$2.5 Billion Russian-Chinese Oil Pipeline Takes Precedence Over Russia-Japan Project

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). Insiders at the World Gas Conference in Tokyo have been wondering what Junichiro said to Vladimir at the G8 summit in Evian, France when he heard that the Russians had decided on building a $2.5 billion oil pipeline to China and put the proposed 3,800 kilometer pipeline from Russia to Japan on hold indefinitely. At the same time as he had been turning off the Japanese oil spigot, Vladimir had been very cosa nostra with Silvio and promised that the Italians could count on an increase in their supply of Russian gas. Italy currently imports about 28.5 billion cubic meters of Russian gas annually under long-term import contracts.

The agreement between Russia and China was signed by Yukos (LSE, Frankfurt :YUKOY) (Moscow, Russia) CEO Mikhail Khodorokovsky and CNPC (China National Petroleum Company) president Ma Fucai during a state visit to Russia by Chinese president Hu Jintao. The contract will run to 2030.

CNPC has agreed to purchase up to 5.13 billion barrels of Russian oil between 2005 and 2030 at a cost of around $150 billion. The oil will flow through the pipeline stretching from Russia's Siberian oilfields to the northern Chinese city of Daqing. The pipeline will go from Angarsk in western Siberia to Nakhogka on the Sea of Japan (a name disputed by South Korea). From the Nakhogka terminal there will be a 2,400 kilometer line through to Daqing. The Chinese are playing the project as a Chinese-Russian pipeline whereas there is some discussion in Moscow as to whether the Russian pipeline ends at Naghogka and then becomes a Chinese pipeline.

Yukos have also signed a separate agreement with CNPC for the supply of six million tons of crude to China between 2003 and 2006. This oil will be transported by rail.

Meanwhile, the Japanese, having been told that the Irkutsk pipeline was off, at least until the Russians found more oil reserves and have fulfilled their contracts with the Chinese, continue to secure long term supplies of LNG. Reports coming out of the Russian oil industry indicate that new reserves could be available in the northeast sooner rather than later. So, Japan may be offered a Russian oil deal well before the Chinese contracts have run their course.

Speaking at the World Gas Conference in Tokyo, Kunio Anzai, chairman of the Japan Gas Association said that currently Japan has a dominant share of the world's LNG trade representing about 50% of total global volume. Anzai said that natural gas represents about 13% of Japan's primary energy demand and there was much room for the market to develop. For example, Japan's gas industry association is pushing to have one million natural gas vehicles on the road by 2010, compared with the current 16,000 vehicles.

A liberalization of regional commodities markets could be fostered by Asian gas demand, said Anzai. The need to transport LNG and natural gas via shipping and pipeline routes should boost commodity trading activities between Japan, China, South Korea, Taiwan and the Philippines and among supplier nations, he said.