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Russia: Moscow Sees No Profit In Japan Oil Line

Russia's biggest booster for an oil pipeline to Japan now sees the huge project as unprofitable. But the statement by the Transneft pipeline monopoly does not seem to have stalled Tokyo's drive to finance construction, as competition with China for Russian oil continues despite the reduced risk of a cutoff from the Middle East.

Boston, 15 April 2003 (RFE/RL) -- After months of promoting a $5.2 billion oil route to Japan, the Russian pipeline monopoly Transneft has declared that the project would be unprofitable.

Last week, Transneft Chief Executive Semyon Vainshtock said the company's feasibility study for a 3,800-kilometer proposed pipeline from the Irkutsk region of eastern Siberia to the Far East port of Nakhodka "left no room for doubt." The area simply does not have enough oil to make the ambitious project pay.

Vainshtock told the Reuters news agency, "It shows that we don't have enough oil to fill this 1-million-barrels-per-day pipeline to the Pacific coast from the beginning. If we decide to fill it gradually, the project will be unprofitable anyway." Analysts have said that the volume is the least needed to justify such a long line.

The issue has been the focus of a three-sided controversy among Russia, China, and Japan since January when officials accompanying Japanese Prime Minister Junichiro Koizumi on his visit to Moscow voiced Tokyo's readiness to tap Russia for up to one-fourth of its oil imports.

Last October, Japan began buying Russian oil for the first time since 1978 as fears rose about relying on the Middle East with the approach of the Iraq war. Japan offered to finance the Nakhodka pipeline from Angarsk near Siberia's Lake Baikal in a bid that clearly stunned Beijing.

The reason is that President Vladimir Putin had already signed an accord with China's then-president, Jiang Zemin, during his Moscow summit in 2001 for a pipeline to carry the same oil. The 2,400-kilometer line to China's oil capital of Daqing was to cost $1.7 billion, making it practical to build for 600,000 barrels a day of exports, an amount that the region could produce.

But Putin voiced interest in the Japan alternative, sparking resentment in China. In February, the official "People's Daily" said that "there should have been no more suspense regarding who will be the purchaser of oil in [the] Far East."

A Russian cabinet meeting in March endorsed a compromise calling for both lines, with the first going to China and a later "spur" link to Nakhodka as more oil is developed. A final decision is scheduled for May. But the ambiguity deliberately obscures the continued competition for limited resources and the question of when or whether a line for Japan will be built.

Last week, there was also no explanation for the sudden turnaround at Transneft, which went from being Russia's biggest cheerleader for the Japan option to a critic of its profitability. In admitting that the Irkutsk area lacks sufficient oil for the project, Vainshtock was only reflecting what oil industry analysts have been saying for months.

But Philip Vorobyov, an analyst in Moscow for U.S.-based Cambridge Energy Research Associates, said the Vainshtock statement was not really surprising. Vorobyov said, "This is just, in fact, the official acceptance by Transneft of reality, that right now there is just not enough oil in east Siberia to justify the pipeline all the way to the Pacific coast." Other Transneft officials have been saying the same thing for the past month, Vorobyov said.

The statement also comes after Mikhail Khodorkovsky, chief executive of Russia's Yukos oil company, agreed to accept Transneft as the operator of the China line, which Yukos hoped to build as a private project. The concession ended a struggle over preserving the Transneft monopoly.

One industry expert, who spoke on condition of anonymity, said that Transneft was never the real source of support for the Nakhodka pipeline and was only responding to a government order regarding the route in July 2001, about the same time as the Jiang summit. The expert said that much of the push has come from the gas monopoly Gazprom and the state-owned oil company Rosneft, adding, "It's really been their ambitions in the Far East."

In fact, a review of Vainshtock's statements posted on the Transneft website ( shows that he has emphasized the "geopolitical" benefits of the Japan option rather than profits. The term suggests an ulterior motive for engagement, such as a solution to the Kurile Island claims and future relations, rather than economics. Gazprom also wants a role in selling China gas from the region's giant Kovykta field.

Last week in speaking to Reuters, Vainshtock echoed the strategic idea, while remaining studiously vague. He said, "A decision to build a pipeline to the Pacific to solve some geopolitical issues is still possible. But from the economic point of view this pipeline is not profitable."

Strangely, Vainshtock's verdict seems to have done little to douse Japan's enthusiasm. On 11 April, one day after the interview, Russian Deputy Prime Minister Viktor Khristenko told reporters that he had met with Japan's ambassador on the pipeline question, saying, "Japan is demonstrating an extremely high degree of interest." The RIA Novosti news agency quoted unidentified "informed sources" as saying that Japan is willing to provide "unlimited" financial support.

This week, RIA Novosti reported that Khabarovsk Governor Victor Ishaev met with a Japanese delegation, headed by Yoshiro Kamata, president of Japan National Oil Corporation. Kamata said the company and the Japanese government would consider "sizeable credits" for the Nakhodka project. Whether credits would solve the profitability problem remain to be seen.

Although Transneft has argued that one benefit of the Nakhodka line is that it could reach multiple markets, Japan's financing offer suggests that it wants all the oil. There are several possible explanations for Japan's interest in a loss-maker. One is the demand for energy security at any cost. China's official press has predicted that Japan would lose interest in the line after the Iraq war with the return of cheaper Middle East oil. If that forecast is true, it has yet to come about.

A time lag and momentum could account for Japan's ongoing interest. Some officials may still be reflecting prewar concerns. Japan may also see a long-term need for Siberia's resources. Another explanation is Japan's industrial interests, which thrive on official credits for such projects.

Whatever the reason, the race for Russia's oil does not seem to have ended with the Iraq war, and competition could continue whether there are profits are not.