Sunday, 3 February 2013

Asian energy pipelines open fresh markets for Russia

As storm clouds build in Russia’s European energy export market, Moscow is looking more seriously at fostering relationships in East Asia. Russian lacks variety in its exports and needs to ensure its energy can be sold all over the world in case one avenue breaks down.

Many strong nations, Russia included, are realising the Pacific Rim is fast becoming the centre of the world’s economic system and want a share of those spoils.

Towards this goal, Russian President Vladimir Putin sat at a conference table on Christmas day, 2012 watching as the new Eastern Siberia-Pacific Ocean oil pipeline’s second leg was unveiled on Russian television.

The pipeline now officially stretches 4800 kilometres from Russia’s West Siberia oil fields to the port of Kozmino in the Pacific Ocean. The terrain it traverses is sparsely populated, cold Siberian steppe. Pipelines are probably the only economically useful reason Russia would build anything in such inhospitable land.

 The new pipeline’s capacity now tops out at 2.1 million barrels per day, up from half a million before the second leg was completed. It delivers much needed energy directly to the Daqing oil refineries in northeastern China and to plants in Russian Manchuria destined for South Korea and Japan.

There are now three completed pipelines travelling east from Russia, the Eastern Siberia-Pacific Ocean line, Russia-China Crude line, and the Sakhalin I line. With these, Russian oil deliveries to East Asia have quadrupled just in the last two years.

With the completion of the latest pipeline, Russia has the ability to divert about half its current oil and natural gas extractions to the east if it should so choose.

Russia is naturally oriented towards its western edge, and has generally neglected its eastern flank. Yet geopolitical changes are afoot and much more oil and natural gas flows into East Asia these days because the reliability of European purchases is questionable. As new European natural gas deposits come online, there is every possibility that Russia may not have a monopoly over, or even a significant export base, within Europe in the near future.

European-extracted energy will take some years to develop before it hits the market, but given the time it takes to build pipelines and work out contracts with new clients, Russia is acting now rather than later to prepare for those changes.

Both Chinese and Japanese energy requirements are increasing, although South Korea’s appear to have peaked. Whereas in the early parts of the twenty-first century, Asian purchases of Russian energy barely scratched 4% of total energy extracted, Russia now delivers almost 20% of its total oil exports to East Asia, and wants to increase this to 30% over the next five years.

Russia’s reasoning is simple. Slowing demand from Europe is going to be disastrous for Moscow if the trend continues. It is estimated about half of Russia’ government income is generated by its energy exports alone.
Photos: Albert Kalashnikov, the pipeline under construction.

Given that Europe currently buys 80% of Russia’s energy, but is cutting back on imported fossil fuels from Russia, Moscow’s extended run with energy control could be coming to an end.

Ukraine, once a staple importer of Russian energy has often locked horns with Moscow’s state-owned energy company Gazprom over energy prices. And Kiev is already moving quickly to develop its own large deposits of natural gas and will be only too happy to loosen the grip Moscow has on their economy.

It is not only declining imports worrying the Kremlin’s financial department. Fluctuations in oil price, so keenly watched by almost every industrialised economy on the planet, were supposed to stay around US$120 in 2012. But they didn’t. Instead Moscow has had to revise its fiscal outlook to reflect an oil barrel price of US$91, and potentially a drastically lowered US$78.

And no matter how full Moscow’s bank account becomes, some estimates place their surplus at close to US$16 billion, it may need to dip into those savings to offset the declining exports and low oil price and could see that surplus turn into a deficit in short order.

Such changes to Russia’s present economic situation, if they were to happen together, would definitely expose the inherent Russian problem of unfavourable geography. Opening up an alternative energy export route to East Asia at least partly compensates for any loss in Europe and drop in oil market prices.

Political issues aside, opening new energy routes into Asia is unfamiliar ground for each interested country. 

Russia would dearly like the status quo to continue in Europe as it is far more comfortable using traditional routes, and Asian countries have deepening relationships with suppliers in the Middle East and Africa. More intense energy market relations with Russia would take time to foster, but the potential now exists for substantial energy trade between them.

Moscow has spent a great deal of money developing oil fields in the Siberian basin over the past decade. Such a task is not simple when the ground freezes beneath the drill bits and ocean surfaces lock with arctic ice in the harsh Russian winters. Those large investments were made when oil prices were high and demand was steady. Now, with a decline in both, Russian moves into Asia could be extremely important for the health of the Russian state.

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