China ties up Russia's crude - again By John Helmer
MOSCOW - After years of on-off negotiations and recriminations between Beijing,
Moscow and Tokyo, Russia's state pipeline company Transneft agreed this week to
complete construction of a pipeline to deliver crude oil between Skovorodino,
in southeastern Siberia, and Daqing, the oilfield and refinery hub in northeast
Heilongjiang, in China.
The agreement, signed during Chinese Premier Wen Jiabao's visit to Moscow to
meet with Prime Minister Vladimir Putin, will be sweetened by up to US$15
billion in long-term Chinese credits for Russian state oil producer Rosneft,
and up to $12 billion to Transneft. In return, the Russians will commit to
delivering not less than 300,000, and up to 600,000 barrels of crude oil per
to Daqing, including pipeline and rail deliveries.
Just 60 kilometers separate Skovorodino from the Chinese border, but getting
the Russians and Chinese to agree to pump oil over that distance and join a
Chinese-built pipeline on the other side of the border has been a protracted
affair lasting for more than four years. There's just one catch to the new
agreement - it has been agreed more than once before.
December 31, 2004, then Prime Minister Mikhail
Fradkov signed an order that was intended to
resolve a question that had been much debated for
several years before: what priority Russian export
of crude oil to Asia should target - to China
overland, or to Japan and other Asian markets by
pipeline to port, and then by tanker delivery in
the Pacific. Fradkov appeared to opt for the Japan
priority over the China one, but his order did not
clear direction to
Transneft, which had been designated lead contractor for the project.
Transneft had been waging its own battle over these priorities for the
preceding two years. The Siberian pipeline project was originally the
brainchild of Mikhail Khodorkovsky's Yukos Oil Company. Their idea was to build
a more costly pipeline over a longer distance, at Yukos expense. By paying up
front, Khodorkovsky thought he would have greater freedom to deliver more oil
to China than Transneft and the government were allowing him to pipe in the
state-owned pipeline system to Europe. He also figured he would improve his
profit margin by cutting out Transneft's fees.
Naturally, Transneft saw Khodorkovsky's scheme as a way of breaking the state
monopoly over crude oil exports by pipeline, and it lobbied the government to
say "yes" to the pipeline and "no: to the Yukos role. In May 2003, Transneft
got what it wanted, and Yukos the consolation prize. Then prime minister
Mikhail Kasyanov announced that the government was putting Transneft in charge
of the pipeline, including the financing terms; Yukos would supply the oil to
Several months later, Khodorkovsky was under arrest, and he and Yukos were
indicted for a range of offences that landed him in prison, other Yukos
shareholders in exile, and Yukos in bankruptcy, its assets sold to the state
oil company, Rosneft.
The argument between Beijing and Tokyo over who should have first option on the
Russian oil was delayed, though lobbying continued by the Japanese to turn an
existing agreement with China into a dead letter.
That deal, a non-binding memorandum of understanding signed in 2002, envisaged
that China would receive 700 million tonnes of Russian crude through the
pipeline over 25 years at a cost of about $150 billion. That amounted to 28
million tonnes per annum, or 560,000 barrels per day. The price formula Russia
and China proposed using for the oil was not disclosed because it hadn't been
The Russians understood and were sympathetic to the strategic objective for
Beijing: the Chinese wanted to reduce their country's dependence on oil shipped
from the Middle East, Africa and South-East Asia, and lower both oil and
delivery premiums. But until Khodorkovsky was out of the way, the Russian
government couldn't make up its mind what its strategic objective was in the
eastward movement of oil.
The then president Putin was clear what he wanted. As he explained, even before
Khodorkovsky's arrest, he would give China deliveries first priority, starting
by rail delivery of the oil. In time, when proposed new oilfields in eastern
Siberia came on stream, their production could be pumped over the longer
distance to the coast and thence by tanker to the highest bidder. In July 2004,
Putin said building the pipeline to Skovorodino should start. That would move
the oil 600 kilometers further to the east of the rail junction at Zabakailsk
and Manzhouli, where railcar shipments of oil crossed the border going south.
Putin said he wanted to preserve Russia's flexibility and avoid single-market
oil commitments - either to repay Japanese loans for the Nakhodka pipeline or
to fill volume obligations to the Chinese. If exporting Russian oil proved to
be more advantageous by shipping or piping to Europe, or North America, Putin's
policy was to delay the Asian plan for as long as possible.
Transneft spokesman Sergei Grigoriev told Asia Times Online in mid-2005: "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 is to Skovorodino
[terminal]. Then for the project to start operations, we will send oil from
Skovorodino by railroad. 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 had been seeking 30 million tonnes of crude
per year, with an additional 50 million tonnes for tanker pickup from Nakhodka,
"we are building an 80 million-tonne capacity pipeline to Skovorodino, and a 50
million-tonne capacity pipeline from Skovorodino to Nakhodka."
Japan's Minister of Economy, Trade and Industry at the time, Shoichi Nakagawa,
reacted angrily: "In such a situation, Japan will not provide financial
cooperation." That threat played directly into Transneft's hands, as it had
more than once warned the Kremlin against allowing the Nakhodka oil port plan
to be held hostage by Japan's financing formula, tying construction loans for
the pipeline to repayment with guaranteed volumes of oil, and favorable
This is what has turned the Skovorodino-Daqing pipeline into the
longest-running soap opera in the history of oil transportation. Five years and
countless episodes later, have Putin and Wen really tied the knot this time? It
seems so, not least of all because the color of China's money has proved more
alluring because of the urgent short-term financing problem in which both
Transneft and Rosneft currently find themselves. The Chinese financing turns
out to be more than double Japan's last offer.
John Helmer has been a Moscow-based correspondent since 1989,
specializing in the coverage of Russian business.