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Analysis: The Axis of Oil - II
By Sam Vaknin
UPI Senior Business Correspondent

SKOPJE, Macedonia, April 3 (UPI) -- Russia is close to North Korea. In its previous incarnation as the Soviet Union, in 1965, it built North Korea's infamous Yongbyon facilities. Russia was also instrumental in convincing the North to agree to reactivate a railway line connecting it to South Korea. Kim Jong-il, the North's enigmatic leader, celebrated his 61st birthday, in February, in the Russian embassy in Pyongyang.

The mooted Russian pipeline to carry gas to North Korea may be nothing but a pipe dream. Even optimists admit that it would require 4 years to construct -- more likely 8 to 10 years. But Russia is in no hurry. Russian gas to the pariah state could yet prove to be a key ingredient in any settlement. Russia intends to drive a hard bargain. It is likely to try to swap gas supplies to the North Koreans for the preservation of Iraqi oil contracts signed by Saddam's regime with Russian energy behemoths.

Regardless of geopolitical vicissitudes, Russia views Asia -- mainly China, Japan and South Korea -- as growth markets for its energy products. By 2008 or 2010, Russia plans to sell 20-30 billion cubic meters a year of gas from the Kovykta field, co-developed by Interros, the Tyumen oil company and British Petroleum, to China, South Korea and, possibly, Mongolia.

According to Asia Times: "Russia is looking at two competing plans. One, backed by Russia's top oil firm Yukos and China, is a $2.5 billion, 2,400- kilometer extension of the existing network from near Irkutsk to Daqing, China. The other, backed by Rosneft and Japan, would cost $5.2 billion and circumvent China, running 3,800 kilometers to the Russian Far East city of Nakhodka on the Sea of Japan ... The Russian Energy Ministry eventually recommended that the Japanese and Chinese proposals be combined into one project, a third option to build the (1.6 million barrel a day) pipeline to Daqing and then extend it to Nakhodka."

Extending the network eastward is by no means the consensus. Prime Minister Mikhail Kasyanov opened a cabinet meeting last month with the confident -- but speculative -- declaration that there is enough oil in Siberia to justify a pipeline. Russia's Energy Minister, Igor Yusufov, observed correctly that, in the absence of sufficient exploration, oil and gas reserves in Siberia and the Far East, pegged at 1 billion tons, are, at best, guesstimates. If these are smaller than projected, the eastern thrust would prove to be a costly error.

More than $12 billion are needed in order to explore the vast swathe and to develop it to a profitable level of production -- about 100 million tons a year by 2020. The pipelines will funnel 70-80 million tons of crude oil and 30 billion cubic meters of natural gas a year to Asian buyers.

Still, Russia cannot ignore the Asian markets, nor can it wait a decade or two to avoid commercial risks. Last week, Russia's Energy Ministry concluded the negotiation of a 10-year collaborative effort with Japan involving the construction of oil and gas pipelines, the development of hydrocarbon fuel reserves in Siberia and other projects.

Wednesday, the Russian Ambassador to China, Igor Rogachev, told Interfax, the Russian news agency, that "in the past three years, the dynamic growth of merchandise turnover (between Russia and China led to a) volume (of) close to $12 billion last year. This year the volume of bilateral trade grew 37 percent for the first two months and exceeded $2 billion."

Russian exports to China since the beginning of this year have soared by 27 percent and Russian imports by 62 percent. China is an avid consumer of Russian electricity generation, aviation, space, laser, and nuclear technologies. Russian firms made inroads into the construction of Chinese hydroelectric plants and railways.

The two countries have "plans for the construction of the Russia-China oil pipeline, and delivering up to 30 million tons of oil a year in it, and a gas pipeline from eastern Siberia to the northeast of (North Korea), and to consumers in third countries." Russia is constructing "a number of major, modern facilities ... in China, (including) the first and second (generating) units at the Tianwan nuclear power plant." China has also signed a contract to buy Russian Tu-204 civil aircraft.

Nor is the cooperation limited to heavy or military industry, explained the Ambassador: "Agreements between Chinese and Russian companies that provide for the assembly in Russia of color televisions and household air conditioners are being successfully implemented."

Twelve years after the demise of communism, Russia is regrouping. It is patching the torn fabric of its diplomacy. In the best American tradition, it is leveraging its growing pecuniary clout, now that it is poised to become the world's leading energy producer. It is reorienting itself -- emphasizing Asia over Europe. It is building new bridges and forming new alliances, both commercial and strategic.

As long as these serve the interests of the sole superpower -- as may be the case with North Korea -- Russia's revival as an important regional player is tolerated. But, following its sudden swing to the Franco-German camp in the run-up to the Iraqi campaign, it is on probation. Should it engage in anti-American activities, it may find that American patience and tolerance are rather strained.

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