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Wednesday, Sept. 17, 2003

Moscow must walk a fine line as Tokyo and Beijing compete for Russian oil

HONG KONG -- Russia is in the enviable position of being wooed simultaneously by Asia's two main powers, China and Japan. At the same time, it has to walk a fine line because it is unlikely to be able to please both countries.

Two years ago, China and Russia signed a strategic agreement concerning the construction of a 2,400-km pipeline at a cost of $1.7 billion to bring Russian oil from Angarsk, in eastern Siberia, to Daqing, in Heilongjiang province. The Chinese, who were self-sufficient in oil until about a decade ago, now require increasing imports to fuel their modernization drive and have become the world's second-largest oil consumer, second only to the United States.

However, Japan cast a cloud over China's plans by making a bid for a much longer and more expensive pipeline to be built from Angarsk to the Russian coastal city of Nakhodka, on the Pacific coast, from where the oil can be put aboard tankers to be shipped to Japan. The Japanese want to reduce their dependency on oil from the unstable Middle East. Last year, Transneft, the state-owned pipeline monopoly, put forward a plan for an Angarsk-Nakhodka pipeline and said it had been approved by Russian President Vladimir Putin.

The Chinese were bewildered by this turn of events. In February, the People's Daily Web site carried an article that asked: "Will Russian oil pipeline lead to China or Japan?" The Russian government, it said, "is still vacillating over whether" to build a pipeline to Daqing or to Nakhodka.

In May, when Chinese President Hu Jintao paid a state visit to Russia, China National Petroleum Corporation and Russia's private oil producer YUKOS signed an agreement, setting out key aspects such as the quality of oil to be supplied, contractual terms and pricing formulas.

Everything appeared set for Russia to provide China with oil for 25 years, from 2005 to 2030, at a cost of $150 billion. China, like Japan, wants a secure source of oil rather than rely on the Middle East, with its constant political upheavals.

However, after Hu's state visit, the Japanese stepped up their efforts to persuade Russia to select the 3,800-km Nakhodka route. From the Russian standpoint, the attractiveness of Nakhodka is that it could potentially open up other markets in East Asia, including South Korea, Southeast Asia and even the United States, while a pipeline to Daqing would serve only China. The Japanese are offering generous terms to finance such a pipeline.

A major obstacle, however, is that the Nakhodka pipeline would need to carry at least 50 million tons of crude a year to be viable, whereas the shorter Chinese route would need to transport only 20 million tons a year, which the eastern Siberian region can supply. In fact, in April the chief executive of Transneft, Semyon Vainshtock, said his company's feasibility study "left no room for doubt" that the area did not have enough oil to justify the $5.2 billion pipeline project. Still, Tokyo refused to give up. A stream of Japanese officials traveled to Russia to press Japan's case.

The Russians have been talking about constructing a pipeline that would branch off and serve both China and Japan. However, it does not appear that such a move can be economically viable, since there isn't enough oil to satisfy the needs of both countries.

A new obstacle emerged last month when environmentalists raised objections to both proposed Siberian pipelines, warning that their construction could destroy the habitat of rare and endangered species. In early September, Russia's deputy natural resources minister, Kirill Yankov, said his ministry was likely to reject the proposed Angarsk-Daqing pipeline. A few days later, Prime Minister Mikhail Kasyanov said the Russian government had not yet decided on the route of the Angarsk-Daqing pipeline "because environmental experts do not approve the proposed routes."

Faced with the possibility that the pipeline may not be built after all, China last week dispatched a high-ranking delegation to Moscow to lobby the Russian government. The high-ranking delegation included Ma Fucai, who had signed the agreement with YUKOS in May.

Russia may well be playing China off against Japan to get the best possible offer. However, if Russia were to renege on its agreement with China in favor of the Japanese proposal, it would be extremely damaging to the Sino-Russian relationship.

Frank Ching is a Hong Kong-based journalist and commentator.

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