Thursday, March 13, 2003
Russia looks east to find market for its oil
Associated Press Moscow, March 13
The Russian government has an enviable if ticklish dilemma to consider this week: Two Asian powers are lobbying for a first crack at eastern Siberia's oil, and Moscow must decide which gets preferential treatment.
The Kremlin is expected to try to satisfy both China and Japan, an approach reflecting both a delicate geopolitical compromise and Russia's insatiable ambition when it comes to its key export commodity.
The Russian Energy Ministry plans to recommend to the Cabinet on Thursday that the Japanese and Chinese proposals be combined into one project, said spokesman Yuri Nogotkov.
The pipeline would eventually pump 1.6 million barrels of oil a day from fields near the shores of Lake Baikal, north of Mongolia, to Nakhodka on the Sea of Japan, but first a spur would be built to Daqing, the Chinese oil production center.
The pipeline to Nakhodka, which would run entirely through Russia, would be about 4,000 kilometers (2,500 miles) long. Daqing is about 320 kilometers (200 miles) south of the Russian border. The huge project would give Russian oil companies a major boost in export capacity. It also would position Russia to become a sort of filling station for the east, which could bring significant geopolitical clout.
Success depends on scraping together enough money to finance the multibillion-dollar construction and tapping into sufficient oil reserves to make it worthwhile.
"The projects are being viewed as complimentary, but I'm very sure that the line to China will be given first blessing," said Adam Landes, an oil analyst with Renaissance Capital in Moscow. "There is sufficient oil and sufficient buying commitment. The other (link) is a much bigger and more ambitious project."
After years of post-Soviet decline, Russia began sharply increasing its oil production in 1999, led by a small brigade of privatized oil companies. Home to about 10 per cent of the world's proven oil and gas reserves, Russia upped its oil production again last month to 8.04 million barrels a day, according to the Energy Ministry.
Moscow is eager to provide an alternative to the turbulent Middle East, but it lacks the pipelines and port facilities to get all of its oil onto the world market. Storms on the Black Sea and freezing temperatures in the northern Baltic ports -- where Russian oil pumped out of western Siberia begins its trek west now -- have further choked exports, creating a glut in Russia's domestic market. The domestic price hovers around $4.50 a barrel, compared with the international price of $33, said James Fenkner, an oil analyst with Russia's Troika Dialog investment company. Oil companies are getting desperate.
But reaching agreement on the Far East pipeline has not been easy, and the Energy Ministry's Nogotkov said it was unclear whether a final decision would be made on Thursday.
The Japanese proposal would cost more than $4 billion, almost double the price of a pipeline to China, and stretch nearly twice the length. But the Japanese have been lobbying hard, promising aid and technical assistance. The Chinese have also been aggressive, persuading Russian President Vladimir Putin to sign a feasibility study last year and securing the support of Yukos, Russia's number one oil producer.
Russian number two Lukoil has also backed the Chinese project. But not every Russian oil company is convinced that building an estimated $2.4 billion pipeline directly to Russia's giant communist neighbor makes good business sense. State-owned Rosneft criticized the plan because the price of Russian oil in China would not be determined by the market.
The principal opponent of the China pipeline had been Transneft, the state-owned pipeline company that up to now has had a monopoly on Russia's aging and inadequate network.
However, Transneft appeared to drop its opposition last week, saying it was ready to fulfill any government decision. It is unclear how China and Japan would respond to the proposed link between the projects. China is unlikely to raise any objections -- oil could be flowing its way some three years before the other line is even completed.
But Japan might have something to fume over, particularly if it turns out, as feared, that oil fields along the planned route don't hold enough to continue the link.
Whichever path is chosen, analysts agree a new outlet will be good news. "Russian oil companies will be outproducing Transneft's capabilities by the end of 2004," Fenkner said. "They need to figure out how to get this oil out of Russia."
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