Russia's Energy Diplomacy toward Europe and Northeast Asia: A Comparative Study1
Hongchan Chun
Dept. of Political Science
Pusan National University
From the rubble of the collapsed empire of the Soviet Union, Russia has rapidly re-emerged as a
global power on the basis of its energy resources. As the world energy market becomes increasingly tight,
Russia’s importance grows accordingly. With the world’s eighth largest proven oil reserves, Russia is the
largest non-OPEC producer of oil. As for natural gas, Russia holds nearly twice the reserve (47.8 trillion
m3) of the next largest country, Iran. At the end of 2005, Russia was the world largest natural gas producer
(598.0 billion m3) as well as the world largest exporter (207.3 billion m3). Aided by record oil prices, the
Russian economy has been growing at an annual average rate of six percent since 1999. In the same
period Moscow’s oil earnings have also increased nine-fold to around $150 billion a year.
Increasingly aware of the importance of energy as a factor in foreign policy, Russia has begun to use
its massive reserves of oil and gas as a lever to wield influence internationally. Russia has already flexed
its muscle at key Commonwealth of Independent States (CIS) countries, and is pursuing a comprehensive
strategy to increase the European Union’s dependence on Russian energy supplies, already around onethird of the EU’s natural gas supplies. In the meantime, EU policy for coping with Russian pressure is in
disarray; European countries have rushed to secure their own energy interests rather than coordinating for
a common approach.
Russia’s energy diplomacy toward the EU is likely to have heuristic implications for Northeast Asian
countries. Both Russia and Northeast Asia have mutual interests in increasing energy cooperation, but
there may be lessons to be found from EU-Russian relations for Northeast Asia in dealing with Russia as
a potential energy partner. This paper aims to analyze the key aspects of Russia’s energy diplomacy
toward the EU and the way the EU has tried to cope. Subsequently, this analysis will be applied to the
situation of Northeast Asia for the purpose of comparison.
I. Russia and the EU
1. The EU as Russia’s trade and energy partner
1
Not for citation; this paper is prepared for presentation at the World International Studies Conference,
Ljubljana, Slovenia (July 23-26, 2008).
1
The EU is by far the largest and most important trading partner for Russia. In terms of trade volume,
the EU accounts for as much as 62.4 percent of Russia’s external trade turnover. In 2006 the EU provided
Russia with a trade surplus of 65.3 billion euros, which was more than a half of the total trade surplus for
Russia [Table 1].
[Table 1] Russia’s external trade and the EU’s share (2006) (unit: bln. euro)
World total
EU (27)*
China
Ukraine
Turkey
USA
Switzerland
Kazakhstan
Japan
S. Korea
Trade volume
335.1 (100%)
209.1 (62.4%)
22.7 (6.8%)
19.2 (5.7%)
13.5 (4.0%)
12.2 (3.6%)
10.6 (3.2%)
10.2 (3.0%)
9.9 (3.0%)
6.9 (2.1%)
Export to
230.5(100%)
137.2 (59.5%)
12.5 (5.4%)
11.9 (5.2%)
11.4 (4.9%)
7.1 (3.1%)
9.6 (4.2%)
7.1 (3.1%)
3.7 (1.6%)
1.5 (0.7%)
Import from
104.6(100%)
71.9 (68.7%)
10.2 (9.8%)
7.3 (7.0%)
2.1 (2.0%)
5.1 (4.9%)
1.0 (1.0%)
3.0 (2.9%)
6.2 (5.9%)
5.4 (5.1%)
source: Russia, EU Bilateral Trade and Trade with the World, EU2
* External and intra-EU trade - Statistical yearbook: Data 1958-2006, EU3
Russia’s trade surplus from the EU comes mostly from its export of energy resources. Of Russia’s
exports to the EU, energy accounts for the dominant portion of 65.4 percent (89.5 billion euros).4 This
makes the EU all the more important as a trade partner to Russia because the energy sector currently
makes up about 25 percent of Russia’s GDP and 60 percent of Russia's exports to non-CIS countries.
Under these circumstances, it is no exaggeration to say that Russia’s oil and gas industry relies
almost entirely on Europe; 74.4 percent of Russia’s oil export and 63.2 percent of gas export were bound
for the EU in 2005 ([Table 2], [Table 3]).
[Table 2] Russia energy export: oil (2005)
World (total)
EU(27)
- Netherlands
- Italy
- Germany
- Poland
- Lithuania
- Finland
- Hungary
Volume (mln. barrels)
1,851.5 (100%)
1,378.0 (74.4%)
298.3 (16.1%)
212.9 (11.5%)
200.7 (10.8%)
128.1 (6.9%)
64.4 (3.5%)
58.7 (3.2%)
46.9 (2.5%)
2
http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113440.pdf
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CV-07-001/EN/KS-CV-07-001-EN.PDF
4
The European Union and Russia: Close Neighbours, Global Players, Strategic Partners, European
Commission, EU. (http://ec.europa.eu/external_relations/library/publications/34_eu_russia.pdf)
3
2
Belarus
Ukraine
China
Japan
S. Korea
141.6 (7.6%)
108.4 (5.9%)
59.1 (3.2%)
10.9 (0.6%)¹
8.3 (0.4%)²
source: The European Union and Russia – Statistical Comparison, EU5
¹ Japan Statistical Yearbook (2008); ² Petronet, Korea National Oil Corporation(KNOC) 6
[Table 3] Russia energy export: gas (2005)
World (total)
EU(27)
- Germany
- Italy
- France
- Hungary
- Poland
- Austria
- Slovakia
Ukraine
Belarus
Turkey
China
Japan
S. Korea
Volume (mln. M³)
207,263 (100%)
130,925 (63.2%)
32,552 (15.7%)
21,852 (10.5%)
13,229 (6.4%)
8,990 (4.3%)
7,032 (3.4%)
6,829 (3.3%)
4,588 (2.2%)
24,366 (11.8%)
20,120 (9.7%)
18,042 (8.7%)
0 (0%)*
0 (0%)**
0 (0%)***
source: The European Union and Russia – Statistical Comparison, EU
* China Daily(11/19/ 2007); **Naeil Shinmum(11/22/2007); ***Dong-A Ilbo(8/17/2007)
Europe’s importance to Russia as the key energy export market is even more conspicuous in the area
of natural gas. As of 2006, Gazprom charges an average of 5,238.5 rubles (approximately $260.7 as of
2006) per 1,000 m3 for its exports of natural gas to Europe, while the price for domestic customers is only
1,320.0 rubles (approximately $65.7 as of 2006). Europe is by far the most valuable market to Gazprom,
compensating for huge losses from domestic sales [Table 4].
