Chapter V. The implications of the energy relations between Russia, China and Japan
Picture 19. Final ESPO route
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Angarsk to Nakhodka320. The new plan was roughly double in price and the length of the pipeline was extended to 3,700 kilometers, significantly longer than planned.
But, Russian government decided to use the favorable situation in the full extent and in one year the plan took another turn when Russian officials and Transneft executives reported in January 2005 that the Nakhodka route would include a pipeline spur from Skovorodino (located about 48 kilometers from China), which could provide China with Russian oil.
According to Russia's state-owned pipeline monopoly Transneft (which has played an important role in the failure of the Taishet-Nakhodka project), the route would extend roughly 4000 kilometers, from Taishet, through Kazachinskoye, Tynda, Skovorodino, Khabarovsk to the Perevoznaya Bay terminal in the port of Nakhodka1, crossing Russia's Irkutsk, Chita, Amur, Buryat and Primorie regions and the pipeline will have a capacity of 1,6 million barrels per day.
Picture 19. Final ESPO route
Source: http://www.rustocks.com/put.phtml/shACTR_091506.ppt (Retriveied September 20,2011)
Although this option was significantly more expensive than the alternative route to Daqing in China, since it covers a greater distance and involves more investment, the Angarsk-Nakhodka route will open up a new Pacific port from which Russian oil exports could be shipped by tanker to other Asian markets and possibly even North America. But,
320 Blagov Sergei, “Russia Walks the Line Between Japan and China”. Retrieved July 6, 2011 from http://www.atimes.com/atimes/Central_Asia/GA05Ag01.html.
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Russian executives realized there is no need to rush exports to the United States. Transneft president Semyon Vainshtok reportedly said that the Marathon terminal in Louisiana could only accept approximately 110 million barrels of Urals or Siberian grade crude oil per year.
Although the Daqing option has been abandoned, China will also obtain exports via the Nakhodka route. In an announcement at the 2006 G8 Summit Viktor Khristenko (the Minister of Industry and Energy of Russia) affirmed that a spur would be built off the Angarsk-Nakhodka pipeline, running into China and terminating in Beijing, making the proposed pipeline one of the largest and most expensive ever built 321.
The construction of the East Siberia-Pacific Ocean oil pipeline started in April 2006. The first stage of the project which connected Taishet, in the Irkutsk region, to Skovorodino, in the Amur region in the Far East, was completed in 28 April 2009322. Once the construction has began, some obstacles to the Nakhodka plan appeared.
First, financing of the project was challenging. The Siberia-Pacific oil pipeline project could become the most expensive pipeline in history, as it would need a larger investment than the Alaska oil pipeline, which cost 9 billion USD323. Early estimates of the cost of an oil pipeline from Eastern Siberia to Nakhodka could reach 11-12 billion USD (Russia has only obtained Japanese promises of 7 billion USD for the project). Also, the initial pipeline route was too close to the waters of Lake Baikal, a UNESCO protected site.
The route had been at the center of controversy and protests by environmental groups, who argued that Lake Baikal could suffer irreparable damage in the event of an accident on the pipeline. In this instance, in April 2006 President Putin ordered that the pipeline should be re-routed from its original path, which would have seen it run within 800 meters of Baikal.
And in May 2006, Transneft head Semyon Vainshtok said the new route should be minimum 8 kilometers away from the original plan due to environmental and constructional considerations.
In late July 2005, Transneft announced that it would build an oil terminal in Kozmino Bay, instead of Perevoznaya Bay. Opponents of the plan to build the terminal at Perevoznaya based their objections on logistical, safety and environmental arguments.
321 Khristenko V., ―Nefteprovod Vostochnaya Sibir – Tikhiy okean mozhet bit postroen ran‘she zaplanirovannikh srokov‖. Retrieved October 2, 2011 from http://www.regnum.ru/news/674378.html.
322 Primamedia, ―Sostoyalas svarke pervogo styka-uchaska nefteprovoda Skovorodino – Granitsa KNR‖.
Retrieved September 29, 2011 from http://primamedia.ru/news/28.04.2009-96772.
323 Blagov Sergei,“Russia Walks the Line Between Japan and China”. Retrieved July 6, 2011 from http://www.atimes.com/atimes/Central_Asia/GA05Ag01.html.
