by Michael Richardson

16-11-06

As oil exports start to flow to India and other parts of Asia from a new field near the Russian Pacific coast, can the region count on Russia as a reliable supplier of energy?
Russia is a key player in the energy game because it is the world's largest exporter of natural gas and the second-biggest oil exporter after Saudi Arabia. It also has the potential to become an even bigger supplier to other countries.

The energy outlook for Asia and the Pacific will unfold a bit further when Russian Prime Minister Mikhail Fradkov arrives in Beijing later this month on a scheduled visit. He will do so amid signs that Moscow is seeking to enhance its power in Asia by offering to meet an increasingly large portion of the region's rapidly growing demand for energy.
However, it is China that seems most likely to become the main partner and beneficiary of Russia's Asia-Pacific strategy. This will cause consternation in Japan just when its new leader, Prime Minister Shinzo Abe, is trying to reassert Japanese influence in the region.

The United States, too, will be concerned that the energy security of its key Asian ally is being undermined while China is being promised much bigger long-term supplies of Russian oil and gas. Europe is also likely to worry that future Russian energy sales in Asia will be at the expense of supplies to the European Union.
Japan's ties with Russia are bedevilled by an unsettled territorial dispute that dates back to the end of World War II. By contrast, China and Russia closed a long chapter of Cold War enmity in 2004 when they resolved remaining issues and signed a border treaty. Political, military, trade and investment ties are expanding fast and Mr Fradkov will be aiming to make them stronger still when he visits Beijing. Both Russia and China have said they want to counterbalance the power of the US and its allies.

Russian President Vladimir Putin pointedly told a group of Western journalists and academics in September that relations with China were at their best ever, and that conditions were now in place for keeping them at this level for a long time. He added that Russia plans a massive increase in its energy exports to Asia by selling 30 % of its oil and gas to the region in 10 to 15 years, compared with 3 % today.
Is this an attempt by Moscow to use Asia as a bargaining chip in its dispute with Europe over the terms on which Russia supplies vast quantities of gas to the continent and gains access to its energy industry? Perhaps in part. But Mr Putin himself noted that economic activity was moving from the Atlantic to the Pacific and that Russia, which has about two-thirds of its territory in Asia, wanted to take advantage of this.

Several recent developments suggest that Russia is serious about strengthening ties with Asia, chiefly with China, and using its abundant energy reserves as leverage to gain greater economic and political influence. Two multi-billion-dollar oil and gas fields being brought into production by mainly foreign producers off Sakhalin Island in Russia's far east have run foul of Russian regulators.
This is widely seen as part of an attempt by Russian state-owned oil, gas and pipeline construction monopolies to take control of energy reserves and distribution networks in Siberia and the Pacific coast in preparation for government-directed sales to favoured customers in Asia. For the ExxonMobil-led Sakhalin-I project, this happened just as its first oil exports were starting.

Japan's new leader, Mr Abe, has warned that forced contract changes or delays in the second of these projects, known as Sakhalin-II, will have “negative repercussions on the whole of our relations with Russia”.
Japan's electricity utilities have signed long-term contracts with this Shell-led project on Sakhalin Island, which is immediately north of Japan, to deliver gas equal to about 10 % of Japan's total needs, starting in 2008. Mitsui and Mitsubishi, two of the country's largest trading companies, own 25 % and 20 % respectively of the project, being built at an estimated cost of $ 20 bn (S$ 31 bn).

Meanwhile, China, too, is keen to lock in pipeline supplies of both oil and gas from Russia, which has the world's biggest natural gas reserves and the eighth-largest oil reserves. Last year, China imported nearly 13 mm tons of crude oil from Russia, or just over 10 % of total imports. This ratio has been rising steadily since 1999, when imports of Russian oil were negligible.
Russia is now China's fourth main source of foreign oil, after Angola, Saudi Arabia and Iran. Sales would be growing even faster if they did not have to rely so much on Russian rail transport, which is expensive. Mr Putin indicated that building new oil and gas pipelines to China over the next few years would intensify shipments.

This sounds like music to Chinese ears. But Russia has a history of failing to deliver on some of its energy promises. Oil sales to China this year are unlikely to be more than 11 mm tons, 4 mm tons less than projected. Many of the oil and gas reserves believed to be in Siberia have yet to be proven. And Moscow still has not made it absolutely clear whether the pipeline being extended eastwards from Taishet in Siberia will first carry oil into China, or to Japan and other customers via an outlet on the Pacific coast.
At this point, however, China appears to be the likely winner.

The writer is a visiting senior research fellow at the Institute of Southeast Asian Studies. This is a personal comment.