[Table 4] Gazprom’s gas production and markets (2006)
Production
Sales in Russia
Export Europe (EU)
Baltic and CIS
amount (bln. m3)
556.0*
316.3*
161.5*
101.0*
average price charged
(per 1,000 m3)
1320.0 rubles** ($48.6)
5238.5 rubles* ($192.7)
2077.4 rubles* ($76.4)
Total income
417.5 bln rubles ($15.4 bln)
845.9 bln rubles*** ($31.1 bln)
209.7 bln rubles*** ($7.7 bln)
Source: * Gazprom's Annual Report for 2006. (http://www.gazprom.ru/documents/Report_Rus.pdf)
** Gazprom in questions and answers: Gas Sales on Domestic Market (http://www.gazpromquestions.ru/index.php?id=35)
*** Gazprom in questions and answers. Gas Sales Abroad. (http://www.gazpromquestions.ru/index.php?id=34)
[The conversion into US$ was made on the basis of the average annual exchange rate of 27.18 rubles for 1 dollar for 2006 ]
(http://www.cbr.ru/statistics/credit_statistics/print.asp?file=ex_rate_ind_06.htm).
5
6
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-77-07-231/EN/KS-77-07-231-EN.PDF
http://www.petronet.co.kr/htm/eng/index.jsp
3
Surprisingly, Gazprom produces only about 550 billion m3 of gas inside Russia, while purchasing an
additional 58-60 billion m3 of gas from Central Asia to meet its commitments to European customers.
Given that only EU customers pay full market prices, the EU market makes up 57.4 percent of Gazprom's
revenues.
2. Russia as the EU’s trade and energy partner
Being the EU’s third-largest trading partner after the United States and China, Russia is a much
weaker trading partner to the EU than the EU is to Russia. In 2006, Russia is the destination of only 6.0
percent of the EU's exports and the source of 10.1 percent of the EU's imports [Table 5].
[Table 5] EU(27)’s world trade and share of Russia (2006) (unit: bln. euro)
World total
USA
China
Russia
Switzerland
Japan
Norway
Turkey
S. Korea
India
Canada
Trade total
2553.1 (100%)
448.7 (17.6%)
256.4 (10.0%)
209.1 (8.2%)
159.1 (6.2%)
121.4 (4.8%)
117.3 (4.6%)
85.4 (3.3%)
62.9 (2.5%)
46.9 (1.8%)
46.8 (1.8%)
Export to
1,189.1 (100%)
269.5 (22.7%)
63.9 (5.4%)
71.9 (6.0%)
87.9 (7.4%)
44.8 (3.8%)
38.2 (3.2%)
46.7 (3.9%)
22.9 (1.9%)
24.4 (2.1%)
26.9 (2.3%)
Import from
1,364.0 (100%)
179.2 (13.1%)
192.5 (14.1%)
137.2 (10.1%)
71.2 (5.2%)
76.6 (5.6%)
79.1 (5.8%)
38.7 (2.8%)
40.0 (2.9%)
22.5 (1.7%)
19.9 (1.5%)
source: External and intra-EU trade - Statistical yearbook: Data 1958-2006, EU7
Overall, Russia is the EU’s third-largest trading partner. When focusing on the energy sector,
however, Russia takes on greater importance. Russia is by far the most important supplier of oil and
natural gas to the EU. In 2005, Russia provided 29.9 percent (1,378.0 million barrels) of the EU’s total
imports of 4,878.2 million barrels of oil. This amounts to 28.2 percent of the total oil consumed in the
region. In terms of natural gas imports, the EU relied on Russia for 45.1 percent of its annual import
volume and 26.6 percent of its consumption [Table 6]. Given the rising importance of energy resources,
Russia has a strong basis for influencing the EU as its most important energy supplier, due to import
dependency being as high as 82.2 percent for oil and 57.7 percent for gas.
[Table 6] EU(27) Energy consumption and imports (2005)
Consumption
Production
7
Oil (mln. barrels)
4,878.2
979.4
Gas (bln. m³)
492.7
208.3
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-CV-07-001/EN/KS-CV-07-001-EN.PDF
4
Imports
Import Dependency*
4,609.1 (100%)
Russia
1,378.0 (29.9%)
Norway
714.7 (15.5%)
Saudi Arabia
444.9 (9.7%)
Libya
370.9 (8.0%)
Iran
259.5 (5.6%)
Other, Middle East
219.9 (4.8%)
Kazakhstan
193.5 (4.2%)
Algeria
167.1 (3.6%)
Other
861.3 (18.7%)
82.2%
Russia
Norway
Algeria
Nigeria
Libya
Egypt
Qatar
Oman
Other
290.3 (100%)
131.0 (45.1%)
69.9 (24.1%)
59.7 (20.6%)
11.5 (4.0%)
5.5 (1.9%)
5.4 (1.8%)
5.2 (1.8%)
1.9 (0.7%)
0.1 (0.0%)
57.7%
source: Statistical Pocketbook 2007, Energy & Transport in figures, EU 8
*definition: Import Dependency = Net Imports / (Bunkers + Gross Inland Consumption)
Russia estimates that energy demand in the EU will increase dramatically until the year 2020, as will
Russia’s supply of energy resources to the EU [Table 7].