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Perevoznaya Bay would have required oil tankers to maneuver in shallow waters, through a channel dotted with tiny islands, in frequently windy and foggy weather. Moreover, the bay is full of chunks of ice about four months of the year. Under these circumstances no one would know how to respond to an oil spill324.
The global economy crises of 2008 also had a significant impact on the situation about the ESPO. Russia was lack of finance to complete the construction of the pipeline and on February 2008 Russia and China announced that China would lend Rosneft 15 billion USD and Transneft 10 billion USD in return for the pledge to build the ESPO pipeline branch to Skovorodino on the Chinese border by 2011 from which China would build a 70 kilometers pipeline to Daqing and pump 15 million tons of oil annually to China through 2031. Thus, this deal ends the long dispute over this pipeline - whether Russia would build a pipeline to the Pacific Ocean as favored by Transneft and Japan or first build a pipeline to China as Rosneft and China preffered. Actually, this deal seems to be a win-win solution for China and Russia. On April 21, 2009 this deal was finalized and signed. China will pay a price for this oil based on the price of Brent Crude oil at the Kozmino Bay – projected end point of the ESPO from Taishet. Thus, Russia has gotten its first long-term customer who lent money for the construction and helped to make the completion of the pipeline.
But, with more detailed analysis, it becomes clear that Russia did not gain much from the deal. The original deal with China for loans that broke down in November 2008 was not a conclusive deal to build ESPO link from Skovorodino to Daqing in China or bailout Russian firms. That deal reflected the fact that despite numerous Russian promises since 2006, the pipeline from Taishet was running behind the schedule and over cost leading to much pressure from Moscow and Beijing to finish it. The financial crisis and huge debts of Russian companies gave China the bargaining power over Russia. It was hard bargaining process. The price of the oil and the financing arrangements connected to the loan were not announced in November 2008, indicating disagreement over those issues325. Even though the final price of the oil was agreed to be linked to the Brent crude oil price at
324 Wachter, Sarah J., ―Is Russia Ready for a Shipping Boom?”, The International Herald Tribune, 2 October 2006.
325 Helmer, Ma Yujia, ― China-Russian Loan for Oil Negtiations Stall On Price‖, Zhongguo Wang, February 19, 2009.
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Kozmino Bay, but no one could predict now will this price be finally higher or lower then the market price at that time326.
Furthermore, it is not clear when the pipeline from Skovorodino to Kozmino Bay will be completed, who will finance it? So far, China does not need it and Japan does not wish to do so without successful peace treaty negotiation with Russia. Also, it is not sure yet how much oil pipeline will be able to carry in fact and its price.
It is worth to mention the fact that Russian officials are still remaining divided about the prospects of the pipeline. The outcome proves that Russia not only tried to play between Japan China to get the best deal from them for ESPO, this policy is also linked with internal bureaucratic and factional rivalries within Russia. These disputes resulted in big delays in the pipeline‘s construction, huge increase in its costs, and undefined strategy for dealing with China and Japan. Obviously, it leads to the lost of the confidence in Russia as a reliable energy supplier and that China and Japan, as well as other NEA countries, started to actively look for other alternatives as Central Asia and Africa.
As Pavel Baev observed ―for China and other energy-hungry Asian countries, Russia shapes up not as an answer to their needs but as a highly unpredictable variable and obstacle for their access to the Caspian hydrocarbons. Seeking to harvest the maximum dividends from the skyrocketing energy market, Moscow has maneuvered itself into a truly tight corner‖327. Consequently this deal reflects the rather negative outcome of an ongoing bureaucratic and political struggle over the ESPO in Russia as well as a foreign policy rivalry between Japan and China for access to Russian oil and gas. Moscow‘s deliberate efforts to stimulate that competition prominently featured as an aspect of Russian foreign policy in Asia after 2002-03328. Transneft wanted to build the ESPO first to its Pacific Coast destination at Kozmino Bay and was thus encouraging Japan, who stood to benefit more from this route to compete with China. If it had its way, Japan and China would compete with each other to Russia‘s benefit and Russia would not depend on a single customer for its pipeline, such dependence always being one that victimizes the supplier rather than the
326 Eastweek Analytical Newsletter , “Russia: A Loan From China In Return For a Pipeline Section Branching Off From the VSTO Oil Pipeline”. Retrieved October 3, 2011 from.
http://www.osw.waw.pl/en/publikacje/eastweek/2009-02-18/russian-federation-loan-china-return-pipeline-section-branching-vsto-.
