RussiaProfile.Org: The Other Side of Security

March 22, 2006
By Ian Pryde
Special to Russia Profile
Energy in the East Rarely Receives Enough Attention
Although the December-January pricing spat between Russia and Ukraine focused attention on Europe’s dependence on outside sources of gas, the political/energy security nexus in East Asia has been acute for decades. In the mid-1990s, Kent E. Calder published the book “Asia’s Deadly Triangle: How Arms, Energy and Growth Threaten to Destabilize Asia-Pacific,” referring to an “Arc of Crisis” stretching from the Taiwan Straits, across China and the Korean peninsula to Japan.
Little has changed. China’s energy sources are far from the booming south-eastern part of the country, while Korea, Japan and Taiwan lack significant oil and gas fields, making all of these countries highly dependent on outside sources for their ever-increasing energy needs. Japan has been a major energy importer for decades and long ago turned to nuclear power to reduce at least some of its then-total dependence on oil from the distant and volatile Persian Gulf. China has only been a net importer of oil since late 1993, but its booming economy and rapidly growing consumer sector will ensure that the country’s energy needs grow exponentially.
East Asia’s problems are compounded by the energy-intensive economies of China, Japan, Taiwan and South Korea, whose petrochemicals, fertilizer, plastics and steel sectors require significant inputs of energy. Paradoxically, North Korea also needs a lot of energy, partly because of its own steel and fertilizer production, but also because of its inefficient use of fuels such as coal. Needless to say, North Korea’s energy problems bear directly on issues of security in the area.
South Asia also faces similar difficulties, with India suffering from chronic power shortages and, like China, undergoing a rapid transition to an automobile-based consumer culture piggybacking on strong economic growth.
But it is not just the high and growing demand for energy that makes energy security in East and South Asia so much more problematic than in Europe, where many countries are well-integrated into security and economic organizations like NATO, the Organization for Economic Cooperation and Development (OECD) and the European Union. No such regional networks are really present in East Asia. ASEAN has not achieved anywhere near the same degree of political and economic integration as the EU, and a real security framework is virtually non-existent.
The overall security situation in East Asia is fragile due to the position of three nuclear powers ? China, the United States and Russia ? on relations with North Korea, not to mention the wider security triangle created by China, Japan and the United States over the issue of Taiwan. All of this is taking place in a region where there should be serious concern over arms build-up, with South Korea and Japan having both the technological and financial resources to go nuclear quickly if they desire: Japan’s fast-breeder reactors, for instance, produce ample mixed-oxide plutonium, which can easily be converted into weapons-grade plutonium.
The countries of East and South Asia are therefore likely to compete for energy as their economies continue to grow. At the same time, while maintaining their supplies from the Persian Gulf, all are keen to diversify their energy sources away from the Middle East. This has led to fears in the United States of an Islamic-Confucian alliance and the development by China and Japan of blue-water navies to guarantee the continued flow of oil.
Enter Russia, which is not only a part of East Asia geographically, but also an energy superpower with huge oil and gas reserves conveniently located in Siberia and its Far East. Russia has proven oil reserves of 60 to 68 billion barrels, but President Vladimir Putin has stated on more than one occasion that the reserves are much larger than these figures, and many experts in the industry believe that Russia’s undiscovered reserves could be the world’s largest.
Russia is also the world’s gas “superpower,” with nearly twice the reserves of its closest rival, Iran, and a major producer of electricity from nuclear power. The latter consideration has led Indian Prime Minister Manmohan Singh to state that his country is considering buying nuclear power plants from Russia in the future, a move that would build on the already close ties between the two countries. Grabbing much less attention is the potential for hydroelectric power in Siberia.
At first glance, therefore, Russia’s oil, gas, hydroelectric and nuclear power resources would appear to be the easy solution to many of Asia’s energy problems and the path to reducing their dependence on the Middle East while at the same time enhancing Russia’s geopolitical role on the continent.
But closer examination reveals that the case isn’t so simple. Huge logistic, financial and political problems, not all of them within Moscow’s control, have to be overcome if Russia is to realize its full energy export potential to Asia.
