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Thursday, September 23, 2004

AN OPPORTUNE TIME FOR A SUMMIT: CHINA'S WEN VISITS MOSCOW TO TALK OIL

When Chinese Prime Minister Wen Jiabao travels to Moscow today, energy issues are likely to take center stage. Obviously the Yukos deliveries question hangs in the balance. September 28 is set to be the last day that Yukos says it can pay the rail freight to send the promised 81,400 bb/d of crude to the China National Petroleum Company. There has been no word from either government concerning whether or not the oil will stop flowing, or who might pick up the tab if it doesn't. However, the Turkish Press reports today (http://www.turkishpress.com/turkishpress/news.asp?ID=28253) that CNPC has offered to pay up-front for rail deliveries through October and then subtract the amount from their subsequent payments to Yukos for the oil. Russia's Interfax news agency later reported only

that China had agreed to pick up that tab, without further detail about withholding the amount from later payments.

It seems likely that the former deal involving the later payments is indeed the case. After all, the solution carries obvious advantages for all parties involved. Yukos wins because it most of those revenues would have gone straight to Moscow for payment of its tax liabilities anyway and it continues to survive as a company -even if only barely. CNPC obviously wins, because they get the oil they have bee promised, without paying a higher price. And the governments of both China and Russia win, because they buy more time to deal with a diplomatically sticky situation. Russia is likely especially relieved not to have the spotlight thrown onto an increasingly embarrassing and untenable situation with Yukos.

But what about a long-term solution? It might well be wrapped within a deal solving Russia and China's other -and really more important- outstanding energy dispute, that over a proposed pipeline from East Siberia's Angarsk to China's north-western oil production and refining center of Daqing. Russia and China signed a non-binding agreement a year ago to build the pipeline that could bring an estimated 700 million tons (5.13 billion bbl) of Russian crude to China over the next 25 years. However, negotiations between China, Russia, and the companies involved bogged down. The Japanese seized upon the opportunity, proposing to Moscow an alternative plan to build a pipeline Eastern Siberia to Nakhodka on Russia's Pacific coast near Japan. Not only did Japan offering to put $7 billon into construction of the pipeline, the Japanese project would open up more export markets to Asia and the U.S. Russia appears opted now for the Japanese plan, much to the chagrin of Beijing.

So what might be a solution to this problem? A spur pipeline from the Russo-Japanese project to Daqing is a likely answer. While this would likely be a good second best for China, while it has the advantage to Russia of guaranteeing the sale of even that much more crude long into the future. The only difficulty for Russia might be producing enough oil to keep both pipelines operational. Russia would likely have to develop West Siberian fields to meet the need, an expensive proposition but a cost they would bear at some point any way.

So, if Russia and China agree are able to agree on a on a deal this larger issue -worth billions of dollars, no doubt, over the coming years- the transportation costs for the Yukos oil easily could be wrapped into the deal. Most likely it would come in the form of CNPC agreeing to pay the costs, at least through the end of the year.

There will of course be other issues discussed between the two leaders. China needs Russia's help in securing WTO membership, while Russia has plenty of geo-strategic issues with China to worry about. However, solving the Yukos issue would take at least a little panic-pressure off of near-record oil prices, while solving the pipeline problem will do much to relieve China that its energy struggles will be a little less in the years to come.

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