327 Pavel Baev, ― Russia Aperies to the Status of ―Energy Superpower‖, Strategic Analysis, Vol. 31, No.3, 2007, pp.459-460.
328 Mark Katz, ―Exploiting Rivalries for Fun and Profit: An Assessment of Putin‘s Foreign Policy approach‖, Problems of Post-Communism, No.3, 2005, p. 26.
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consumer. Rosneft, the fiefdom of Deputy Premier and Putin protégé Igor Sechin, opted instead for building the ESPO to China first. Apart from the foreign policy implications of putting China first, and probably for reasons of cementing partnership with Beijing against Washington, this option risked committing Russia to dependence on a single supplier.
The positive side of this is that in 2008-09 it offered Rosneft a sure market and plenty of cash up front for which it is desperate. Gazprom and Rosneft are, in fact, among the most highly leveraged firms in Russia. According to Radio Liberty who cites the distinguished energy economist Vladimir Milov in 2008, Gazprom and Rosneft are the
―champions of debt accumulation‖, with total debts of more than 85 billion USD as of the third quarter of last year. That accounts for some 20 percent of Russia‘s total corporate debt.
The chairman of Gazprom‘s board of directors is President-elect Dmitry Medvedev and Rosneft‘s board chairman is deputy presidential-administration head Igor Sechin. Milov wrote that Gazprom‘s debt-to-earnings ratio has reached 70 percent, while Rosneft‘s was already 106 percent, which lead him to conclude the two companies ―are in a deep financial crisis that has so far been covered up only by high world oil prices.‖ Milov said the most likely outcome would be additional loans to the companies from state banks at the order of the government. It is important to understand that the reckless policy of restoring the government‘s influence in the oil-and-gas sector in recent years has not been free for the country. It has a concrete price and a very high one‖329 Thus this process reflected the continuation of the parallel Russian bureaucratic and Sino-Japanese rivalries for a pipeline route favourable to each of them and ultimately to drive policy.
As a 2005 report by Russian, Chinese, and Japanese scholars observed: ―in reality, it is not China or Japan, but Russia that wants to bring large volumes of its oil and gas to the market of Northeast Asia in the most economical way. Also, it is not Japan and China who are the main contenders for a pipeline route, but rather diverse interests within Russia.
Indeed, some interest groups would prefer to explore the oil and natural gas reserves in a way that would not necessarily gain local industries and communities, and without considering the overall groups that prioritize regional developments, social advancement and national energy markets, as well as access to multiple markets in Northeast Asia. The problem is that the Chinese decided to side with the former, while the Japanese aimed
329 Radio Free Europe Radio Liberty Newsline, ―Economist Predicts ―Financial Crisis‖ fro Gazprom, Rosneft‖.
Retrieved September 15, 2011 from http://www.rferl.org/content/article/1144069.html.
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towards the latter. Tokyo was only supporting, not proposing the pipeline route that Transneft already advocated and that President Putin strongly favoured330.
Ultimately Sechin showed greater clout and Rosneft got debt relief and its pipeline preference from China while Russia finally got major access to Northeast Asia for its oil where it hopes to export much more energy in the future331. It also is possible that this aspect of debt relief might contribute in some way to relieving the downward pressure on the rouble since Russian firms have to refinance a staggering total of 117 billion USD in debts in 2009 and that is a factor that has exerted downward pressures on the rouble.332 While Transneft will use the money to build the pipeline first to Skovorodino and then the second stage to Kozmino Bay for completion in 2013, Rosneft will use at least 9 billion USD to cover its refinancing debts due this year333. Given the 2008-2009 economic crises that has greatly depressed energy prices and the inveterate rent-seeking and sub-optimal organization of the Russian economy from top to bottom this outcome, where China got Russian equities in return for loans, a relationship that always implies subordination on the part of the borrower. But it does indicate growing Russian dependence and weakness in economic terms relative to China.
