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Russia: Moscow Gives Mixed Signals On Pipelines

Russian Prime Minister Mikhail Kasyanov tried last week to calm the controversy over the government's choice for building oil pipelines to either China or Japan, but confusion continues. Analysts say the struggle within Russia to serve as an alternate source to Middle East oil has become politically charged.

Boston, 18 March 2003 (RFE/RL) -- The Russian government has added to the confusion over whether it will build an oil pipeline to China or Japan following a series of conflicting statements in the past week.

A long-awaited decision on the destination for Russia's oil exports from eastern Siberia was supposed to be made at a government meeting on 13 March. Would it be China or Japan? The three-way struggle over who will get to buy Russia's eastern oil has been straining relations for months, taking on the proportions of yet another international "great game."

The overworked analogy seemed likely to apply, with China and Japan frantically seeking energy supplies outside the Middle East. Russia has courted both countries for months with the limited resources in the east Siberian area that it has discovered so far. In recent weeks, the debate has taken on urgency because of the threat of war with Iraq.

The choice is between building a 2,400-kilometer line from Angarsk in the Irkutsk region to China's oil center at Daqing or a much longer line to the Far East port of Nakhodka on the Sea of Japan, at perhaps three times the cost.

The Russian Energy Ministry thought it had the solution: build them both. Russia would start with the shorter pipeline to China, costing some $1.7 billion, as it agreed at a summit with former President Jiang Zemin in 2001. That would be followed by a branch, or spur line, to Nakhodka, if Russia found more oil to feed Japan, South Korea, and perhaps the United States.

But when the day came for the government meeting last week, Energy Minister Igor Yusufov emerged to say that the decision had been put off for more study.

Yusufov said, "The government ordered the ministry, departments, and the oil companies to present the most effective route by 1 May," Reuters and other news agencies reported. News of the postponement was widely reported in the Russian and Western press, as well as in China and Japan. Analysts concluded that the final decision would be part of the government's energy strategy through 2020, which is due to be completed in May.

But one day later, Prime Minister Mikhail Kasyanov contradicted Yusufov, announcing that the government had already taken "a conceptual decision" to build the main line to Nakhodka, the RIA-Novosti news agency reported. By Kasyanov's account, the spur would be to Daqing, rather than to Nakhodka. And the 1 May date was only supposed to be a deadline for Russian ministries to study and determine the exact route.

Kasyanov appeared stung by reports that the cabinet had been unable to reach a decision. China in particular had started to show impatience, noting that Russia had already agreed to build the Daqing line before Japan offered to finance the alternate route, which could cost more than $5 billion. An article in China's official "People's Daily" cited "chaos inside the Kremlin" over the issue.

But it was still unclear whether Kasyanov's vexed announcement would be the last word. Russia's ministries must still conduct studies of the 3,800-kilometer Nakhodka route, which could find it impractical.

The long line needs 1 million barrels of oil per day to pay for itself, an amount that, for the present, does not exist. There is barely enough oil for the original plan to pump 400,000 to 600,000 barrels per day to China.

But the three-way argument has been stretched even further to include a standoff between Russia's private oil companies, led by Yukos, and Transneft, the state-controlled pipeline monopoly. Because the China project was a Yukos deal, the company first pushed it as a privately run pipeline, which would effectively break the Transneft monopoly.

Transneft made the case for Nakhodka, arguing that a line to a single market like China could not guarantee Russia a competitive price for its oil. Earlier this month, Yukos chief Mikhail Khodorkovskii raised the stakes in the standoff by warning that he would not put oil into a Nakhodka line, the industry newsletter "Petroleum Argus" said.

In an interview, Julia Nanay, a director at PFC Energy, a Washington-based consulting firm, said, "If the Russian government were thinking only commercially, you could argue that the pipeline that Yukos proposed to China is the logical one, but there are too many political decisions involved in this, and as a result, it's a very complicated decision-making process."

Some Yukos competitors, including the TNK oil company, have argued for the Nakhodka option, while the government wants to keep control over oil exports through Transneft.

Filip Vorobev, an analyst in the Moscow office of U.S.-based Cambridge Energy Research Associates, said the infighting has also fallen smack into the middle of Russia's election cycle, when oil industry support is needed. Vorobev said: "You have to remember, this is a tough time politically. We're talking about an election year for the Duma.... The presidential election is just around the corner. All of these issues are very politically charged."

But according to "The Russian Energy" weekly, last week's government meeting offered at least one new twist. The newsletter said Transneft has now, in effect, switched sides by supporting a route running south of Lake Baikal to Nakhodka, knowing that there is still not enough oil for such a line. The switch from Transneft's plan for a northerly route means that China will get its pipeline, while the Nakhodka option will languish for lack of oil, the weekly concluded.

The decision is likely to be confirmed during an upcoming Moscow visit of China's new president, Hu Jintao, it said. But for now, Russia's statements appear to be a study in ambiguity.