[Table 7] Amount of oil and gas extraction in Russia, Russian export to the EU and demands of the EU in
the years 2000-2020.
The increase of extraction in Russia
in 2000-2020.
The increase in Russian export to the
EU-30 in 2000-2020.
increase rate
Oil
Gas
200 mln tonnes
150 bln m3
60%
25%
The increase of demand in the EU-30
in 2000-2020.
increase rate
32 mln tonnes
31 bln m3
25%
23%
increase rate
170 mln tonnes
300-400 bln m3
40%
150-200%
source: Энергетическая стратегия России на период до 2020 года (Москва: Минэнерго России,
2003)9
3. Russian-EU energy confrontation rather than cooperation
Given this high degree of trade complementarity and interdependence between the EU and Russia,
the two sides would seem to be in need of close cooperation. Their strategic positions, however, are
confrontational. Making the most of its dominant position as energy supplier, Russia is seeking to
consolidate its dominance of the EU energy market. The EU, on the other hand, seeks ways to reduce the
reliance on Russia for the provision of energy and diversify its sources of supply. Their different
approaches are summarized in the conflict surrounding the Energy Charter Treaty (ECT) and competition
over the pipeline route from Central Asia to Europe.
1) Energy Charter Treaty (ECT)
In December 1991 European countries created the ECT as a mechanism for cooperation in order to
mitigate the possible negative impact of the impending dissolution of the Soviet Union, upon which they
8
9
http://ec.europa.eu/dgs/energy_transport/figures/pocketbook/doc/2007/2007_energy_en.pdf
http://www.minprom.gov.ru/docs/strateg/1
5
relied heavily for energy. As the successor to the Soviet Union, Russian signed the ECT in 1994, but still
has yet to ratify it. The main point of disagreement is a transit protocol existing in the treaty, which calls
for open access for foreign companies to national transportation infrastructure including pipelines owned
by Russia.
The EU’s requirement for open access to national pipelines originates from the EU energy policy’s
emphasis on ‘diversification’ and ‘liberalization’: diversification of supplying partners and energy sources
and liberalization of protective regulations. Diversification policy is an outgrowth of the EU’s concerted
efforts to prevent a situation in which Russia could use its dominant position as energy supplier as a tool
for political pressure. Also, the ECT is driven by a “free market” ideology, whereby large nationallybased energy companies of EU member states would be forced to accept greater competition due to the
creation of a new continent-wide energy market. The treaty calls for opening up nationally-owned
pipelines to foreign companies.
EU policymakers are worried that if Russia’s Gazprom, a company that monopolizes gas exports
overseas, dominates the gas supply and the distribution infrastructure in Europe, it would have excessive
control of the continental market. That adds to a concern that Russia could one day use its gas supply as a
political lever in its relations with Europe. From the standpoint of Russia and Gazprom, however,
allowing foreign competitors to access its own pipelines would be tantamount to giving up its status as
the dominant supplier in Europe.
Joining the ECT is likely to contribute to improving the investment climate in Russia and give Russia
a flow of much needed foreign investment into its energy industry. At the same time, however, Russia
would have to face a substantial loss of its market share in the EU to other suppliers, such as Central
Asian countries, and be deprived of its price-control power. Russia seems to prefer maintaining its
monopoly status and controlling power over the EU energy market. That is why Russia insists on holding
on to its monopoly over gas pipelines to Europe from Russia and Central Asia.
Even if Russia doesn't ratify the ECT, it would not be able to prevent the EU’s efforts to diversify its
energy supply partners. There are already projects developing in the EU in this direction. For example,
Nabucco, Trans-Caspian, Trans-Afghan and other gas pipelines are being planned. Those projects are
aimed at enabling oil and gas from former Soviet republics, including those in Central Asia and the
Caspian region, to go to the European market in a diversified way without being controlled by Russia.
2) The Nabucco Project
While it is in the best interest of Russia to maintain exclusive control of gas pipelines to Europe, it's
equally important for the EU to eliminate this monopoly. That is why the EU plans to build pipelines that
will connect it directly to the countries of the Caspian and the Central Asian regions, bypassing Russia.
There already is one in operation, the Baku-Tbilisi-Ceyhan (BTC) pipeline. Since May 2006, it carries
about one million barrels of crude oil a day from Baku, Azerbaijan to Turkey’s Mediterranean port,
6
Ceyhan, via Georgia. It is the second-longest oil pipeline in the world, after Russia’s Druzhba pipeline,
covering 1,768 km (1,099 mile). Emboldened by the successful construction of the BTC pipeline, the EU
plans a new pipeline network that includes two legs: the Trans-Caspian gas/oil pipeline (TCP), to be
constructed during the first phase, and the Nabucco gas pipeline during the second phase.
The 3,300 km (2,050 mile) Nabucco pipeline will bring gas deep into the EU from the Caspian and
Central Asian regions, with much of its supplies coming from Azerbaijan. For this, the national energy
companies of five European states – Austria's OMV, Hungary's MOL MOLB.BU, Romania's Transgaz,
Bulgaria's Bulgargaz and Turkey's Botas – are to shoulder the burden of the $5.8 billion investment. The
EU has given the project its own support, as the Nabucco is central to EU efforts to diversify gas supplies
and reduce its dependence on Russia. Should the construction begin in 2008, the pipeline is expected to
start carrying gas by 2011 with a maximum capacity of 30 billion m3 per year, reducing the export of
Russian oil and gas to the EU by as much as one-fourth by 202010.
