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Moscow is now facing the moment of truth with regard to the Eastern Siberian oil pipeline
Russia produced more than 302.61 million tonnes of oil between January and August, turning out 9.37 million barrels of oil per day in August alone, a record since the collapse of the USSR. Last year's daily output volumes stood at 8.3 million barrels. Russia's Industry and Energy Minister Viktor Khristenko is positive that national companies will produce more than 450 million tonnes of oil before the year is out (a 7% increase on 2003). The minister said the increment, which is set to reach 260 million tonnes by the end of the year as exports increase by 10%, would be used for exports alone. Therefore, present Western accusations that Russia is responsible for rocketing oil prices hold no water. All the leading Russian oil companies have considerably expanded production. Despite the arrest of its former CEO Mikhail Khodorkovsky, Yukos is no exception, producing a record 1.72 million barrels per day (an 8% increase). However, the state must overhaul existing pipelines and build new ones, if it wants to export more oil. According to Mr Khristenko, the nation's pipeline infrastructure is currently operating at capacity. As far as long-term prospects are concerned, the following three export-orientated oil pipelines could rectify the situation: 1) The Baltic pipeline network with a current annual throughput capacity of more than 40 million tonnes. Plans are in place to boost its capacity to 62 million tonnes. 2) The northern or Murmansk project, which would eventually pump up to 50 million tonnes to the Barents Sea's ice-free ports. The concerned parties are choosing an optimal pipeline route and compiling a feasibility study. 3) The Eastern Siberia - Pacific Ocean project with an initial capacity of 50 million tonnes, later rising to 80 million. The feasibility study is now being analysed. The Eastern Siberia - Pacific Ocean follows the Baltic pipeline network in termsof its significance and state of readiness. It is a new pipeline, whose third (final) stage is currently being completed, that fundamentally changed the situation with Russian oil exports on the Baltic. Yukos was one the companies behind the construction of the pipeline, which was originally planned to follow the Angarsk - Daqin (China) route. Yukos and China signed a letter of intent in mid-2003, with the Russian company undertaking to sell 700 million tonnes of crude oil to China over 25 years. The company even drafted a feasibility study and coordinated the document with its Chinese partners. However, Prime Minister Mikhail Fradkov recently announced that the state would retain control over Russia's oil pipelines. He stressed that the available national transport infrastructure was a major competitive advantage. The premier referred to pipelines as "the goose that lays the golden egg", which means the state alone can decide how, where and when pipelines can be built. It seems that Yukos overlooked this circumstance, when it signed its contracts with China. The company's Chinese project was rejected for several reasons, including environmental safety considerations. The Angarsk-Daqin pipeline was to have passed along Lake Baikal's southern shore, crossing numerous rivers that fall into the gigantic lake. However, Lake Baikal is a UN world heritage site as the world's largest freshwater reservoir that has its own biosphere. The state's geo-strategic interests, though, proved to be the main reason for abandoning the Angarsk-Daqin project. Russia has been looking to the Asia-Pacific region's markets for some time. China, Japan, India and other countries rely heavily on fuel and energy imports, while their growing demand for oil has a huge influence on the global market situation and is largely responsible for the current record prices. A pipeline linking Eastern Siberia and the Pacific coast would allow Russian oil exports to Asia-Pacific countries and America's West Coast. However, the Angarsk-Daqin pipeline would have catered to a single client, albeit a large one, eventually making Russia dependent on Beijing, to some extent. Therefore, while taking its economic security into account and the desire to diversify oil exports, Russia found a new route to the Pacific. The pipeline, whose plans technical and environmental experts have already studied, will link Taishet with the port of Nakhodka. Public discussions have been organised in the Russian territories where the pipeline will be built. The 4,200km pipeline will feature 30 large compressor stations and two smaller compressor stations in Taishet (Irkutsk region) and Nakhodka. In addition, there will be 14 terminals with oil reservoirs, dozens of smaller industrial facilities, bridges, highway junctions, industrial towns, etc. It is clear that the new pipeline will pass to the north of Lake Baikal, subsequently heading through the relatively densely-populated area of the Baikal-Amur Mainline, which is the Trans-Siberian Railway's reserve track. The designers' greatest concerns were that the new pipeline would have to be constructed in an adverse engineering and geological environment. The local taiga is notorious for its earthquakes (sometimes measuring 10 on the Richter scale), while other obstacles include vast permafrost stretches and landslide-prone areas. According to experts, 50% of the future pipeline's route will run through dangerous areas susceptible to floods, land and mud slides avalanches, etc. The area is also prone to fires. Builders will have to cross dozens of rivers, including the Angara, the Lena and the Vitim. If the projected route is more or less clear, then there are still doubts as to where all the eastward bound oil will be produced. Proven regional deposits must be studied in greater detail, their deposits confirmed and their mid-term prospects assessed. The ambitious, albeit regional, projects, will require $3 billion to complete. As Russian oil companies spent about $2 billion on national prospecting operations last year, project operators will need substantial foreign investment. Russia's proven deposits are limited and account for 8-9% of the world's total deposits. Experts say that Russia is unlikely to discover any large deposits, while its main ones will be depleted by 2010. Today, 55% of the country's deposits are difficult to develop and so are more expensive. Financial issues still remain to be settled. Former energy minister Igor Yusufov said a year ago that this project would require $5-6 billion. The top management of Transneft, which will be constructing this pipeline, now estimate it at $12 billion. The project's recoupment period will also almost double. Greater project costs will entail higher tariffs on pumping, which companies could pay given the current high prices. However, one can only guess what will happen tomorrow if prices fall. The new project's authors did not overlook China. As pipelines run from Daqin deep in China, it will be included in the route, if there is enough oil. Mr Khristenko and the Chinese leadership had discussed the situation with the Eastern Siberian pipeline in Beijing in late August. The minister noted, though, that the Russian government could start officially examining this project only after its environmental and technical expert checks had been completed. He believes these may take about six months, but any discussion of the Chinese route cannot begin before that. However, the minister stressed that the Russian route was a purely domestic affair. At the current stage, Russia will export additional oil batches to China along the Trans-Baikal railway, with trains hauling 15 million tonnes of oil next year (2004 volumes are estimated at 6.5 million tonnes). A railway modernisation project has already received ample investment. Given that no decision has been taken on the pipelines, there does not seem to be any alternative for oil exports to China. Mr Khristenko made it clear in Beijing that the Russian government was merely creating favourable conditions for the implementation of inter-state energy co-operation. At the same time, Russian and Chinese companies are supposed to clarify delivery issues, export volumes, deadlines and prices. Moscow is now facing the moment of truth with regard to the Eastern Siberian oil pipeline. The concerned parties should analyse the pros and cons. No one knows what the ultimate decision will be, but one thing is obvious: Not a single major energy project has been studied so painstakingly and meticulously in the history of modern Russia. The stakes are just too high.
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