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Russia: Beijing Signals Compromise On Siberian Oil

China signaled this week it will accept a Russian compromise on sharing eastern Siberia's oil with Japan, but only if Moscow can guarantee China's supplies. Beijing's statement on the controversy over competing pipeline plans is the second in the past week, suggesting rising stakes in relations with Moscow.

Boston, 5 March 2003 (RFE/RL) -- China voiced cautious support this week for Russia's compromise plan to build oil pipelines for both the Chinese and Japanese markets, giving Moscow a way out of an embarrassing predicament.

In an interview with the English-language "China Daily," an unidentified official said Beijing is "willing to finalize plans" for a promised pipeline from eastern Siberia to China's oil center at Daqing, even though Russia may build an extension to serve Japan later on. The official said China "may agree" to Russia's new plan for adding a second line to Russia's Far East port of Nakhodka, "as long as it guarantees adequate supplies for China," the paper reported.

"China Daily" quoted the official as saying: "We are not against the [new] proposal.... Should they guarantee our supply as we have agreed, the addition of other pipelines is totally their [Russia's] business."

The tale of the two pipelines has become a serious diplomatic problem for Russia, which agreed to the first-ever oil link with China at a Moscow summit between Presidents Vladimir Putin and Jiang Zemin in 2001. Putin then turned around and started negotiating to send the same oil to Japan during a visit by Prime Minister Junichiro Koizumi in January.

Aside from compromising the commitment to China, a comparison of the two projects seems sure to have rubbed Beijing the wrong way.

On the one side, the line to China from Angarsk in Russia's Irkutsk region was planned to be 2,400 kilometers long and cost $1.7 billion. On the other, the pipeline to Nakhodka on the Sea of Japan (East Sea) would stretch for some 3,800 kilometers, costing up to $6 billion. In other words, Russia would go farther to sell its oil at a higher cost. But Moscow finds the route to Japan attractive on several counts.

First, the line to Daqing was backed by Russia's Yukos oil company as a private project that could erode the power of the Russian pipeline monopoly Transneft. Russia's state-owned operator first raised the competing idea of the longer project to Nakhodka, offering the second benefit of being able to sell oil to countries other than China.

Japan then provided an additional incentive by offering to finance the Pacific pipeline and buy a million barrels of oil per day, or one-fourth of its imports, from Russia. Japan's Kyodo news agency quoted Putin as telling Koizumi, "I like the Japanese proposal." Analysts have said that the large volume of oil is dictated by the cost of building the long line.

China's response was restrained until last week, when an article in the official "People's Daily" accused Moscow of "vacillating" on its promise to build the pipeline to Daqing. This week, "China Daily" cited "chaos inside the Kremlin" as one reason for the pipeline dispute. Tension has also risen as both China and Japan seek to diversify their oil sources and ease dependence on the Persian Gulf, fearing war with Iraq.

Russia's compromise would mean building the China line first to carry from 400,000 to 600,000 barrels per day. Later a "spur" line would be added from the Siberian city of Chita to deliver 1 million barrels a day for Japan and perhaps South Korea, or even the United States.

Yukos Chairman Mikhail Khodorkovskii has already compromised his own plan by naming Transneft as the operator of the China line during a presentation in Washington last month. The Russian government is expected to decide the issue at a cabinet meeting on 13 March.

China has given its assent to the additional line, knowing that it may never be built. Analysts say that oil reserves large enough for both countries remain unproven in eastern Siberia, and Japan may back away from the investment once the threat to Mideast oil supplies ends.

But China has also put a fine point on its qualified approval of the Russian compromise. "China Daily" quoted Han Lihua, an expert at China's University of International Business and Economics, as saying, "If the project fails, it would cast a deep shadow on bilateral trade between the two nations." The article also quoted analysts as saying that "Russians are split on whether China should gain access to its rich oil reserves."

This week, Konstantin Kosachev, deputy chairman of the State Duma's International Affairs Committee, underscored the importance of the decision to Russia, the RIA-Novosti news agency reported. Kosachev said, "Actually, the future development of East Siberia and Russia's Far East is in question."

Beijing's public messages in the past week also seem to be a warning that relations could deteriorate quickly unless Moscow moves to mend the damage from its flirtation with Japan.