[Graphic 1] Planned South Stream and Nabucco gas pipelines
Graphic source: BBC
3) Russian counter-measures: the South Stream pipeline
In order to cope with these moves Russia’s Gazprom has been working on counter-plans to set up
their own new supply routes that traverse Russia. Currently, Gazprom only has two export channels to
Europe – one via Ukraine and the other via Belarus. Both lines, however, share a common problem: the
supply of energy to Europe gets threatened when Russia runs into disputes with Ukraine and Belarus.
Indeed, when Russia turned off the gas supply to Ukraine in January 2006 and to Belarus in January 2007,
EU countries reverberated with panicked talk of an energy crisis. Furthermore, these facilities are old and
10
Е.А. Квочко, Т.А. Ланьшина, “Проблемы и перспективы сотрудничества России и ЕС в
рамках энергетического диалога,” p.6
(http://www.iori.hse.ru/publications/herald/material/h4/analytical_material_1.pdf).
7
in need of repairs costing billions of dollars. This is why Russia is looking for new gas pipelines to
Europe. For the Russian leadership, it would be even better if new venues could successfully compete
with the Nabucco project.
The South Stream pipeline, a product of Russia’s desire to continue to dominate the European energy
market, was conceived by Gazprom as a joint venture with Italy’s ENI. With the construction costs
amounting to no less than 10 billion euros ($14.66 billion), the 900 km (558-mile) pipeline will be able to
transport as much as 30 billion m3 of gas annually from Beregovaya, a Russian port on the Black Sea
coast, to Europe through the Black Sea via Bulgaria.
This plan has caused controversy in the EU because of Italy’s participation. As the EU is making it a
major task to reduce its reliance on Russian energy and break up the Russian monopoly of pipelines, Italy
is going against this policy direction by endorsing the Russian plan for further penetration into the
European market. Russia appears set to play a “divide-and-rule” game vis-à-vis the EU in order to
challenge the Nabucco project. From the standpoint of ENI, Italy’s national energy corporation, joining
forces with Gazprom could be an effective strategy to gain an advantage for access to oil and gas
resources in Russia over its Western competitors. Actually, the timing appears auspicious for ENI. In 2006,
Royal Dutch Shell had to give up its controlling share of the Sakhalin-2 project to Gazprom after the
Russian government threatened to shut down the venture because of alleged violations of environmental
regulations. In June 2007, BP sold its stake in a vast Siberian gas field to Gazprom after coming under
regulatory pressure from the Russian authorities against BP’s Russian subsidiary, TNK-BP. Under these
circumstances, ENI has emerged as Gazprom's primary strategic partner in Europe by joining in the South
Stream project.
Another case in point is Bulgaria where both the Nabucco and the South Stream pipelines are
planned to traverse. Becoming the newest EU member country together with Romania in January 1, 2007,
Bulgaria was offered by the EU to join the Nabucco project. But together with Italy, Bulgaria has agreed
to join in the South Stream project by allowing the pipeline to pass through the country on its way from
the Black Sea to two branch lines: one destined for Italy via Greece and the other destined for Austria via
the Balkan Peninsula. The agreement was signed during a January 2008 summit meeting in Sofia.
Bulgaria is now torn between proving its EU credentials and maintaining its renewed ties with Russia.
Receiving almost all of its oil and gas from Russia, Bulgaria is eager to diversify its energy sources by
being a partner in the Nabucco pipeline, but is also attracted by South Stream because of lucrative transit
fees.
The EU denies that the Nabucco project will be affected by South Stream and emphasizes that the EU
project will proceed as planned. The EU maintains that the Nabucco pipeline, once completed, will
diversify Europe’s gas imports by providing access to gas produced not only in Central Asia and the
Caspian Sea, but in countries such as Iraq and Iran.
Aside from building counter-pipelines like the South Stream, Gazprom is making every effort to keep
8
as much control as it can over the export of Central Asian energy resources to Europe. The Russian gas
giant concluded a landmark deal in March 2008 with three Central Asian states: Kazakhstan, Uzbekistan,
and Turkmenistan. In that deal, Gazprom agreed to pay “European prices” for gas delivered in 2009, no
less than $350 per 1,000 m3. This is going to be a more-than-double increase from the prices the company
has been paying to these countries. Currently, Gazprom pays just $140 per 1,000 m3 for Turkmen gas,
$145 for Uzbek gas, and $180 for Kazakh gas. The price hike agreement could be a dramatic turning
point in the race between Russia and the EU for gas from Central Asia and might signal the end of the
EU’s plan to transport Central Asian gas through the Nabucco pipeline and away from Russian control.
This agreement is likely to bring the Central Asia states closer to the Russian side and deprives
Kazakhstan, Turkmenistan and Uzbekistan of incentives to get involved in the EU’s Nabucco project.
Until the March 2008 agreement, Gazprom had refused the demands for higher prices from these
Central Asian energy suppliers and had insisted on below-market prices largely due to Russia’s control
over pipelines to Europe. Recently, however, Russia’s reliance on cheap Central Asian gas has
increasingly come under threat because Central Asian countries have attempted to expand their energy
partners to include countries other than Russia, while striving to become more independent from Russia
and make the most of their energy resources. For example, Turkmenistan concluded an agreement with
China in 2007 to provide 30 billion m3 of gas each year for 30 years, with Beijing agreeing to finance a
new pipeline to carry it to China’s Xinjiang province. On the top of increasingly independent moves by
Central Asian energy producers, Gazprom has been seeing its own production of natural gas declining
with no new gas fields in operation since 1991. The company has even been warned by Russia’s Industry
and Energy Ministry that if the decline continues, Russia may be unable to service its own domestic gas
needs by 2010.11
Under these circumstances, for all its present position as Europe's dominant energy supplier, Russia
simply cannot allow Central Asian energy resources to be siphoned off to Europe. That was why Russia
had to accept the demands of Central Asian countries even though the new higher prices put Gazprom in
a difficult position financially.
