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Russian oil heats up rivalry in Asia

Sunday, July 13, 2003

NAKHODKA, Russia -- This gritty port city perched on the Pacific Ocean seven time zones from Moscow has suddenly emerged as the front line in a struggle between China and Japan for one of the richest prizes in today's gas-guzzling world.

A proposal to build a $5 billion pipeline linking untapped Siberian oil fields to the ocean here has set Asia's historical rivals against each other. An increasingly energy-hungry China wants Russia to build a pipeline directly to its territory. But Japan has offered billions of dollars to persuade Moscow to instead build a more costly pipeline to Nakhodka. The oil could then be shipped across the Sea of Japan to become gasoline for the country's Toyotas and Hondas.

In the 130 years since the first oil wells were dug on its territory, Russia has looked westward for markets. Now, with its oil industry surging to new post-Soviet heights, it is increasingly turning east. Moscow has an opportunity to reshape the energy map of Asia and at the same time assert itself on the world stage as an economic player.

"There's a very serious strategic decision for Russia to make here," said Stephen O'Sullivan, research director at United Financial Group, a Moscow brokerage firm. "Energy is definitely an important element of Russian foreign policy, without a doubt. It helps back it up. It gives it credibility."

The outcome could be crucial to Japan and China. China's energy demands are growing exponentially as it modernizes, while Japan is eager to wean itself off oil from the volatile Middle East. The contest displays the historic rivalry between East Asia's two biggest countries for influence in the region.

China seemed to have won in May, when President Hu Jintao visited Moscow and signed a communique with Russia's president, Vladimir Putin, endorsing a $2.5 billion, 1,400-mile pipeline to run from Angarsk near the Siberian city of Irkutsk to the northern Chinese city of Daqing. During the same visit, China's national oil company signed a $150 billion, 20-year agreement with Yukos, Russia's largest oil producer, under which the Russian firm would provide fuel by railroad until such a pipeline could be built.

But it soon became clear that Russia had made no actual decision to build the Daqing pipeline and was still considering the more expensive, 2,300-mile route from Angarsk to Nakhodka, as proposed by the Japanese.

Prime Minister Junichiro Koizumi, has come to Russia twice this year already to lean on Putin, while regularly dispatching envoys, businessmen, and a former prime minister to Moscow dangling ever-bigger financial offers.

Japan's foreign minister, Yoriko Kawaguchi, last month came to Vladivostok to the west of here to propose $7.5 billion worth of financing for exploration of eastern Siberian oil fields _ but only if a pipeline is built to Nakhodka before one goes to China. Another Japanese delegation went to Moscow this week to press the case.

The Japanese, said one person involved on the Russian side, are playing on Russia's historical fears of China, with which it shares a long border. The Japanese, "in order to persuade the Russians, play a geopolitical game. They say, 'Do you want to be gobbled up by the Chinese?' And of course we don't. We're white people."

Issei Nomura, Japan's ambassador to Moscow, disputed such characterizations. "Don't put it that it's a war between Japan and China over Russian oil," he said. "This is not the case." Yet in an interview he also raised the issue of Russia's dwindling population in the Far East just north of China, touching on Moscow's historic fear of Chinese encroachment. "It's a serious demographic problem," Nomura said. In the Far East, the Japanese pitch has won converts who otherwise would be left out of the development of the pipeline. The office of the local governor, Sergei Darkin, is stocked with flat-screen televisions, laptop computers and an electronic white-board. Some of this equipment was a gift from the Japanese. Putin's administrator for the Far East, Konstantin Pulikovsky, has become such an advocate for the pipeline that he has called himself "a Japanese ambassador." For Nakhodka and the region around it, an oil terminal feeding Asia could revive a largely dormant economy. "If our ports are working," said Gennady Zakharov, Nakhodka's labor director, "the whole territory will come alive." The oil would come from now-undeveloped oil fields in eastern Siberia that some analysts consider the next engine of Russia's energy industry. The most optimistic Russian estimates conclude that as many as 10 billion barrels of oil lie beneath the icy tundra, equivalent to nearly half of all U.S. reserves. But the oil will prove valuable only if Russia can deliver it. Though Russia's total oil production has reached the level of Saudi Arabia's, an inadequate pipeline network has capped its exporting ability. So as deliberations continue on the Siberian pipeline, the country has embarked on a crash construction program elsewhere to open the spigots. Plans have advanced to build a $4.5 billion pipeline to the northern city of Murmansk, where oil would be loaded at a proposed deep-water port onto supertankers heading to the U.S. East Coast. Development of Sakhalin Island in the Pacific has progressed to the point that the first crude bound for the U.S. West Coast was loaded recently onto a tanker. As it searches for its own new energy sources, China considers the Siberian oil critical. Until a decade ago, China was a net exporter of oil. But last year it needed 1.8 million barrels a day from foreign suppliers, a demand projected to jump to 4.2 million by 2010 and 6.9 million by 2020, according to the International Energy Association. If built as proposed, the Angarsk-Daqing pipeline would provide 400,000 barrels a day starting in 2005, growing to 600,000 five years later. Japan, the world's second-largest oil importer, has already invested heavily in Sakhalin. But it still relies on the Middle East for 88 percent of its supply and now has its eye on Siberia. Officials in Tokyo argue that an Angarsk-Nakhodka line carrying 1 million barrels a day would allow Moscow to sell not just to Japan, but to other countries, including possibly the United States. It would not become hostage to a single customer _ China. "It costs more money ... but on the other hand, the open market is there once the pipeline reaches Nakhodka," Nomura said. Russia's oil industry remains divided. Mikhail Khodorkovsky, chief executive of Yukos, is lobbying for the China route. But the Transneft state pipeline company and Rosneft oil company are pushing for the Nakhodka line. At a recent news conference, Putin seemed to side with the Japan lobby, rhetorically reducing the China pipeline to the status of a possible spur off a Nakhodka line. "Angarsk-Nakhodka, of course, seems preferable from the standpoint that it allows access to the market in the wide sense of the word," Putin said. "Generally this is a very attractive project for us. The question is only whether it is economically valid." He talked about adding "a branch pipe, if that is necessary" to China. But some analysts believe Putin eventually will approve the China line, on the grounds that it's the simplest, most cost-effective and further along in the planning. "The reason the Russians haven't made a final decision is because it keeps the pressure on the Chinese," O'Sullivan said. "Ultimately it will be China. It will be more cost effective. ... As soon as the Chinese agree to (a) price, the Japanese option may disappear."


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