Neither will it be the last such deal that registers this process of growing dependence upon China as shown below. As Vladimir I. Tikhomirov, the Chief Economist at Ural SIB Bank said, ―If the situation remains tense in Russia and the world economy, we will see more concessions to China‖334. To the degree that the global crisis is prolonged, it becomes ever more difficult for Russia to raise the cash it needs to develop Siberian energy sites, invest in infrastructure to hold up its end of the ESPO bargain, and pay off its energy firms‘ accumulated debts without making concessions to one or another foreign lender.Therefore China‘s gains are considerable. The Memorandum of Understanding (MoU) outlining these terms conforms to Chinese economic and political desires. Obviously, the economic context of the bilateral relationship has now changed very much in China‘s favour. For example, Prime Minister Wen Jiabao in 2008 placed cooperation in developing
330 Shoichi Ito, Vladimir I. Ivanov, Zha Daojiong. (2005) Conflict Prevention and Conflict Management in Northeast Asia. In Swanstrom Niklas (Ed.), China, Japan, and Russia: The Energy Security Nexus (pp. 121-142). Uppsala university.
331 Sergei Blagov, ―Russia‘s Rosneft Eyes Siberian Expansion‖, Eurasia Daily Monitor, February 28, 2008.
332 Andrew E. Kramer, ―Russia, Looking Westward, Opens a Gas Plant to Supply Asian Markets‖, New York Times, February 19, 2009.
333 Ibid.
334 Ibid.
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resources at the top of his proposals for economic cooperation with Russia335. China still holds that energy should be a priority in the relationship as Foreign Minister Yang Jiechi said336. In other words, China‘s agenda appears to be driving the relationship. At the same time this deal is clearly also supposed to advance bilateral political ties, possibly also along China‘s agenda or hierarchy of priorities.
Formally, the two governments announced that the price of this oil would be based on a formula based on the floating price of Brent crude oil when it arrives at the projected Kozmino Bay terminal337. But as there is no pipeline to Kozmino Bay and no clear idea about who will pay for it since it is quite unclear whether or not Japan will make the huge investment necessary for this pipeline to materialize. Thus, for now energy flows to Kozmino Bay will be only those carried by the Russian railway system, an overpriced and inefficient way of transporting oil. Second, while Chinese analysts may not be happy about this pricing arrangement, as noted above, one or another side will seek to renegotiate it once prices move dramatically up or down. Russia may think that it got a stable market and the first major step in it is efforts to diversify its energy supplies eastwards, but in fact this deal was made out of Russian weakness and not only will China gain access to upstream Russian energy assets in the loan and in subsequent deals, it also evidently was able to induce Moscow to reorganize its organizational process for negotiating energy deals with China, a sure sign of its superior leverage338.
In other words, despite Russian satisfaction that it has a stable market and that Rosneft and Transneft were saved, it appears that China got and will get more and more out of this deal than Russia and has increased its leverage over Russia. China has essentially effectuated a major victory over Russia and will gain access to equity in hitherto excluded Russian firms apart from its leverage over Russia339. Russia may proclaim that it could become China‘s largest oil supplier in 15 years, but in fact Moscow must accept not only
335 Wen Jiabao, “Work Together for Fresh Progress in China- Russia Economic Cooperation and Trade‖.
Retrieved April 12, 2011 from http://www.fmprc.gov.cn/eng/wjdt/zyjh/t523498.htm.
336 Ria Novosti, “China, Russia Should Strengthen cooperation-Chinese FM”, Retrieved October 15, 2011 from http://en.rian.ru/world/20090307/120469526.html.
337 Gaye Christoffersen, ―The Multiple Levels of Sino-Russian Energy Relations‖, Paper Presented to the Conference “Sino-Russian Relations: Old Patterns, New Realities”, Central Asia-Caucasus Institute, Washington, D.C., May 6~7, 2009.
338 Ibid.
339 Helmer John, “China Loan Turns Russian Oil East”, Retrieved September 25, 2011 from http://www.atimes.com/atimes/Central_Asia/KB24Ag01.html.
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Chinese equity positions in their energy firms, Russia also must accept outcomes that it has successfully rejected everywhere else and get less for its products than the market now charges340. Moreover, China certainly intends that this deal will remain stable and lead Moscow to provide it with even more oil, gas, and electricity341. Russia also must find financing to build oil and gas pipelines from Siberia to the Pacific Coast, and given its own shoddy record of construction and the games it has played with Japan, this is by no means a certain proposition.
Since many of Russia‘s decisions here represent a reversal of past Russian priorities, e.g. building a pipeline to one Asian party alone and not to the Pacific where it
Since many of Russia‘s decisions here represent a reversal of past Russian priorities, e.g. building a pipeline to one Asian party alone and not to the Pacific where it