4. A summary view of the Russian-EU energy relationship
In many traditional measurements of power, Europe is stronger than Russia: the EU's economy
($16.8 trillion) is 13 times the size of Russia's ($1.3 trillion), its population (495 million) is three-and-ahalf times the size of Russia's (142 million), and its total military spending is ten times larger. In terms of
trade volume, the EU is by far Russia’s most important trade partner, while Russia is only EU’s third
largest trading partner. Unfortunately, because there is a lack of unity among EU member states over
energy security, Russia has been able to exert considerable influence over EU policy. Russia’s strategy of
11
Owen Matthews, “Russia’s Big Energy Secret,” Newsweek, December 31, 2007.
9
‘divide and rule’ thus far has worked very effectively.
The EU is trying to formulate collective energy security programs to maximize its bargaining power
vis-à-vis its primary energy supplier, Russia. The pressure on Russia to sign the ECT was an initial
example of the EU’s attempt at collective action toward Russia. More recently, the EU has begun to work
out a common strategy for dealing with Moscow energy diplomacy. “Energy Strategy for Europe,” a
white paper published by the European Commission in January 2007, epitomizes this common strategy.
In principle, EU countries have agreed on the need for it, but when it comes to a specific policy, they
often have failed to be strategic and united; instead they have rushed to secure their own energy interests
rather than following a more coordinated collective approach. Behind the façade of unity, even key
member countries are scheming to secure their own energy interests. Disarray over the Nabucco pipeline
project provides such an example. The project will help Europe cut its dependence on Russia for the
supply of natural gas, but EU countries have not been able to agree on the route, financing, and gas
suppliers to fill the pipeline. Even worse, some member countries such as Italy and Bulgaria are joining
forces with Russia in a rival project, the South Stream pipeline.
In short, individual EU countries are being played by Russia in its ‘divide and rule’ game. Aside from
luring Italy and Bulgaria into the South Stream project, Russia has formed diverse energy ties with other
EU member countries on an individual base. In the spring and summer of 2007, Austria, Italy, and
Hungary negotiated separate deals with Gazprom, even though these deals may undermine the Nabucco
project.
Germany, while very wary of Russia’s growing influence, is continuing to cooperate with the
Kremlin through such projects as the Nord Stream gas pipeline. The idea to construct a 1,200 km gas
pipeline from Vyborg, Russia to Greifwald, Germany, under the Baltic Sea was first floated back in 1997,
but was finalized in 2005. The operating company, Nord Stream, is a joint venture between Russia’s
Gazprom and Germany’s BASF and E.ON. It is primarily aimed at bypassing Ukraine, Belarus, and
Poland, three countries with which Russia has had conflict over many issues including gas prices.
Germany considers the project far more important than keeping solidarity with its EU partners such as
Poland; Germany knows that, when Nord Stream is completed, Russia can suspend gas supply to Poland
as well as Ukraine and Belarus without having to take the political burden of risking the supply of gas to
the western European countries. Therefore, Poland will be subject to a unilateral threat from Moscow
once Russia is able to provide its gas directly to Germany and other northern European countries. From
Greifwald, Germany, Russian gas can be transported onward to neighboring countries such as Denmark,
the Netherlands, France, and the U.K. through its branch lines. Therefore, it is not purely a GermanRussian project; these other western European countries are looking forward to benefiting from the
construction of Nord Stream as well. It is notable that even a country like the U.K., a European country
which tends to be the most critical of Russia on human rights and democracy, rushed to make the most of
this Russian-Germany gas pipeline; British Prime Minister Tony Blair and Russian President Vladimir
10
Putin signed a memorandum of understanding in June 2003 to co-operate in the construction of branch
line extended from Nord Stream. Given this record, Blair’s call for a common European energy policy,
which he made in a speech to the European Parliament in October 2005, rings hollow.12
Greece also signed an agreement with Russia in September 2006 for construction of a 280 km oil
pipeline to facilitate oil supply from Russia through Bulgaria. It was aimed to bypass the congested and
narrow Bosphorus Straits.13 The new pipeline would give Russian oil exporters a direct path not only to
Greece but south European countries along the Mediterranean Sea. The volume of oil exported through
this new pipeline is planned to increase to the capacity of 800,000 barrels per day by 2012.
France and Spain have also formed special energy relationships with the Kremlin at the level of
“strategic partnership.” Smaller EU countries such as Austria, Belgium, Finland, Luxembourg, Malta,
Slovakia, Slovenia and Portugal are also keen to do business with Russia. Perhaps only Lithuania, alone
in the EU, stands strong for a unified stance against Russia on energy issues. 14 In a sense, dependence on
Russian energy supplies has become the most divisive issue in the EU.
II. Russia and Northeast Asia
1. East Siberia and the Far East
In contrast to the EU, Russia has not yet established a strong position in Northeast Asia. In fact,
Russia has been a non-factor in the Northeast Asian balance of power for almost two decades. Russia
does have a great potential to achieve relevance, however, as the massive energy wealth it reportedly has
in East Siberia and the Far East raises its profile in the region.
So far, the global energy power status of Russia depends heavily on production in West Siberia,
where the Tyumen oil/gas field is located. By comparison, oil and gas production in East Siberia and the
Far East has been negligible. As the tables below show, as of 2006, East Siberia and the Far East produce
only 4.15 percent and 1.48 percent of crude oil and natural gas in the Russian Federation ([Table 8],
[Table 9], [Table 10]).
