CHINAS FUTURE OIL SUPPLY SQUEEZED BY YUKOS CRACKDOWN


2003.11.06
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Beijing left in dark over Moscow's intentions

A crackdown by the Russian authorities on the country's biggest oil company may have an impact on China's ability to meet its rapidly growing energy needs in years to come, RFA reports.

China�struggling to keep up with soaring oil demand�had hoped to make Siberian oil reserves one of its major energy sources for the next 25 years, and was in the process of negotiating a US$2.5 billion pipeline with the Russians.

But the arrest of the head of Russia's largest oil company, Mikhail Khodorkovsky, on Oct. 25 on seven charges including tax evasion and fraud, may have scuppered negotiations, which were already delayed by Tokyo's proposals for an alternative pipeline to serve Japanese energy needs. There are not sufficient reserves in Siberia for more than one pipeline.

"This may prove to be the final straw on a catalogue of events of the Russian government, [which] for this reason or that reason, is just procrastinating," Philip Andrews-Speed, China energy expert at Scotland's University of Dundee, told RFA.

"I think the Chinese are likely to say, this may come through one day but not at the moment, let's look in other directions for the short term."

Experts said it was still unclear whether Khodordovsky's fall from grace would have a direct impact on a US$150 billion import deal that the state-owned China National Petroleum Corp. (CNPC) signed with Yukos during Chinese President Hu Jintao's visit to Moscow in May.

But they said Beijing was growing angry and frustrated at the lack of transparency in dealings with Russian officials and oil executives.

"I think they will feel betrayed. I think it's all been done in very bad faith from certainly the Chinese perspective," Fiona Hill, a senior fellow at the Brookings Institution in Washington, told RFA's special correspondent Michael Lelyveld. "The [pipeline] deal has dragged on much longer than they were anticipating."

Yukos was the main champion of the proposed Siberian pipeline to the northeastern oil city of Daqing. China had intended to rely more heavily on Russian oil, which currently accounts for just five percent of its oil imports, which have soared in recent months on the back of a sharp rise in private auto sales.

"They thought [Yukos would be] a little more transparent in their motivations, a commercial venture," Hill said. "Now, it clearly seems that... the principal players involved are to a large extent at the mercy of the whims of people in the Kremlin, and perhaps the whims of narrow personal interests rather than the strategic interests of relations between the two states."

The Yukos scandal is the latest in a long line of difficulties for China's attempts to secure energy supplies from Russia. Initially, Russia delayed the pipeline contract, citing strategic concerns that it would be controlled by a private company. Later, it paused to consider Tokyo's proposals, when Chinese negotiators regarded the deal as settled. And in September, Russian Prime Minister Mikhail Kasyanov said on a visit to Beijing that Russia would need a few more months to resolve environmental concerns.

Even pledges of increased rail imports to China have been thrown into question because of the seizure of Yukos' shares and the review of its operating licenses. Russian equity analysts say it is currently impossible to predict whether the shares would be reappropriated by the state, and if the company would continue to exist in its present form.

Experts say Khodorkovsky's run-in with the law may stem from shady privatization deals in the mid-1990s, which gave birth to Russia's existing oil companies. But they argue that the government seemed content to overlook past practices until Khodorkovsky posed a political challenge to President Vladimir Putin.

The Russian press has attributed the crackdown on Yukos to a powerful group of former intelligence agents that Putin brought into government from his days in the KGB.

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