Analysis: Hardly seems that a century has passed since the trans-Siberian Railway was completed. The 12-year project was the right idea, but it came at the wrong time. The railroad tied together the vast territory of czarist Russia, but was one factor that precipitated the Russo-Japanese War in 1904.
Apparently this century is off to a better start, at least on the surface. Japan and Russia, who never formally signed a peace agreement after the 1904 to 1905 conflict, are talking about cooperating on a 2,500-mile, $5.7-billion, one-million-barrels-per-day oil pipeline that would tie reserves in the Irkutsk region of Siberia to the Pacific Coast port of Nakhodka. From here, petroleum could be exported to Japan, South Korea, or even the United States.
Though hidden in the back pages of most trade publications, the January announcement that Japan would finance a major portion of this trans-Siberian pipeline was an intriguing first step in defining an evolving future for the global oil and gas industry. The event has implications for oil development in Central Asia, China, and provides a potential, if temporary, alternative for the premier source of future crude reserves, the ever-unstable Middle East.
But a lot must be done before the trans-Siberian project becomes reality. A witch's brew of troublesome issues simmers beneath the surface that could prove to be as daunting as that attempt one hundred years ago to provide rail transportation across the Russian subcontinent.
For one, there is the continuing fractious relationship between the large Russian oil companies and the Russian government.
At the center of the dispute is Transneft, the state-owned monopoly responsible for most of Russia's pipeline system. It controls transportation and levies fees for all but 400,000 barrels per day of Russia's nearly eight-million-barrels-per-day production.
Chafing under the control of Transneft are the formidable Russian oil majors who are pursuing their own programs to increase export capacity, arguing that the existing Transneft pipeline framework is at capacity. The Russian majors are pressuring the government to expand the system on the one hand, or on the other hand to permit the companies to build their own rival projects.
Without an export outlet, Russian crude is forced back onto the domestic market, which is currently oversupplied and characterized by prices as low as $4 per barrel versus a world price of about $30.
Yukos has been promoting a separate crude oil export pipeline to China. A consortium of Russian oil giants also proposed a deepwater terminal at Murmansk last summer to export oil to the United States. This terminal would draw west Siberian oil through a 1,860-mile, $2.5-billion pipeline. The project faces a number of practical, governmental, and financial hurdles and is unlikely to be a factor anytime before 2005.
Transneft opposes the Murmansk project and the Russian government has not formally agreed to the concept. Reportedly, the government intends to assert control over any new pipeline that rivals the Transneft system.
The snit between the public and private sectors has other repercussions. A proposed Yukos pipeline to Daqing in China is on hold, having received the cold shoulder when the Japanese prime minister went on record as willing to financially support the Russian government's concept of a trans-Siberian pipeline to the Pacific coast.
That is not to say that a pipeline will never be built to China. So far, both Russia and China have agreed to conduct a feasibility study for an alternative route connecting the two countries. The $1.7-billion pipeline would ferry 400,000 barrels per day of oil to China beginning in 2005, which is about one fourth of China's imports. Capacity could expand to 600,000 barrels per day by 2010.
Despite the bilateral agreements, problems remain. Russia prefers a shorter, less expensive route through Mongolia. The Chinese want to bypass Mongolia for security reasons, which adds 105 miles--and additional costs--to the project.
Meanwhile the Far East is on the verge of an explosion in energy demand. China's passenger car sales exceeded 1.1 million in 2002, a 50 percent increase year over year, and sales are expected to grow at 10 to 20 percent for the foreseeable future. The country has placed its economic future in the hands of an energy-consuming manufacturing sector, which is cranking out goods for consumer nations globally.
China has little chance at energy self-sufficiency. It imports 40 percent of its crude oil now and will eventually resemble Japan in its importation profile in another 40 or 50 years.
Where will that oil come from? Make no mistake, the Middle East is the treasure trove of global crude oil reserves and every nation who wants oil for economic growth in the next half-century will find itself drawn inevitably to the Middle East.
But there are alternatives between now and then. Up to 20 billion barrels of recoverable oil resides in the Caspian Sea region, bordered by Azerbaijan, Turkmenistan, Kazakhstan, Russia, and Iran. Meaningful production is expected to begin flowing toward world oil markets by 2005--assuming additional pipeline export options work out.
Previously, the Caspian had been the major focus of the 21st century's great game: the rush to develop alternatives to Middle Eastern crude reserves. Ultimate reserves could rise above 200 billion barrels, providing a global contribution equivalent to the North Sea. But work on pipelines has been problematic at best.
Do they go east through the politically troublesome Caucasus, west through Afghanistan, or south through Iran?
Plus the Caspian region is infected with a variant of political turmoil that may grow to rival that of the Middle East. Even existing programs have proven problematic. The Tengizchevroil project, clearly the most successful in the region, foundered during the fourth quarter 2002 over a dispute involving taxes. Essentially, the operators wanted to pay off existing governmental debt out of revenues while the governmental partner refused to go along, miffed at a loss of up to $600 million in tax revenues over the next three years.
The word right now is that the problem is settled, but no one is clear about the details, including the participants. Furthermore, the ongoing boundary dispute between the five nations surrounding the Caspian has yet to be resolved, which will retard development further.
Lastly, add a large dose of geographic isolation to the political uncertainty and it is easy to understand why costs to produce Caspian oil run as high as $10 per barrel.
Contrast the situation with Russia where 2002 oil production rose 8.7 percent, one of the best track records globally. Ostensibly, the major hurdle facing the Russian republic is getting its oil out of the country. It is telling that the United States championed the Caspian during the mid-1990s as a future bright spot in global oil production. Now similar rhetoric is addressed towards Russia, the world's second largest petroleum producer after Saudi Arabia.
Both are generating about eight million barrels per day, though most Saudi production is destined for export, while a little more than half of Russian production finds its way into the global market.
For perspective, it is important to remember that both Russia and the Caspian region represent potentials rather than realities on the supply front. As for demand, there will be a subtle shift in gravity towards the Far East as the 21st century evolves.
So imagine a future where oil is shipped globally from all sides of the Eurasian continent. But be bolder yet. Consider the evolution of gas in North America. It is peaking in the U.S. Initially, Canadian and deepwater production will provide a decade-long bridge before gas must be imported from the Arctic. And when Arctic gas runs low, it is not inconceivable to envision extending the North American pipeline grid over the top to the abundant gas reserves in Russia and Central Asia.
This is a far-fetched concept, to be sure. But so, too, was the trans-Siberian railroad in its day.
Associate Editor: Robin Beckwith
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