[Table 8] Oil production in Russia by region (unit: thousand tonnes)
Russian Federation
European Russia
North-West Federal District
2000
323,517
99,248
13,457
2001
348,133
104,747
14,487
12
2002
379,563
110,731
15,418
2003
421,341
120,026
18,009
2004
459,318
127,813
21,584
2005
470,175
131,165
24,513
2006
480,507
135,094
26,040
“PM speech to the EU Parliament in Strasbourg,” October 26, 2005 (http://www.number10.gov.uk/output/page8384.asp)
13
The existing transportation using oil tankers through the Bosphorus Straits is very slow; tankers
sometimes have to wait as long as ten days to pass through the Straits. (BBC News, September 4, 2006.)
14
Russia has blocked an oil pipeline to Lithuania’s refinery since 1996, claiming that it needs “repairs”.
(The Economist, May 3, 2008).
11
South Federal District
Volga Federal District
West Siberia
Ural Federal District (incl. Tyumen
region)
East Siberia and the Far East
Siberian Federal District
Far Eastern Federal District
10,635
75,156
213,469
11,582
78,678
231,253
12,324
82,989
254,165
12,768
89,249
283,169
13,307
92,922
310,002
13,469
93,183
320,237
13,554
95,500
325,493
213,469
10,800
7,019
3,781
231,253
12,133
7,930
4,203
254,165
14,667
10,997
3,670
283,169
18146
14,574
3,572
310,002
21,504
17,599
3,905
320,237
18,773
14,346
4,427
325,493
19,919
13,346
6,573
2004
632,623
45,075
3,961
16,832
24,282
577,776
577,776
9,772
6,184
3,588
2005
640,801
45,978
4,116
17,977
23,885
585,311
585,311
9,512
5,987
3,525
2006
656,271
45,693
4,164
17,942
23,587
600,881
600,881
9,696
5,840
3,856
source: Регионы России: Социально-экономические показатели (2007)
[Table 9 ] Natural gas production in Russia by region (unit: mln m3)
Russian Federation
European Russia
North-West Federal District
South Federal District
Volga Federal District
West Siberia
Ural Federal District (incl. Tyumen region)
East Siberia and the Far East
Siberian Federal District
Far Eastern Federal District
2000
583,933
47,018
4,067
14,393
28,558
530,359
530,359
6,556
3,005
3,551
2001
581,443
47,132
4,146
15,439
27,547
526,391
526,391
7,920
4,135
3,785
2002
595,106
46,637
3,906
16,055
26,676
539,916
539,916
8,555
4,877
3,678
2003
620,234
46,231
3,979
16,666
25,586
564,492
564,492
9,511
5,889
3,622
source: Регионы России: Социально-экономические показатели (2007)
[Table 10] Oil and Gas production in East Siberia and the Far East of Russia (2006)
Oil (thousand tonnes)
Russian Federation
Siberian Federal District (A)
480,507
13,346
(2.78%)
6,573
(1.37%)
19,919
(4.15%)
Far East (Far Eastern Federal District) (B)
East Siberia and the Far East (A+B)
Gas (mln ㎥)
656,271
5,840
(0.89%)
3,856
(0.59%)
9,696
(1.48%)
Source: Регионы России: Социально-экономические показатели (2007)
When it comes to reserve volume rather than production, East Siberia and the Far East are
considered to be Russia’s biggest asset enabling the country to maintain its status as a global energy
power into the future. Currently, East Siberia and the Far East are estimated to have a “proved” crude oil
reserve of 1,541.6 million tonnes (11.3 billion barrels) and 545.7 million tonnes (4 billion barrels),
respectively. This is only 7.7 percent of the total crude oil reserves of the Russian Federation, but these
reserve figures can be misleading because less than 10 percent of East Siberian and the Far Eastern
territory has been prospected so far. One estimate claims that as much as 75 percent of Russia’s energy
resources are located in East Siberia and the Far East,15 which have been compared to the final frontier of
Russia’s energy resources exploration.
15
Nodari A. Simonia, “Energy Cooperation as a Main Link to the Efforts to Bring Stability and Peace in
the Korean Peninsula and the Asia-Pacific,” Energy, Regional Security, and the Korean Peninsula:
Toward a Northeast Asian Energy Forum Workshop (November 2006).
12
2. Energy Situation of Northeast Asian countries
Russia’s East Siberia and Far East territory are proximate to great energy markets in Northeast Asia.
This offers a big incentive for Russia to develop the hitherto untapped energy resources in these regions
because Northeast Asia has become a principal driver of fluctuations in world energy markets and
countries in the region have a keen interest in utilizing Russian resources.
As the tables below show ([Table 11], [Table 12], [Table 13], [Table 14]), Japan, China, and South
Korea are some of the world’s top energy consuming countries and rely heavily on foreign imports.
[Table 11] Leading oil consuming and importing countries (2005) (unit: mln barrels)
Consumption*
U.S
China
Japan
Russia
Germany
India
S. Korea
Canada
France
Brazil
6,973.8
2,402.8
1,788.5
903.8
897.2
876.7
772.6
735.2
682.4
660.4
Imports**
U.S
Japan
China
Korea
Germany
India
Italy
France
Netherlands
Spain
4,266.1
1,561.3
930.9
843.0
821.0
725.7
696.4
615.7
454.5
439.8
source: * BP, BP Statistical Review of World Energy (2007)16
** IEA, Key World Energy Statistics (2007).17
[Table 12] Import dependency of NE Asian countries: oil (2005) (unit: mln barrels)
consumption(A)
China
Japan
S.Korea
2,402.8
1,788.5
772.6
import(B)
930.9²
1,561.3
843.0
Import dependency
(B/A)
38.7(%)
87.3(%)
109.1(%)
source: BP, IEA.
[Table 13] Leading natural gas consuming and importing countries (2005) (unit: bln m3)
Consumption
U.S.
