Russia Gets Mileage With Oil Diplomacy

After years of deliberation, Moscow finally declares its oil pipeline plan


After years of expectation, the curtain rang down on the first round of Russia’s oil pipeline plans on December 31, 2004. On New Year’s Eve, Russian Prime Minister Mikhail Fradkov approved the Taishet-Nakhodka oil pipeline blueprint, declaring that the annual capacity of the East Siberia-Pacific pipeline system would eventually reach 80 million tons. The pipeline will run from Taishet, through Kazachinskoye, Tynda, Skovorodino, Khabarovsk to the Perevoznaya Bay terminal in the port of Nakhodka, crossing Russia’s Irkutsk, Chita, Amur, Buryat and Primorie regions, according to Russia’s state-owned pipeline monopoly Transneft, which has long backed the Taishet-Nakhodka project.

Li Fuchuan, an oil expert with the Chinese Academy of Social Sciences, said, “Russia showed a mature and convincible diplomatic strategy on this issue. Its role has changed to be the rule maker from a common card player.”

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According to him, Russia’s priority is to realize maximum benefits by exporting more energy to multiple buyers, so as to promote its economy in the Far East regions and guarantee the security of its energy resources.

“Benefits to China or Japan is of secondary concern,” Li noted.

Tokyo has been lobbying hard for the Angarsk-Nakhodka oil pipeline to the Pacific. As the world’s second largest petroleum consumer, Japan burns 260 million tons of oil annually. Close to 99 percent of this is imported. At present, 85 percent of Japan’s oil imports are from the Middle East. That is why Tokyo tried every possible means to persuade Moscow to build an oil pipeline that would come up to Russia’s Pacific coast. The estimated construction cost of the oil pipeline from east Siberia to Nakhodka could reach $11-12 billion. Japan reportedly promised up to $14 billion in funding for the pipeline as well as $8 billion in investments in the Sakhalin-1 and Sakhalin-2 oil and gas projects, Russian media report.

Traditional Russian oil fields, mainly located in the west Siberian regions and established in the 1970s, are in need of capital and technology to stabilize their production. For this purpose, Russia needs at least a $25-billion overall investment and about $6-7 billion annually.

After the Iraq war, international petroleum prices started rising and the world’s major energy importers looked to Russian supplies. As early as June 2003, high-ranking Japanese officials, such as then Foreign Minister Yoriko Kawaguchi, flew to Moscow for talks on building the Angarsk-Nakhodka pipeline, promising $7.5 billion and help in developing new oil fields in east Siberia. According to Russian media reports, Japan committed tens of billions of dollars for economic development and environmental protection in cities linked to the pipeline.

In contrast with the previously discussed 2,247-km pipeline from the Russian city of Angarsk in the Irkutsk region to Daqing in northeast China and the Angarsk-Nakhodka route, the Taishet-Nakhodka route is seen as being of strategic importance to Russia, allowing it to funnel crude not only to Japan but to China, South Korea, Indonesia, Australia and west coast of the United States. Moreover, since the Taishet-Nakhodka route is in the north, away from Lake Baikal, its threats to the ecosystem of surrounding regions will be greatly reduced.

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“The new oil pipeline has blueprinted the energy cooperation between Russia and Asia-Pacific countries, such as China, Japan, South Korea and North Korea,” said Feng Yujun, an associate researcher with the China Institute of Contemporary International Relations. He added that as the Taishet-Nakhodka oil pipeline would enlarge its capacity to 80 million tons every year, Russia has no reason to refuse building a branch pipeline to China to replace the formerly discussed Angarsk-Daqing route, which would have a capacity of 30 million tons.

With the world’s top natural gas resources and sixth largest crude oil reserves, Russia’s energy exports ensure a stable 25 percent of its total annual revenue. In recent years, with natural energy becoming a sought-after commodity, Russia’s energy resources have also helped it anchor its diplomatic strategy.

After a short honeymoon between Russia and the Organization of Petroleum Exporting Countries (OPEC), during which the Russian Government accepted OPEC’s requirement to restrict its oil export volume to 150,000 barrels, the two sides chose different ways on developing energy strategies. OPEC expressed that, in consideration of balance of oil demand and supply, it would restrain its daily oil production below 27 million barrels since January 1, 2005, cutting down supply by 1 million barrels everyday compared to 2004. Meanwhile, as the biggest non-OPEC oil producer, Russia now is playing an important role to oil importers who want to reduce their full dependence on OPEC.

Therefore, Russia definitely will seize the day and pursue its own energy strategies in spite of OPEC rules, which are connected with its diplomacy. As early as in October 2003, former Russian Energy Minister Igor Yusufov claimed that Russia must increase its oil production and exports and dominate the international market. Former Foreign Minister Igor Ivanov also said countries with abundant energy reserves should design their own energy policies.

Besides the East Siberia-Pacific pipeline system, Russia is also proposing to pump oil west toward the Adriatic and ports in Albania, Croatia and Greece, and north to serve North America via a Barents Sea port, as it strives to boost its ability to supply rising demand in international markets.

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In February 2004, Russia’s daily oil production touched 7.3 million barrels, a 22-year record. This figure exceeded that of the biggest oil exporter Saudi Arabia, where production stood at 7.15 million barrels. Energy experts expect Russia to become the world’s top oil producer and exporter in the next four years and all indications point to it reaching this goal.

In October, Russian Industry and Energy Minister Viktor Khristenko said Russia’s international oil pipelines would transport 303 million tons a year by 2010 and 433 million tons by 2020. Last year, the pipeline network handled 182 million tons of Russia’s total exports of 223 million.

Russian production of crude oil should reach between 550 and 590 million tons per year by 2020, owing to development of resources in west Siberia and the Far East, the energy minister has said.

The state energy agency has forecast oil production will increase by 6 to 8 percent in 2004 from 2003 output of 421 million tons.

Feng pointed out that, after signing energy cooperation agreements with the European Union and the United States, Moscow has upped the ante in energy-linked diplomacy.

With greater energy demands, Feng noted, the EU would have to enhance its energy cooperation with Russia. At present, 16 percent of EU’s petroleum and 41 percent of its members’ natural gas imports are from Russia, and the figure is expected to reach 60 percent in the future. Russian and EU leaders signed an energy cooperation declaration in May 2004, which recognizes that “Russia has the privilege of entering the European energy market.” Meanwhile, Russian-British energy cooperation is deepening.

Also in May 2004, during U.S. President George W. Bush’s visit to Russia, the two countries signed an energy dialogue declaration. Washington promised to invest in Russia’s energy-sector to “strengthen bilateral energy cooperation, guarantee world energy safety and stabilize international strategy.’’

While Russia can boost revenues from oil exports, the United States can reduce its long-term dependence on energy imports from an unstable Middle East, said Feng. He predicted that Russia’s energy-oriented diplomacy would spur the development of energy resources in the Caspian region.

But some Russian experts worry about the risk that an over-dependence on oil and gas exports may pose. As foreign investments, especially U.S. capital, enter the Russian energy market, can Russian oil companies withstand the competition? Will Russia lose the edge in providing crude supplies to Western countries? And if relations with OPEC countries become purely competitive, how will Russia face pressures from the Gulf and North African countries in producing oil at lower costs?

An energy-oriented strategy is a double-edge sword, which Russia should use with great caution.