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Daily Yomiuri
June 13, 2003
Russia emerging as energy powerhouse
By Vladimir I. Ivanov

As of today, Russia's energy exports basically have only one predominant destination--Europe.

Extensive energy links have made Europe and Russia economically interdependent, requiring closer policy coordination. The war in Iraq has only reasserted Russia's vital position in meeting Europe's energy needs. Conversely, the European Union makes no secret of the fact that its increasingly high and growing import dependence on Russia has to be kept within certain limits.

Similarly, Russian energy planners propose to diversify energy exports, accessing new oil and gas markets in the Asia-Pacific region, Northeast Asia in particular. The Russian government is proposing to diversify energy supplies to the "north, east and south," promoting energy production in new, capital-intensive environments, including Eastern Siberia, the Far Eastern region, the Arctic and the continental shelf of the northern and Caspian seas.

The economies of Northeast Asia and possibly the United States are emerging as potential new targets of Russian oil producers and exporters of natural gas. Recent policy trends support these intentions. In May 2002, Moscow and Washington launched their "new energy dialogue." China, for its part, has been successful in lobbying for an export pipeline.

On May 30, in St. Petersburg, Prime Minister Junichiro Koizumi and Russian President Vladimir Putin continued discussion of a yet larger oil pipeline project from Angarsk to Nakhodka. Energy cooperation became part of the Japan-Russia Action Plan adopted in January 2003 and recently, the Russian Energy Ministry held high-level consultations with counterparts in Japan, China, South Korea and Mongolia.

Energy exports to Northeast Asia seem to become a priority target for Moscow. On the other hand, Russia is not planning to expand its energy exports to Europe in physical terms.

Contrary to expectations, including projections by the International Energy Agency, the new Russian plan for energy sector development--the Main Provisions of the Russian Energy Strategy to 2020, adopted on May 22 this year--basically reflects this change in priorities. The Russian government's strategy says that under a favorable scenario crude oil exports to the Asia-Pacific region could reach 105 million tons a year--a little more than 2 million barrels--including 25 million tons to be produced by the Sakhalin offshore fields. These huge amounts will constitute about one-third of the projected Russian oil exports in 2020.

The plan includes building an oil pipeline linking the Yurubcheno-Tokhomskoe oil-and-gas field in Krasnoyarskiy Krai and Talakanskoe and Verkhnechonskoye oil fields in Yakutia with the existing trunk oil pipeline that currently ends in Angarsk, near Lake Baikal.

Then, as Koizumi proposed, a mega-pipeline with a an annual capacity of 80 million tons should be built in an easterly direction along railway routes to Nakhodka. From Tynda, a smaller pipeline with a 30-million ton capacity would turn south, crossing China's border. The estimated cost of this project is close to 9 billion dollars. If materialized, it could divert as much as 15 percent to 20 percent of Russia's total oil output and 25 percent to 30 percent of its oil exports to markets in Northeast Asia.

Unlike the rather upbeat projections for oil exports to the Asia-Pacific region, estimates for natural gas are quite conservative, reflecting various impediments and barriers to cross-border trade. Indeed, the predominant reliance of Japan and South Korea on liquefied natural gas creates a barrier to most of the Russian natural gas that could be supplied from the heartland of Eastern Siberia and Yakutia via pipelines. In addition, market access for pipeline gas cannot be assured without adjustments to domestic policies in Japan, South Korea and China.

Russian gas exports to China and the Korean Peninsula via pipelines could reach 25 billion cubic meters (bcm) by 2020. This is above the volume of natural gas that South Korea currently imports in liquefied form (LNG). Technically, a gas pipeline to South Korea could be routed via North Korea, but a more viable transit option would be via China.

However, the integrated plan steered by the Russian Energy Ministry envisages building in parallel a "high-capacity gas pipeline (about 33 bcm), connecting the Kovykta gas field and a gas pipeline network in Western Siberia with the Pacific coast of Russia and South Korea via North Korea.

Yet another submarine gas pipeline between Sakhalin and Japan--Sendai or Niigata--has been proposed by Exxon Mobil. Also, the Sakhalin-2 LNG project could annually export about 12 bcm of LNG by 2015. In total, the share of Northeast Asia in Russia's gas exports could reach 15 percent to 20 percent by 2020.

On the other hand, Europe is unlikely to get as much natural gas from Russia as it currently desires. Foreign observers forecasted that Russia would deliver about 200 bcm of gas to Europe as soon as 2010, rising to 244 bcm by 2030. The Russian government estimated that total gas exports would grow from 185 bcm in 2002 to 235 to 245 bcm by 2020, including 160 to 165 bcm directed to Europe, one-quarter more than today.

To sustain domestic demand, expand exports and modernize domestic energy industries Russia needs at least 620 billion dollars of investment over the next two decades, including 260 billion dollars to 300 billion dollars mobilized before 2010-2012. Most of these funds should originate from private sources and loans.

Only Sakhalin-1 and Sakhalin-2 international consortiums, in which Japanese companies are involved, plan to invest as much as 25 billion dollars over the next decade or so, but several other oil and gas projects on the Sakhalin shelf are in the formation phase, promising to generate another 30 billion dollars to 50 billion dollars in investment.

British Petroleum works closely with the state-owned Rosneft in exploring prospects for investing in Sakhalin-5 and Sakhalin-4 projects.

Also, BP recently decided to put almost 7 billion dollars in a new company formed with TNK, the Russian oil major with a presence in Eastern Siberia. In this context, an oil pipeline project to Nakhodka that the Japanese Bank for International Cooperation could partially back with its low-interest loans looks like a reasonably priced venture.

All these investment funds that should support energy infrastructure development in Russia potentially would create huge business opportunities for Japan. Investors and equipment manufacturers could benefit from the construction of new power plants and the modernization of existing facilities, as well as a broader reorientation of the Russian energy sector toward increased efficiency and added value.

More generally, the development of energy industries is seen by the Russian government in the context of technological advancement and high-tech research and development that would reduce project costs and enhance energy efficiency. Japan-Russia technological cooperation in the field of energy, fuels and emission reduction could benefit both countries.

Also, cross-border power interconnection is on the Russian long-term agenda, with forecasts of electricity exports to China and the Koreas. European electricity markets and power grid interconnection have been already defined as the priority goals. Eastern Russia's unique hydroelectric power potential presents an opportunity for projects that are efficient both in economic and environmental terms. It seems that the proposed plan for energy sector development contains significant potential for investment and trade, including new business opportunities for companies and investors from Japan, South Korea, the United States and China. On the other hand, cross-border energy cooperation in Northeast Asia, focused on energy sector development in Eastern Russia would enhance energy security of the economies of this area, contributing to their international competitiveness and overall political stability of the entire Asia-Pacific region.

Ivanov is a senior economist at the Niigata-based Economic Research Institute for Northeast Asia.

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