Russia
Iran
Germany
Canada
U.K.
Japan
16
17
Imports
629.9
457.5
102.4
101.0
96.7
95.1
87.3
U.S.
Germany
Japan
Italy
Ukraine
France
Russia
122.9
90.7
80.9
73.5
67.8
49.0
39.1
http://www.bp.com/productlanding.do?categoryId=6848&contentId=7033471
http://www.iea.org/textbase/nppdf/free/2007/key_stats_2007.pdf
13
Ukraine
Italy
Saudi Arabia
China
S. Korea
87.2
86.2
71.3
46.9
30.4
Spain
S. Korea
Turkey
Netherlands
China
33.1
29.5
26.6
23.0
0
source: EIA, International Energy Annual18
[Table 14] Import dependency of NE Asian countries: natural gas (2006) (unit: bln m³)
Japan
China
S. Korea
consumption(A)
87.3
46.9
30.4
import(B)
80.9
0
29.5
Import dependency (B/A)
92.7(%)
0(%)
97.0(%)
source: EIA
Especially notable is China’s remarkable growth in consumption in recent years. The continuing
surge in China’s demand for oil, which rose by 15 percent or almost 1 million barrels per day in 2003
alone, has emerged as a major factor influencing world oil prices. China’s demand for oil and gas is
projected to increase at 3.8 percent and 6.5 percent, respectively, per annum until 2030 ([Table 15], [Table
16]).
[Table 15] Forecast of oil demand/consumption in NE Asian countries (unit: mln barrels /day)
2003
Japan(A)
China(B)
Korea(C)
World(D)
(A+B+C)/D (%)
5.6
5.6
2.2
80.1
16.7
2010
5.4
8.7
2.6
91.6
18.2
2015
2020
5.5
10.0
2.9
98.3
18.7
5.4
11.7
3.0
104.1
19.3
2025
5.5
13.2
3.2
110.7
19.8
2030
5.4
15.0
3.5
118.0
20.3
ave. annual
change(%)
-0.1
3.8
1.7
1.4
source: EIA, International Energy Outlook (2006).19
[Table 16] Forecast of gas demand/consumption by in NE Asian countries (unit: bln m3)
Japan(A)
China(B)
Korea(C)
World(D)
(A+B+C)/D (%)
2003
2010
2015
2020
2025
2030
85.0
31.2
25.5
2,718.8
5.2
102.0
79.3
31.2
3,282.4
6.5
110.5
104.8
34.0
3,653.4
6.8
113.3
130.3
36.8
3,996.1
7.0
118.9
161.4
39.6
4,304.8
7.4
121.8
198.2
42.5
4,622.0
7.8
ave. annual
change(%)
1.4
6.5
1.6
1.9
source: EIA, International Energy Outlook (2007).20
On the top of Northeast Asia’s extraordinary increase in reliance on foreign imports, what is perhaps
more notable is that the foreign suppliers to countries in the region are concentrated in the Middle East
([Table 17]). As of 2006, about 66 percent of the three Northeast Asian countries’ oil consumption was
18
19
20
http://www.eia.doe.gov/iea/ng.html
http://www.eia.doe.gov/oiaf/archive/ieo06/pdf/0484(2006).pdf
http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2007).pdf
14
supplied by the Middle East. Japan and South Korea, with little oil reserves, rely on Middle Eastern
imports of 80.4 percent and 74.8 percent, respectively. China is less dependent on the Middle East, but the
dramatic increase in energy consumption in the PRC has also forced Beijing to actively search for new oil
and gas suppliers.
[Table 17] Reliance on the Middle East (unit: thousand barrels /day)
Japan
S. Korea
China*
Total import
From the ME
share
Total import
From the ME
share
Total import
From the ME
share
2003
5,560
4,200
75.5%
2,814
1,967
69.9%
2,607
1,045
40.1%
2004
5,425
4,288
79.0%
2,830
2,033
71.8%
3,410
1,264
37.1%
2005
5,470
4,321
79.0%
2,861
2,135
74.6%
3,384
1,360
40.2%
2006
5,432
4,370
80.4%
2,963
2,215
74.8%
3,887
1,490
38.3%
source: EIA, International Petroleum Monthly(IPM)21; * BP Statistical Review of World Energy (20022007)
The reliance of Northeast Asian countries on the Middle East has been such that Middle Eastern
crude oil exporters charged $1.00 to $1.50 more per barrel than they do European countries or the United
States. This surcharge is called the “Asian Premium.” There are several reasons for this surcharge, but
primarily it is due to the fact that, unlike Europe and the United States, Northeast Asian countries have
few alternative import sources to meet their surging demand. In other words, based on their near
monopoly supplier status, Middle Eastern oil exporters have the power to impose prices that exceed the
competitive market price on Northeast Asian buyers. This practice has been in effect for crude oil since
1991, spreading to liquefied natural gas (LNG) in 1992. Northeast Asian countries, therefore, have a
common interest in diversifying their foreign energy import sources in an effort to eliminate the Asian
Premium. Seen from this perspective, the energy relationship between Russia and Northeast Asia seems
to provide another case of natural complementarities within such a proximate geographical space.
3. Russian policy direction toward Northeast Asia
Due to these circumstances, the Russian government has set direction for its new energy policy,
emphasizing the need to develop oil and gas in East Siberia and Far East. On the one hand, Russia finds
in Northeast Asia a huge market for export of its energy resources. Indeed, regional countries with strong
industrial bases are concerned that tight supplies and consequent high prices may act to constrain
economic growth. To China, Japan, and South Korea, the largely undeveloped resources of East Siberia
21
http://www.eia.doe.gov/ipm/imports.html
15
and the Far East are viewed as an important supply option. Therefore, Russia sees a great opportunity to
induce funds for developing energy resources in East Siberia and the Far East. Furthermore, Russia may
use its new partners in Northeast Asia as a bargaining chip to facilitate negotiations with the EU.