With output recovering in recent years to Soviet-era production levels, Russia has been exporting more oil. The prospects for further increases, however, are heavily constrained, since pipelines are already operating at full capacity, forcing oil companies to resort increasingly to so-called “intermodal” transport ? by railroads and rivers ? which is significantly more expensive than pipelines. In 2005, Russia exported 80 million barrels of oil to China, but all of this was shipped by rail. Rail exports of crude to China are expected to increase by 50 percent in 2006, to 300,000 barrels per day.
Progress on building new pipelines in general, and to East Asia in particular, has been slow. Russia’s policy makers and oil companies have argued in the past over how to increase the country’s oil export capacity, differing both over the routes and destinations of the lines and the respective roles of state and private companies in their financing and construction. This is generally accepted to have been one of the contentious issues between Putin and former Yukos CEO Mikhail Khodorkovsky ahead of his arrest in 2004 and conviction last year, with Khodorkovsky advocating more market-oriented solutions and increased exports to the United States using supertankers loading crude from a privately-financed pipeline terminating at Murmansk.
In the Far East, two pipeline routes have been suggested: one to Nakhodka, on the coast opposite Japan, and one to Daqing, in China. In late 2004, after two years of official uncertainty, accompanied by intense lobbying from the Japanese and Chinese governments, Putin finally announced that Russia would build a pipeline from Taishet to Nakhodka via Skovorodino. One factor in the decision was that Russia wanted to avoid being tied to China, instead looking to maintain the option of exporting oil to the wider Asian market and, perhaps, North America. Keeping all the players in the game, officials from Transneft, the state-owned pipeline monopoly operator, said that a spur could still be built off the main line to run directly to China. Nakhodka is located a mere 20 miles (30 kilometers) from the Chinese border.
The Kremlin and Transneft have since announced that the 2,500-mile (4,000-kilometer) Eastern Siberia Pacific Ocean Pipeline (ESPO) would be built in two stages. The first stage will reach the Pacific coast and include a new export terminal. Russia estimates that the project will cost from $11.5 billion to $18 billion and have a capacity of 1.6 million barrels per day. The Kremlin has made the completion of the first stage a priority, saying that it wants this section finished by late 2008, but major financing problems remain.
Progress is also being made on an eastern pipeline from the massive Kovytka gas field, near Lake Baikal. In contrast to Europe, however, there is no regional gas grid in East Asia, so even with pipelines, Russia cannot easily supply China and Korea with gas. This lack of a regional gas grid means that East Asia relies heavily on Liquefied Natural Gas (LNG) from the Persian Gulf for the bulk of its supplies. As a result, East Asia is far less dependent on natural gas in its energy mix than Europe and the United States. This is despite the proximity of major gas reserves, and the efficiency and environmental friendliness of gas as an alternative to petroleum.
The future of Russia-China gas pipelines remains vague at this stage. Routes to South Korea have been proposed, but most would, of course, have to traverse the Korean peninsula, which is currently impossible given the political division between the North and South. However, an international feasibility study in 2003-2004 on the Kovytka field concluded that for $12 billion, a?3,000-mile (4,887-kilometer) pipeline could be built running under the Yellow Sea to South Korea, thus bypassing North Korea. Little in the way of concrete planning has come out of the study.
The six Sakhalin projects, identified, simply enough, as Sakhalin I to Sakhalin VI, however, are conveniently located on the island of that name, just off Russia’s eastern coast and north of Japan. These are much closer to East Asian markets than the oil and gas reserves of distant Siberia.
The projects at Sakhalin I and II are currently well underway; drilling at Sakhalin I began in May 2003, and planned total investment over the project’s lifetime is estimated at $12 billion. With development led by Exxon-Neftegaz, Sakhalin I holds estimated oil reserves of 2.3 billion barrels and 17.1 trillion cubic feet of gas. Onshore processing facilities are already in place, a gas pipeline is currently under construction, and commercial gas production is expected to commence in 2008. Both Sakhalin I and II are expected to export LNG to the United States, and Sakhalin II, where development is led by Shell, Mitsubishi and Mitsui, has been producing oil since 1999. Approximately $20 billion is due to be invested in Sakhalin II over the next four to five years, following up on the $4.5 billion invested during Phase I of the project. Phase II is expected to start year-round oil production by December 2007, with a daily output of 180,000 barrels. LNG production is slated to begin in summer 2008.
The remaining Sakhalin projects are promising, but remain in the preliminary stages.
http://www.russiaprofile.org/business/2006/3/22/3458.wbp