minimum profitable price, according to Milov. Ecological worries also work against the Chinese route as Beijing refuses to have the pipeline run through Mongolia and demands it passes near Russia's Lake Baikal, a pristine region protected by the UNESCO as a World Heritage site.
Russia's failed promise in 2001 to supply China with 30 mm tpy of oil and its decision to bar Beijing from bidding for the Slavneft oil company two years ago soured relations and complicated negotiations, he said. Financial difficulties of the oil giant Yukos, engaged in a year-long battle with the Russian state over payment of back taxes and a main backer of the route, has also undermined the Russo-Chinese pipeline project.

But the Japanese route has pros and cons of its own. Besides Japan, it couldsupply oil to other countries in the region, including South Korea, and even, potentially, the west coast of the US.
But this option could end up being much less profitable than a Chinese pipeline because it would require a lot of oil in order to make economic sense. A number of experts estimate Russia could not reach output of around 50 mm tpy needed for the longer, much more expensive pipeline to turn a profit. A Japanese option might also further erode Russo-Chinese relations.

The Transneft pipeline monopoly has estimated construction costs at $ 16 bn, or $ 4 mm per kilometre, far more than the global average.
Meanwhile the US, which like Japan is seeking to diversify its energy sources, has urged Moscow to build a pipeline from Siberian fields to the port of Murmansk on Russia's northwest coast.

Source: AFX
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