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Financial Times (UK)
January 11, 2003
Struggle looms over rival oil pipeline routes from Siberia to the east:
Plans to export more of Russia's booming oil output to the east has spawned projects for pipelines to supply Japan and China.
But is there room for both?
By David Buchan, Andrew Jack, and David Stern

The agreement by the leaders of Russia and Japan yesterday to examine the construction of a Siberian pipeline to the Far East highlights the growing competition for energy sources outside the Arab world.

Until now, attempts to get more of Russia's surging oil production in its landlocked Siberian oilfields to world markets have mainly focused on improving Russia's western outlets in the Arctic, the Baltic and the Black Sea.

Now, the interest in a pipeline from Angarsk to the Pacific port of Nakhodka raises the prospect of a struggle between Japan and China over a rival project from Angarsk to Manchuria. It also opens the prospect of Japan reducing its heavy dependence on Arab energy, while furthering the US desire for a more diversified world oil market. Just a few years ago, a single oil route from Russia's eastern flanks into the Asian market seemed little more than a pipedream. The rival projects that have now emerged show just how far the regional economic and political situation has changed.

Far from Moscow and transport infrastructure, eastern Siberia was left undeveloped for much of the 1990s, with Russian oil companies concentrating on their longer established existing fields to the west. Several prospected sites are only now coming up for sale.

But with greater political stability, consolidated private ownership and cash from sustained high oil prices in the past two years, the conditions are right for development of oil farther to the east. Yukos, Russia's second largest company, has been the pioneer and dominates the reserves set to be exploited over the next few years.

Keen to establish long-term purchase contracts and provide it with some stability in prices, Yukos has already held detailed negotiations with the Chinese, and is insistent that it will pursue the Dollars 1.8bn 2,400km pipeline from Angarsk into Manchuria.

Strategically, Russia arguably has greater interest in developing the 4,000km Pacific pipeline, which potentially allows it to sell its oil more easily into a wide range of Asian markets including Japan and even the west coast of the US.

But the government's ability to influence commercial oil companies' decisions is more limited than in the past, and its capacity to finance the additional costs of the Pacific route which may run to Dollars 5bn, are more open to question.

Ultimately, Yukos may be able to juggle the two projects for its own benefit. But it will also come under pressure from Transneft, the state-controlled pipeline operator which backs the Pacific route towards Japan. The latter might try to cut some of Yukos' export quotas westwards if Yukos pursues its Chinese route.

Stephen O'Sullivan, head of research at UFG, the Moscow-based brokerage, said: "This is a vexed issue. The Russian government has not made a decision between the Chinese and the Japanese routes. No one thinks there is room for both."

From the Japanese viewpoint, establishing supplies from Russia is highly attractive. Chris Weafer, strategist at Alfa Bank, said: "The Japanese really can't remain so vulnerable to supplies from the Gulf. They want and need the Russian pipeline. No one would have given any credibility to the project one and a half years ago but now it has moved from possibility to probability."

Russian oil might also give Japan and some of its neighbours bargaining power to resist paying the so-called Asian premium generally charged by Middle East producers. The latter can get away with making their Asian customers pay more - typically an extra Dollars 1-Dollars 1.50 - because they control the destination of their cargoes and Asia is a more captive market than Europe or the US which can draw on local output and imports from other sources.

There are still some concerns over Russian management of pipelines, however. The private consortium operating the pipeline that runs through Russia from Kazakhstan is under threat of nationalisation, with Transneft attempting to take over its operations.

Opening oil routes to the east might aid development in some areas of the Caspian, like Kazakhstan, which might be able to open an eastward export route linking to the Siberian project. Japanese officials have said they would like US support.

Ian Bremmer, president of the Eurasia political risk consultancy, yesterday predicted such backing would be forthcoming. The US has a strong political desire to see Siberian oil reach world markets, which it could do more easily through Nakhodka where it could be shipped to other countries as well as Japan, rather than being tied to China.

But the US is considered unlikely to put any money into any Far East pipeline. Washington, the world's largest oil importer, is keen to see non-Opec producers boost output as a counterweight to the Opec cartel. But it has left the funding of new infrastructure projects, even those tailored for the US market, to US oil companies.

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