China Mulls Pipeline-Rail Combination for Russian Oil


2004.04.14
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Beijing hasn't officially scrapped a deal with Russia to build a crude oil pipeline that would meet much of the country's projected energy demand — ; and it plans to build a pipeline to the Russian border even if a proposed rail link goes ahead. But experts have told RFA China may now be seeking to make the best of what's on offer.

"As time goes by, China is more eager to get some kind of oil. So this railway is being built up to 300,000 barrels per day or 15 million tons per year," Kang Wu, an energy expert at the University of Hawaii's East-West Center, said.

"That, indeed, partially solves the problem of the Daqing crude production declining and those kinds of issues. I think China is somewhat satisfied, not fully satisfied, but somewhat happy with this solution."

Wu said a pipeline would mean a more permanent commitment to China, while rail shipments can be stopped any time. Although some Chinese officials have suggested that there could be serious diplomatic consequences if Russia fails to honor its pipeline pledges, Wu said Beijing now seems ready to take what it can get.

On April 8, China's Foreign Ministry spokesman Kong Quan urged completion of the pipeline project from "as early as possible." But officials have also acknowledged on several occasions that Russia has now turned its attention toward Japan if a pipeline is to be built at all.

"I think they've probably had to have seen the writing on the wall for the past few months," said Jason Feer, bureau chief for the industry weekly Petroleum Argus in Singapore. "The Russians have been pretty clear that their preferred option had become a pipeline into the Pacific. But the Chinese are anxious to diversify their slate of imports, and... this is obviously a blow to their strategy."

"If you were going to compare it to the economics of long-haul tanker shipping or if you were going to compare it to how much it would cost just doing it via pipeline, the economics aren't that favorable," Feer said. "But it accomplishes what the Chinese and Russians are looking to accomplish in the short term."

Russia promised to build a 2,400-km pipeline to China when the two countries signed a 20-year friendship treaty at a Moscow summit in July 2001. The project was supposed to have started last year. But since then, Russia has shown greater interest in building a 4,000-km line to the Pacific Coast for shipping its limited amount of East Siberian oil to Japan.

Instead of pursuing the pipeline project for China, Russia has now agreed to deliver greater amounts of oil to the Chinese border by rail. Last month, the Russian oil company Yukos reached agreement with Russian Railways to increase supplies fivefold, rising from about 3 million tons last year to 15 million tons in 2006, or 300,000 barrels per day.

While the deal would mean a huge increase in rail shipments, it would still be less than one-sixth of the amount of oil that China imported last year. The pipeline that Russia promised would have carried twice as much oil as the railway at a lower transport cost.

Feer said Russia might see the rail-link agreement as a way of keeping China engaged, without a major commitment such as a pipeline. Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said that shipping so much oil by rail is so inefficient that the motives were unlikely to be economic.

"Moving 300,000 barrels of oil a day by rail over such long distances, to me, I just wonder whether they're going to make any money on it, or whether it's more political rather than economic," Ebel said.

Ebel said that Russia seems to be wary of making a permanent commitment to China on the one hand and worried about losing influence on the other.

"We could be moving from economic problems into political problems. China's beginning to try to develop some influence in Central Asia, and that may not set too well with the Russians," he said.

The pipeline from China's northern rail crossing near the Mongolian border at Manzhouli would run some 700 kms to Daqing, where production has been declining sharply at the country's oldest oilfield. Yukos is also supplying smaller amounts of oil to Chinese refiner Sinopec through Mongolia by rail.

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