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Russia/China: Joint Pipeline Plan Makes Slow Progress

Russian Prime Minister Mikhail Kasyanov pressed for the first oil pipeline from Siberia to China during visits to Shanghai and Beijing last week. Analysts say the plan is making progress, but much of the diplomacy seems aimed at establishing trust in ties that have mended gradually since the Cold War.

Boston, 27 August 2002 (RFE/RL) -- With the latest of several summits last week, Russia and China seem to be trying to build trust and an oil pipeline at the same time.

At their meeting Thursday in Shanghai, Prime Ministers Mikhail Kasyanov and Zhu Rongji pledged "to lose no time" on the pipeline plan to pump Russian oil to China that was first announced at a Moscow summit in July 2001. In a joint communique, the two leaders urged state offices to expedite the $1.7 billion project so that it can move to the "initial planning phase."

Although the planning is still incomplete, the 2,400-kilometer pipeline from Angarsk in Siberia to China's main oil center at Daqing is scheduled to open in 2005.

Agreements on a feasibility study and other pipeline preliminaries were also important topics at a Moscow summit with Prime Minister Zhu last September and at a host of meetings by high officials since then. The initial accord on the pipeline was signed by Presidents Vladimir Putin and Jiang Zemin last year along with a 20-year friendship treaty between Russia and China, the first in more than 50 years.

One reason for all the political contact is that the pipeline would be the first between the two countries, joining one of the world's largest energy exporters with one its biggest consumers. So far, Russia has exported its vast oil resources to China only in small volumes by rail.

The pipeline from Russia's petroleum-rich region of Irkutsk would carry 400,000 barrels of oil per day, compared with daily crude exports to China of only about 25,000 barrels now. By 2010, pipeline volumes are expected to rise to 600,000 barrels per day. Prime Minister Zhu estimated that the line will boost bilateral trade by 50 percent over the current annual level of $11 billion.

Beijing also sees the pipeline as a way to enhance its energy security, since China's biggest source of imported oil has been the Middle East.

But for all the advantages, the project has faced its own security concerns. With the legacy of the Cold War, China and Russia are not the easiest of allies. Last September in St. Petersburg, Zhu said relations with Russia were "like a car moving along a speedway." But the pace of negotiations on the pipeline have been something less.

Even before last year's summit agreement, the project, which is being pushed by Russia's second-largest oil company Yukos, had been under discussion for two years.

Julia Nanay, director of Petroleum Finance Company, a Washington-based consulting firm, said: "The Chinese and the Russians have to basically reach an understanding whereby they feel comfortable in terms of this huge economic tie that this would create. It would basically tie certain Chinese end users into Russian energy supplies in a very firm way, because pipelines do hardwire countries to each other."

Nanay said that the huge investment in pipelines requires confidence not only that stability in relations has been reached but that it will last. "Pipelines are forever, and much more so than tankers. Importing oil by tankers gives you the ability to diversify supplies, but pipelines do mean that if there's a problem between two countries, such as we've seen in the Middle East with quite a few pipelines, they just get turned off, and that energy source goes away," Nanay said.

Both countries have worked to create a context of improved relations, making it more likely that the project will take place. Last week's communique covered a wide range of subjects from terrorism and trade to tourism and sports. But the long agenda of standard confidence-building measures seemed short on concrete steps and new business deals.

Official reports spoke of Russian arms sales, which are ongoing, and the possibility of jointly developing a Siberian aluminum plant. China also extended $200 million in financing for exports of gold-mining and forestry equipment, the Russian new agency RIA-Novosti said. But although trade is rising to new highs, it remains relatively small between two such large neighbors. China is sixth among Russian export markets, while Russia ranks eighth for sales of Chinese goods, Xinhua said.

After meeting Kasyanov in Beijing, President Jiang spoke again of trust in remarks reported by "People's Daily." Jiang was quoted as saying that "Sino-Russian ties have entered into a very sound phase, as the leaders of both countries have built mutual trust and a cooperative partnership, exchanged high-level visits frequently, and coordinated in major international affairs."

The long courtship between the countries may be one reason for skepticism on the part of the Russian pipeline company Transneft. The state-owned transporter is nominally part of the Yukos plan, but it has also been pushing a rival pipeline route that would not depend on China.

Transneft has argued that a 3,000-kilometer pipeline from Angarsk to Russia's Far East port of Nakhodka would be a better use for the eastern Siberian resources because it would allow them to reach a range of export markets. But the project could cost from $4.6 billion to $6 billion. Last week, the industry newsletter "Petroleum Argus" said that Moscow seems to be backing both plans rather than choosing between them, at least for now.

But despite slow moves toward each other, Russia and China have changed the basis of their relations in promoting cross-border pipelines, said Philip Vorobyov, an analyst at Cambridge Energy Research Associates, a U.S.-based consulting firm.

Vorobyov said, "In the 1990s, we did not see the enthusiasm on the part of actual private companies participating in this, but now we have very concrete feasibility studies going forward."

Although Vorobyov said much of the talk about energy cooperation in the 1990s was window dressing, he argued that it laid the political foundation for progress that is taking place now. "So, we're talking about very concrete things. We're seeing the Chinese side being quite aggressive about getting the oil from Russia," Vorobyov said.

Vorobyov cited reports that China will not only pay for the $700 million cost of building the oil pipeline on its territory, but it will also finance half of the $1 billion section on the Russian side.

But Vorobyov said Russia will have to decide between the Daqing and Nakhodka options. Unless more oil reserves are found in eastern Siberia, it is unlikely that both projects can be financed at the same time, he said.

One test of trust may be Russia's willingness to pursue a single oil route instead of two.