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    Central Asia
     Apr 29, 2005
China beats Japan in Russian pipeline race
By John Helmer

MOSCOW - Despite pressure from the government and oil importers in Tokyo for priority in Russian crude deliveries to Japan, Russia's new eastern oil pipeline will first deliver crude oil to China, and later to Japan, a senior executive of Transneft, the state pipeline agency, told Asia Times Online. But the oil to China will be transported by rail, not by a special China spur pipeline.

For two years, Russian government officials have been tugged in different directions by Japan and China over the route the pipeline should take. At stake are deliveries of up to 1.6 million barrels of crude per day. The biggest soap opera in the history of oil transportation began with an ambitious scheme by Mikhail Khodorkovsky's Yukos oil company to build its own pipeline from Angarsk, in eastern Siberia, where Yukos operated a refinery, to Daqing, a terminal town in northern China. The China National Petroleum Co agreed to build the section of the pipeline from the border to Daqing, and began work.

Then Transneft, the state-controlled pipeline agency, moved to block Yukos from taking ownership of the pipeline. Russian government officials agreed that commercially owned pipelines threatened their control over oil export capacity, and allowed unrestricted pumping of the oilfields. Transneft took over equity in the project; Yukos was to supply the oil for China.

Then war broke out between Khodorkovsky and President Vladimir Putin over Khodorkovsky's attempt to sell up to 40% of Yukos to a US oil company. Khodorkovsky went to jail, where 18 months later he remains - he is to face court judgment in Moscow this week - and Yukos was dismantled. Its principal assets have been transferred to state-controlled companies in payment of massive tax-fraud claims.

But Japanese lobbying in the meantime failed to shake Transneft's preference for piping the first oil in the project to China, thereby setting high Russian officials at one another's throats or, to be more precise, their pockets. While cabinet ministers appeared to favor the Japanese, Transneft worked on persuading the Kremlin to back the Chinese.

Japanese officials have reacted to the Transneft plan by threatening to withdraw their promised financing. "In such a situation, Japan will not provide financial cooperation," announced Japanese Minister of Economy, Trade and Industry Shoichi Nakagawa. This threat plays directly into Transneft's hands, as Transneft spokesman Sergei Grigoriev has more than once warned against accepting the Japanese financing formula, which ties construction loans for the pipeline to repayment with guaranteed volumes of oil, with favorable pricing.

Claims by the Japanese media in January that the Kremlin preferred the Tokyo-financed oil pipeline route to deliver crude oil to a new tanker terminal at Perevoznaya Bay near Nakhodka port turned out to be wishful thinking. Transneft announced at a January meeting between chief executive officer Semyon Vainshtok and Putin that a substantial increase in pipeline oil shipments to China overland remained the strategic priority, and would not be eliminated in favor of the Japanese bid to corner Russian exports eastward through Nakhodka. Vainshtok and Putin appeared to agree that his agency would build a branch line to China as part of the longer project.

Still, Transneft officials were so uncertain of the outcome in January, they have been reluctant to confirm what exactly is on their drawing boards. In the past, Transneft has told Asia Times Online it wants to lay the southeastern branch line to China to carry an estimated 30 million tonnes per annum (584,000 barrels per day); while the eastern branch line to the Sea of Japan coast would carry 50 million tonnes per annum (972,000 bd). In December, however, an order by Prime Minister Mikhail Fradkov proposed eventual capacity of the Nakhodka line to be 80 million tonnes per annum (1.6 million bd).

Transneft has never been enthusiastic about the Nakhodka option, not least of all because there are no operating oilfields yet in eastern Siberia to fill the pipeline. However, for the past four months, Putin has been unable to resolve fierce lobbying by both Tokyo and Beijing among his advisers and ministers. Last month, Yury Trutnev, appointed a year ago as minister of natural resources, emerged as the leader of the cabinet clique against Transneft. In a speech on March 30, he said Transneft should lose control of major new oil pipeline and port projects, especially the eastern pipeline. Trutnev said Transneft should not be responsible for pipeline transport, and therefore should be reorganized under the control of a new federal agency.

"Nonsense," charged Grigoriev. "Absolutely incompetent", he said of Trutnev, indicating how personal the politics has become. Sources from the Natural Resources Ministry have told Asia Times Online that Trutnev, who himself has an oil background and was a regional politician before taking his Moscow post, is under the influence of LUKoil and other powerful oil and mining companies. Last year, LUKoil clashed with Transneft, and attempted to lobby for the same reorganization plan Trutnev advocated in March. Trutnev is so wary of the charges against him, he has ordered his spokesman not to answer press questions.

The internecine lobbying continued unabated until Industry Minister Victor Khristenko led a Russian delegation to Tokyo recently for a session of the Russia-Japan inter-government commission. Again, the Japanese tried to force the Russians' hand by a flurry of press statements. To this, Grigoriev told Asia Times Online: "We are not building a pipeline to China or Japan. We are building a pipeline on the territory of Russia. The first part of the project will stretch to Skovorodino [terminal]. Then for the project to start operations, we will send oil from Skovorodino by railroad."

Skovorodino is considerably further to the north and east of the initial Angarsk-Daqing route proposed by Yukos. The new planned pipeline skirts northward of the ecologically sensitive region around Lake Baikal, and will run from Taishet, near the Bratsk aluminum center, to Skorovodino. This terminal is 600 kilometers east of the main border rail junction at Zabakailsk and Manzhouli, where current Russian oil deliveries by rail cross into China. It is still unclear what rail capacity China has, or will build, to carry the oil from Skorovodino. Current maps show Russian and Chinese rail lines moving east-west in parallel on either side of the border. They are not yet connected.

From Skorovodino, Grigoriev told Asia Times Online, politics, not geography, will decide the oil's course. "It is political lobbying that will decide where it will go - to China or Japan. After that, we plan to build a pipeline from Skovorodino to Nakhodka." Grigoriev noted that since China is seeking 30 million tonnes of crude per year, with an additional 50 million tonnes for tanker pick-up from Nakhodka, "We are building an 80-million-tonne-capacity pipeline to Skovorodino, and a 50-million-tonne-capacity pipeline from Skovorodino to Nakhodka."

John Helmer is the doyen of the foreign press corps in Russia. He first set up his Moscow bureau in 1989, and specializes in the coverage of Russian business. US reviews of Western reporting from Russia have rated him at the top of the profession.

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Russia walks thin line between Japan and China (Apr 28, '05)

Don't dismiss China's Daqing oil pipeline (Oct 1, '04)

China's Russian pipe dream (Sep 28, '04)

Russia tangles with Japan and China  (Sep 1 '04)

Kremlin decides China pipeline on new terms (Mar 4, '03)


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