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DANCES WITH BEARS
Oil to China is a
race against time
By John Helmer
MOSCOW - The Russian government has decided
that, in playing the global game to lock in new crude
oil markets for the country's burgeoning oil output, its
next move must be to build a billion-dollar pipeline to
China. Pronto.
Although not yet announced
officially, or leaked to the press, a high-level source
in Moscow has disclosed that the Kremlin favors the
China pipeline over an alternative, and costlier, route
to the Russian Pacific coast. The latter, according to
the source, has been judged to be clearly uneconomic, at
least until the 50 billion barrels of reserves believed
to be lying underground in eastern Siberia are ready for
lifting.
Yury Nogotkov, spokesman for the
Ministry of Fuel and Energy, says that at his agency,
"there is no information about the timing of the
government's decision on support of either the Chinese
or the far eastern oil pipeline. The ministry has
reviewed the project supported by Yukos for construction
of a pipeline between [Russia's] Angarsk and Daqing
[China's largest oil field, in the northeast of the
country], and the feasibility study for this project is
being prepared. We didn't have any requests from the
government to study the far eastern pipeline project.
The Angarsk-Daqing project is part of the
Russian-Chinese inter-governmental agreement that was
signed in September of last year."
If indeed the
China option is chosen, the winner will be Yukos,
Russia's second-largest oil producer. Company data
indicate that Yukos's production will reach 70 million
tonnes this year, up from 45 million tonnes in 1999.
Yukos is also lifting more oil from each of its wells
than its domestic rivals, with a direct lifting cost
averaging $1.75 per barrel. This, Yukos sources say,
puts its development and production cost on a par with
Iraqi, Saudi and Kuwaiti oil.
Yukos strategy,
according to senior company officials, is to ensure that
foreign demand is locked in for the expected growth of
its output; and that Russian transport infrastructure
keeps pace with both output and export growth.
At an industry meeting early this month in
London, Yukos forecast that total Russian oil output
will jump from 6.9 million tons last year - 11 percent
of world production - to 10.5 million tons in 2010; if
reached, the target would represent 16 percent of world
production. The company also said that, until
exploration proved up to the expected volume of oil
reserves in eastern Siberia, the proposed eastward
pipeline should be delayed.
The China pipeline
is an immediate priority, however, and Yukos' executive
vice president for corporate finance, Oleg Sheiko, is
the company's negotiator with the China National
Petroleum Corporation (CNPC) to finalize a deal. He says
that in the next decade, according to Yukos estimates,
East Asian demand for oil will jump faster, and also
further, than US and West European levels, reaching 24
million barrels per day. East Asia is currently more
dependent on Middle Eastern oil than other regions, he
said, and is paying a premium - more than $4 billion
annually - to receive that oil, compared to Western
countries.
According to Sheiko, Russian studies
of the China pipeline are almost complete, and detailed
negotiations with the CNPC are about to begin. According
to the plan on the drawing boards, the new pipeline will
be built from the refinery town of Angarsk in the
Irkutsk region of southeastern Siberia to the
northeastern Chinese terminal center of Daqing. On the
Russian side of the border, the pipeline will be 1,500
kilometers long; on the Chinese side, 800 kilometers.
The initial capacity of the line will be 400,000 barrels
per day (bpd) - 30 million tons per annum. Yukos and
CNPC would be co-owners, with Transneft, the Russian
state-owned pipeline company, as operator. The estimated
cost of the project is US$1.7 billion.
Yukos is
already trading oil to China, but by rail the volume is
only 27,000 bpd. In 2001, total Chinese crude oil
imports from Russia approached 2.5 million tons.
The Russian and Chinese governments first
announced the project in July 2001, but wariness in
Beijing and indecision in Moscow slowed down the
planning process. At a meeting in Shanghai recently,
Prime Ministers Mikhail Kasyanov and Zhu Rongji
announced that they want to speed up this project.
That was the starting-gun for Russian oil
strategy to reorient itself. Sheiko will go to Beijing
soon. "The Russian government is supportive," he said.
"We need to start talking to Western banks, and to the
potential suppliers to the project."
Sustaining
China's oil demand for Russian oil is also a race
against time - and against the American strategy of
grabbing Iraq's current and prospective oil wells, and
flooding the market with Iraqi oil. If that happens
before the Angarsk-Daqing pipeline becomes operational,
Yukos isn't the only one to fear that global demand for
new Russian oil will dwindle, and development of the
east Siberian fields will stop, threatening Russia's
long-term chance to take market control away from both
the US and its Middle Eastern clients.
(©2002
Asia Times Online Co, Ltd. All rights reserved. Please
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