Japan and China battle for Russian oil supplies

Energy-hungry Asian rivals China and Japan are locked in a fierce struggle for supplies of Russian crude, allowing Russia to bargain hard as it chooses where to build a pipeline from its Siberian oil fields.

After a decade of patiently courting Russia to build a US$2.5 billion, 2,400km pipeline from Angarsk to the northeastern Chinese city of Daqing, China is facing a determined last-ditch challenge from its neighbour.

Prime Minister Junichiro Koizumi pushed Tokyo's case for a more expensive 4,000km route to the Russian Pacific port of Nakhodka, on the Sea of Japan, when he met Russian President Vladimir Putin last week on the sidelines of the APEC summit in Bangkok.

"The odds of the Japanese pipeline are improving. There is a lot of recent political momentum for the Nakhodka route. Japan keeps coming back to the table and increasing its offer," commented Paul Collison, oil and gas analyst at Brunswick UBS brokerage in Moscow.

In their latest move, the Japanese offered to finance the entire US$5 billion cost of constructing the Pacific pipeline and provide another US$2 billion to develop untapped oilfields in eastern Siberia.

Keen reduce its reliance on the volatile Middle East for its oil needs, Japan argues that the Nakodkha route would also be a strategic asset for Russia, allowing it to export to other Asian countries and perhaps the US West Coast.

That has struck a chord in Russia, where suspicion of China and its booming export-driven economy remains strong, fanning fears of mass Chinese immigration into the resource-rich but sparsely-populated Russian far east.

Sergei Grigoriyev, deputy president of state-owned Russian monopoly pipeline operator Transneft, which has lobbied for the Nakhodka pipeline, told reporters: "We can get immediate dividends from choosing the Chinese route, but we will be tied to one country and find ourselves at the whims of their policy."

From a strictly commercial standpoint, the cheaper and shorter Daqing pipeline would be far more profitable as it needs only to transport 30 million tonnes (600,000 barrels) of oil a year to be economic. The top Russian oil producer Yukos has backed the project.

The Angarsk-Nakhodka pipeline, in contrast, would need to carry at least 50 million tonnes to be viable, and this capacity does not exist currently.

Yet on a trip to Beijing last month, Russian Prime Minister Mikhail Kasyanov stunned his Chinese hosts by announcing that Moscow had decided to postpone an agreement on the Chinese route.

A final decision is now expected at the end of this year or early next year.

"The Japanese are very interested. It's no secret that we are in active negotiations with them because they have said they are ready to finance the cost. We cannot afford such investments," Russian Energy Minister Igor Yusufov told foreign journalists recently.

"Our oil from that region is more competitive than from the Persian Gulf," he noted.