THE ASAHI SHIMBUN (Japan): Despite the boom times, is Russia really ready to go it alone?

02/21/2007

BY IZURU YOKOMURA

ANGARSK, Russia–Oil has been good to this riverside city, nestled deep in the heart of southeast Siberia.

From humble beginnings just a little more than half a century ago, the city is now awash with oil rubles.

Construction is booming. A new glass-walled high-rise that houses Transneft, the state-run oil pipeline giant, glistens symbolically in the downtown area.

Within that building lies a force driving even further growth for the wider Irkutsk region: the Project Management Center (PMC) of the ambitious East Siberia-Pacific Ocean (ESPO) pipeline project.

Signed off on by Russian President Vladimir Putin in 2005, the project will see the construction of a pipeline linking the Russian hinterland with China and the Sea of Japan.

For energy hungry China, and Japan, too, the pipeline is expected to emerge as a major oil supply route.

The first phase of the project involves building a roughly 2,600-kilometer pipeline between Tayshet, northwest of here, and Skovorodino, near the Chinese border, where it will join with a local Chinese pipeline. Operation is scheduled to start by the end of 2008.

The second phase, slated for completion by the end of 2012, will link Skovorodino to Kojimino Port near Nakhodka on the Sea of Japan.

Between 2008 and 2012, oil will be transported from Skovorodino to the coast via the Trans-Siberian Railway.

Back in the PMC office in Angarsk, telephones ring constantly while the fax spits out updates from a pipeline construction site some 360 kilometers northeast of Tayshet.

Despite temperatures up there as cold as minus 40 degrees, a PMC executive Sergey Sergeev says construction is proceeding smoothly.

“Last week, we constructed 4 km of pipeline per day on average. It was our new record,” he states proudly.

Officials at Transneft’s headquarters in Moscow are also keen to trumpet the project.

“The future of Russia, which has abundant natural resources, depends on whether this project will succeed or not,” says Sergey Grigoriev, a vice president at Transneft, the parent organization of PMC.

Keen to accelerate construction, PMC hired about 4,000 retired workers at wages more than twice the national average.

Despite the enthusiasm, there are very real concerns over whether enough oil can be secured to feed the pipeline.

When Transneft starts operation of the pipeline at the end of 2008, it will have access to about 30 million tons of oil annually, most of which will come from the Verkhnechonskoye oil field in Irkutsk region.

Another 50 million tons of oil will be needed annually when the second phase is completed in 2012. The problem is, no one quite seems to know where that will come from.

“Oil field development in Eastern Siberia alone will not be sufficient to meet the increased demand,” says Sergei Fyodorov, a policy director at Russia’s Ministry of Natural Resources. “The shortfall of oil will need to be supplemented with fields under development in Western Siberia.”

But according to some analysts, oil production in Western Siberia is already nearing its peak.

On top of that, there are also misgivings about Russia’s ability to pull off the project single-handedly.

In October last year, Gazprom, Russia’s state-run natural gas extractor, which enjoys an almost total monopoly, announced it was terminating all negotiations with foreign-based companies over joint development of the large-scale Shtokman gas field in the Barents Sea in the Arctic Ocean north of Russia and Norway.

Gazprom officials said the company felt more confident going it alone.

The mind-set is one not uncommon in Russia, where the abundance of natural resources is apparently empowering the country’s leadership.

Repeated hikes in oil and gas prices have helped boost annual economic growth by 6 to 7 percent since 2003.

That has enabled the country to pay off its debts to the International Monetary Fund ahead of schedule. Last year, Russia’s foreign reserves totaled more than $270 billion (about 32 trillion yen), ranking it third behind China and Japan.

As noted by Transneft’s Grigoriev, Russia did not need to seek overseas financial assistance for the ESPO pipeline project.

Thus emboldened, Moscow decided to increase its control in the Sakhalin II natural gas and crude oil development projects off Sakhalin island, north of Hokkaido.

But more state control could backfire, say analysts.

For example, Moscow in mid-November imposed special import tariffs on Japanese pipes as a way of protecting domestic pipe makers involved in natural resource development projects in Eastern Siberia.

According to experts, Japanese piping technology is such that pipes can easily withstand Siberia’s frigid conditions. They also say that domestic manufacturers have a lot of catching up to do.

Pumping oil to the surface through frozen soil requires highly specialized technology that only Britain can provide, according to the president of a local oil company, who asked not to be identified. Government restrictions on such imports could harm the industry.

In late November, the Organization for Economic Cooperation and Development cited in its report growing international concern about Russia’s ability to provide natural resources on a stable basis. It urged Moscow to improve the environment for foreign investment.

Should foreign investors turn their backs on Russia, the bottom could fall out of the economy.

Kazakhstan is also feeling the benefits of rising oil prices, sustaining high economic growth.

Like Angarsk, the central Asian country’s new capital, Astana, is undergoing a major construction boom fueled by oil dollars.

A huge China National Petroleum Corp. billboard towers over the highway connecting the new airport with downtown. The same road leads to the headquarters of the state-run gas and oil company KazMunaiGaz.

“The sight represents the current status of this country,” said Shoichi Ito, a researcher of the Economic Research Institute for Northeast Asia, adding that during his latest visit, a heightened overseas presence was unmistakable.

According to Kazakh President Nursultan Nazarbayev, the country’s economy is expected to expand by 3.5 times within the decade.

Despite the boom times, Ito said Kazakh attitudes to foreign companies are still riddled with suspicion.

At the end of 2005, for example, China completed a 1,000-km pipeline connecting Atasu, south of Astana, with Alashankou in the Xinjiang Uyghur autonomous region in western China.

Soon after, oil started to flow to China from a Kazakh oil field that had been placed under Chinese control.

But in late November, Kazakhstan’s Energy and Natural Resources Minister Vahtiodja Izmokhammedov abruptly suspended further Chinese oil field purchases. No reason was given for the suspension.

As Kazakhstan prospers, it seems increasingly keen to retain control over its natural resources. For example, parliament revised the underground resources law in October 2005 for that purpose. Ito says this smacks of growing resource nationalism in Kazakhstan.(IHT/Asahi: February 21,2007)