Thoughts Concerning the “Pacific Route” Crude Oil Pipeline

|Russia

On December 31st, 2005, Prime Minister Mikhail Fradkov signed the construction plan for the “Pacific Route” of the oil pipeline from Eastern Siberia towards Japan, which formally determined the construction of the pipeline along this route. The pipeline will run about 4,400km from Taishet in Eastern Siberia to Perevoznaya Bay in Primorskiy Krai and have a maximum annual transport capacity of 80 million tons. The main body in charge of construction will be Transneft, the state-owned pipeline construction company. The construction will be divided into two phases. During the first phase, that is to say the point at which the pipeline has been constructed as far as Skovorodino, which is located halfway along the route, Transneft plans to transship oil onto rail tankers and start exports to Japan; the target for commencing exports to Japan is 2008. During the second phase, the pipeline will be constructed through to the shipment port.

This is a pipeline with a story behind it, in which there was a conflict over whether the Daqing route or the Pacific route would be adopted; it is gratifying for our country that the Pacific route was ultimately settled upon and, what is more, Japan will be able to get crude oil three years from now. I would like to examine whether things will continue to progress in this seemingly picture-perfect way.

The decision on the route has two implications. One is that, as can be understood if one looks at the starting point of the route, the crude oil to be transported is being sought in oilfields in Eastern Siberia. Small oilfields are dotted around the region from Krasnoyarsk Oblast to Irkutsk Oblast, but in most cases, the existence of commercial reserves remains unconfirmed. Some have completed exploration work for the purposes of verifying reserves; among these is Kovykta oilfield. In the summer of 1996, I had the chance to go up in a helicopter to view the oil exploration well. A derrick made of logs nestled quietly in the dark forest. I keenly felt that, “It is surprising that God granted His favor to this remote frontier”. It was located amidst primary forest, in a place where rugged mountains overlap, close to Lake Baikal. How much money will be needed to develop this region? In order to ensure that 80 million tons per year are transported, many oil fields, which are scatted far and wide around the massif, should be tapped. In addition, the cost of constructing the pipeline is estimated at 14 billion dollars. Who is going to be able to absorb such a gigantic investment? Russia? Japan? Or what would the proportions be if the two countries were to split the investment? If the project makes no business sense, it will turn out to be pie in the sky.

Another problem is that the Daqing route is expected to be a branch line of this route. Originally, the route towards Daqing was talked about as the main stream of what is called the Eastern Siberian pipeline concept. The project, which was promoted by Mikhail Khodorkovsky, President of Yukos, involved the transport crude oil produced by Yukos-owned companies from the oilfields of Western Siberia to Daqing by extending the line and connecting it directly to the pipeline that has been laid down to Angarsk. A basic agreement on this plan was reached in September 2001 between Mikhail Kasyanov, then Prime Minister of Russia, and Zhu Rongji, then Prime Minister of China. The agreement was subsequently scrapped. The official reason is said to be that the National Environment Appraisal Committee of the Ministry of Natural Resources of Russia did not approve from the viewpoint of environmental problems; however, it is now obvious, in fact, that it was a measure taken by President Putin, aimed at the exclusion of Khodorkovsky.

Nevertheless, the Daqing plan has not completely disappeared. President Putin, who had Khodorkovsky arrested on suspicion of tax evasion, pursued the dissolution of Yukos. On December 19th, Yukos’s core subsidiary, Yuganskneftegaz, which has been slapped with back taxes of 27.5 billion dollars, went up for auction and an unknown firm called the Baikal Finance Group made a successful bid. Before long, on December 23rd, the national petroleum company Rosneft announced its takeover of the group. This is how Khodorkovsky’s ambitions were thwarted.

This profoundly mysterious farce did not end here. On December 30th, Viktor Khristenko, Minister of Industry and Energy, disclosed the policy on Yuganskneftegaz, which had been bought up by Rosneft: the company would become a state-run independent firm, with 20% of its stock being sold to China National Petroleum Corporation (CNPC). Khodorkovsky’s oil will thus return to Daqing. So long as CNPC participates in the management of the company as a big stockholder, there is no doubt that it will argue in favor of the supply of Western Siberian crude oil to its country. According to the initial pipeline construction plan, Russia would handle 1,300km of the pipeline from Angarsk, while China would cover 760km. The total construction cost is estimated at 2.55 billion dollars and maximum crude oil transportation capacity would be 30 million tons per year, making it far cheaper than the Pacific route. It is a law of nature that the smaller the investment is, the better the profitability of the project will be.

Taking economic efficiency in terms of project cost into consideration, the Daqing route wins hands down over the Pacific one. However, there are some doubts in terms of the commercial strategy. If China uses its inimitable business practices to drive a hard bargain with regard to the purchase price, Russia will have nowhere else to sell this crude oil. It will either have to waive the construction costs or settle tearfully for a cheap price. In that respect, crude oil can be sold to any country along the Pacific route according to the market circumstances.

Furthermore, I need to mention that the construction of the oil pipeline possesses an important element that lies close to the nature of the relationship between these countries. In short, it is the nature of the Russo-Japanese and Russo-Chinese relationships. It could be said to be a strategic factor that will be built by Russia for the sake of the security of the country in international relations. It would be nothing for President Putin to tear up Mr. Fradkov’s final decision paper on the Pacific route, if he thinks it necessary as a strategy, just as he dropped the commitments made between Mr. Kasyanov and Mr. Zhu. Russia, which lost the Cold War, now uses oil and gas as the most powerful weapon in its security strategy. With regard to this point, the country sometimes turns a blind eye to economic efficiency and goes back on its word.

If Russia thinks a great deal of the relationship with Japan, there is, in theory, a possibility that the country will disregard commercial profit and embark on the investment of a vast amount of money in Eastern Siberian oil development. However, from Russia’s standpoint, given that the Sino-Russian border dispute has been cleared up and the fact that, in contrast with China, which has become the biggest customer for Russia’s state-of-the-art fighter planes, Japan is seen as being closely allied with the US and at a complete loss over the four islands issue, Russia may not feel very optimistic about this relationship.

It may be overly negative to predict a situation along the lines of “Construction of the branch pipeline has already been previously completed, but when the trunkline will be is anybody’s guess…”

It seems that there may be many twists and turns ahead on the path towards the realization of the Pacific route. It also depends on Japan’s foreign policy towards Russia.

[Translated by ERINA]