China at front of the queue for Russia's oil
Russia's first oil pipeline to Asia is snaking its way eastwards across the Siberian wilderness, raising hopes among China, Japan and other major Asian importers that they will soon have access to reliable oil from a near neighbour.
Nikolai Tokarev, head of the Russian state-owned company Transneft which is building the pipeline to the Pacific, said recently that the first stage would open by the end of the year. It will stretch 2,757km from Taishet in East Siberia, to Skovorodino in the Amur region near the border with China, and initially carry 600,000 barrels of oil per day.
The second stage will run another 2,100km, from Skovorodino to the port of Kozmino on Russia's Pacific coast. Due to be finished by 2014, the Eastern Siberia-Pacific Ocean Pipeline (Espo) will have a capacity to transport 1.6 million barrels of oil per day - nearly half of China's oil imports in 2006 and about a quarter of its projected imports in 2014.
But, even as the first stage nears completion, there are major doubts about the project. Already a year behind schedule, construction is beset by rising costs, contractors unable to deliver on time or at all because of economic turmoil in Russia, and concerns about the venture's economic viability following the collapse in oil prices.
China and Russia are due to resume negotiations this month on a loans-for-oil deal that could have a critical impact not just on the pipeline's future but also on Sino-Russian relations. If a deal is struck, the strategic partnership forged by China and Russia to counterbalance the US and Europe will be reinforced by a long-term energy supply bond.
Russia, the world's second-biggest oil exporter after Saudi Arabia, will be able to sell large amounts of oil to Asia as well as Europe, providing a boost to production from new fields in East Siberia and underpinning its role as a global energy power.
By clinching an oil deal with Moscow, Beijing would pave the way for similar long-term supplies of natural gas by pipeline from Russia. This would help China reduce its heavy dependence on coal and cut pollution.
China would also outflank Japan and other potential East Asian buyers of Russian oil and gas by securing the first pipeline supplies. At present, only relatively small amounts of Russian oil are sent to China by train, and supplies have been unreliable.
During talks in Moscow in October, Premier Wen Jiabao and Russia's Prime Minister Vladimir Putin approved a memorandum of understanding (MOU) under which Transneft and Rosneft, the country's leading oil producers, would receive loans of US$10 billion and US$15 billion, respectively, from Chinese state-owned banks in exchange for long-term oil deliveries and construction of an Espo spur to China.
However, subsequent negotiations have foundered over details. The MOU will expire in March. With oil prices less than a third of their peak in July, China may have the whip hand in the new round of negotiations with Russia to try to finalise an agreement.
Both Transneft and Rosneft have a heavy debt load. Analysts say the economic crisis makes it much harder for Russia to raise the capital needed to tap East Siberian oil and invest in infrastructure to keep its side of the Espo bargain. The cost of building the first stage of the pipeline has risen 21 per cent, to around US$12.5 billion, according to Transneft.
Russia sees the pipeline to the Pacific as a way to sell oil to Asian markets and even to North America. This may eventually happen. Japan has promised US$7 billion in loans to help complete the project.
But if Russia wants to secure the earliest possible buyer for its oil in Asia, China seems the best bet.
