China and Japan struggle to win access to Russian oil

The oil city of Daqing, in the bleak plains of north-eastern China, was once a proud symbol of the country's self-reliant spirit. The discovery of huge reserves there in 1959 allowed China to end its dependence on Soviet oil supplies, and fortified the country in its subsequent cold-war struggle with its fellow communist neighbour.
Daqing's ubiquitous rigs still pump away, but output from the ageing field is dropping off. Meanwhile, China's economic boom has produced a growing hunger for energy that only foreign supplies can satisfy. Energy strategists in Beijing now see great promise in the former Soviet Union. Unfortunately, so too does China's old rival, Japan.

If China has its way, Daqing would be the terminus of a crude-oil pipeline beginning 2,300 km (1,430 miles) away in Angarsk, at the southern end of Lake Baikal in eastern Siberia. And if Daqing has its way, it would become a refining centre for the Russian oil, which would help revive the fortunes of a city plagued a couple of years ago by large-scale protests involving laid-off oil workers.
The pipeline could provide 20 mm-30 mm tpy of crude, the equivalent of up to 30 % of China's current imports. But Japan's rival idea is to pipe the oil instead to the port of Nakhodka, where it could be shipped to Japan and other markets (including China). A branch line could in theory be built to Daqing, but doubts abound on all sides as to whether there would be enough oil in Angarsk to fill it.

Promising though eastern Siberia's oil resources appear to be, they have yet to be tapped commercially. Even to be sure of filling the original proposed pipeline to Daqing, Russia would have to depend initially at least on supplies from the better developed fields of western Siberia. But this did not stop Japan wading in a year ago with its proposal for a route that would cost nearly twice as much (about $ 5 bn) and take far longer to build than the Daqing line-to the intense fury of the Chinese who thought they had a deal sewn up.
Many analysts believe that the Russians may now favour Japan over their "strategic partners" in China. The Japanese scheme would avoid dependency on a single market. It also includes provisions for billions of dollars of Japanese investment in oil exploration in eastern Siberia-much needed if Russia is to realise the full potential of the area (though possible Japanese investors, worried about the economic viability of the project, have been lukewarm to the idea). And the chief Russian backer of the Daqing proposal, the private oil company Yukos, suffered a severe blow to its political influence with arrest of its chairman, Mikhail Khodorkovsky, last year on charges of fraud and tax evasion.

Oksana Antonenko of the International Institute for Strategic Studies in London believes the Russians have already decided on the Nakhodka route. This, she says, would fit better with Mr Putin's plans to develop the Russian Far East, since the Nakhodka line would be better able to supply domestic markets as well as foreign buyers. The possibility of building a branch line to Daqing would theoretically be kept open, "but this diversion would simply not ever happen."
Where would this leave China? Its biggest concern is protecting itself against the price volatility of international markets. At present, China imports about a third of its oil requirements. This could rise to some 60 % by 2030. More than half of China's oil imports come from the Middle East. The oil is shipped through the Malacca Strait between Malaysia and Indonesia, an area notorious for well-organised piracy. China's navy is ill-equipped to carry out duties much beyond its shores. Instability in the Middle East, and its impact on prices, has focused the minds of policymakers across North-East Asia on the need to diversify their supplies.

Uncertainty over the Daqing scheme and worries about the Middle East have made China all the keener to explore other options. A long-standing proposal for an oil pipeline from Central Asia to China, which had made little headway because of cost concerns, is back on the table. President Nursultan Nazarbayev of Kazakhstan is due to visit Beijing in mid-May and is expected to sign an agreement on the construction of a 1,200 km cross-border section of the pipeline from Atasu in Kazakhstan to Dushanzi in China's Xinjiang region. Work could begin this summer and be completed possibly within a couple of years.
The pipeline would link up with Kazakhstani pipelines connecting to the Caspian Sea region, far to the west. Even so, the oil would still have far to go before reaching the booming coastal areas of China where it is needed most. It is an extremely costly proposition (Chinese reports suggest around $ 3 bn just for the route from Kazakhstan to Xinjiang) for a projected supply of 20 mm tpy.

But Scott Roberts of Cambridge Energy Research Associates, a consultancy firm, says that while the costs are high "there is a strategic value at stake. China's oil security is increasingly important to its overall economic and politicalsecurity and from that standpoint, yes, it makes great sense if you can ensure that the supply reaches your market reliably."
China has offered a spectacular demonstration of its willingness to lavish money on strategically important energy schemes, with its 4,000 km (2,500 mile) natural-gas pipeline from Lunnan, in Xinjiang, to Shanghai. This $ 15 bn project, one of China's costliest-ever infrastructure developments, is due to become fully operational later this year, ahead of schedule.

China sees the development of Xinjiang's backward economy as important to the country's stability. It is also eager to promote the use of gas, which is less polluting than China's main energy source, coal.
By the time the Xinjiang gas reaches consumers in eastern China, its price will hardly be competitive with that of alternative fuels. But that is of little concern in Beijing.