Russia’s policy direction to towards Northeast Asian countries is discussed in The Russian Energy
Strategy until 2020, which was published by the Russian government in August 2003. The document
predicts that crude oil and natural gas production in West Siberia will gradually decrease from 2010
onward. This decline will be compensated for by production increases in East Siberia and the Far East.
According to The Russian Energy Strategy until 2020, the combined region of East Siberia and the Far
East is projected to produce 71-106 million tonnes of crude oil by 2020, which is approximately a 7001,000 percent increase from the production level in 2000. Natural gas production is expected to reach 95106 billion m3 in 2020, approximately a 1,200-1,400 percent increase from7 billion m3 in 2000 [Table 18].
[Table 18] Crude oil and natural gas production planned in Russia (2000-2020)
(unit: oil, mln tonnes; gas, bln m3)
oil
gas
Russian Federation
European Russia
West Siberia
East Siberia & Far East
Russian Federation
European Russia
West Siberia
East Siberia & Far East
2000
324
100
220
11
584
47
530
7
2005
420-445
103-113
311-325
7-9
610-615
41-42
557-559
8
2010
445-490
97-103
323-348
27-38
635-665
40-41
564-572
31-52
2015
450-505
92-108
314-328
45-70
660-705
48
526-558
86-97
2020
450-520
89-99
290-315
71-106
680-730
65-85
520-541
95-106
source: Энергетическая стратегия России на период до 2020 года
Production increases in East Siberia and the Far East are intended largely for export to the
neighboring countries of Northeast Asia. Currently, however, these countries import only a limited
amount from Russia ([Table 19], [Table 20]). This creates a huge opportunity for Russia to expand energy
export markets into Northeast Asia and induce investment for energy development in East Siberia and the
Far East.
[Table 19] Import dependency of NE Asian countries: oil (2005) (unit: mln barrel)
China
Japan
S.Korea
consumption
2,402.8
1,788.5
772.6
import
930.9²
1,561.3
843.0
import from Russia
110.0*
11.0**
13.9***
Source: BP; IEA; * Yonhap News (11/5/2007); **Statistical Yearbook of Japan; ***KNOC
[Table 20] Import dependency of NE Asian countries: gas (2005) (unit: bln m³)
consumption
import(B)
16
import from Russia
Japan
China
Korea
87.3
46.9
30.4
80.9
0.0
29.5
0
0
0
source: EIA
As stated in The Russian Energy Strategy until 2020, Russia aims to increase its oil exports to the
Asia-Pacific market from three percent of its total oil exports to 30 percent by 2020, which will be
equivalent to 100 million tonnes. Concerning natural gas, Russia hopes to raise the Asia-Pacific
proportion to 15 percent. At the same time, Russia anticipates an infusion of investment from Northeast
Asian countries to promote infrastructure and energy resource development.
In order to make this plan possible, the Russian government has begun construction on a crude oil
pipeline from East Siberia to the Pacific Ocean (ESPO). This ambitious project is expected to be the
world's longest oil pipeline, pumping up to 1.6 million barrels per day over a distance of 4,200 kilometers.
It originates from Taishet in East Siberia and extends to the Kozmino Bay located just south of
Vladivostok on the Pacific coast. The whole project is to proceed in two stages, with construction of the
first leg—a 2,300-kilometer section from Taishet in East Siberia's Irkutsk Region to Skovorodino in the
Amur Region—started in spring 2006. Estimated to cost $11 billion, the first leg is expected to be
completed by December 2008 and will have a capacity of 30 million tonnes (219.9 million barrels) of oil
per year. The second leg will stretch for 1,900 kilometers from Skovorodino to the Pacific coast,
transporting 80 million tonnes (586.4 million barrels) of oil annually when in full operation. The second
stage also envisages an increase in the Taishet-Skovorodino pipeline's capacity to 588 million barrels.
Skovorodino also is the point from which a branch line to the Chinese city of Daqing will be built.
The ESPO is Russia’s first pipeline to Northeast Asia, aimed ultimately to unlock the supposedly
vast oil reserves in East Siberia and the Far East. The extent to which Russia can strengthen its presence
as a major energy supplier in the Asia-Pacific region is likely to depend on the progress of the ESPO
project and the associated development of energy production within the region.
Russia’s ‘divide and rule’ strategy in NE Asia
Moscow decided upon the ESPO through a long process of diplomatic maneuvers vis-à-vis China
and Japan. As noted above, the most notable element in Russia’s energy diplomacy toward the EU has
been its ‘divide and rule’ tactics based on its position as a dominant energy supplier. Russia used this
strategy mainly to neutralize the collective challenge of the EU. While the EU has tried to coordinate a
common energy policy vis-à-vis Russia, Moscow has managed to incorporate individual member states
into Russian programs and crack the EU’s attempt to pressure Russia through a unified stance.
In Northeast Asia, however, Russia has yet to establish such a strong position as an energy supplier.
Still, Russia has been quite successful so far in encouraging such regional countries as China and Japan to
compete for its energy resources in East Siberia and the Far East. Moscow first presented proposals to
17
China for a Sino-Russian partnership back in the mid-1990s. This was an extension of the Sino-Soviet
rapprochement initiated by Gorbachev in the late-1980s. After the dissolution of the Soviet Union,
Russia’s continued approach toward China produced a Government Agreement on Energy Cooperation in
1996. The apex of Sino-Russian cooperation was reached in 1999 when they joined forces in opposing
the United States and NATO on the Kosovo War, the U.S. missile defense system, and other issues. Their
thriving relationship was most notably reflected in arms deals. In parallel with the strengthening of ties
between the two governments, their biggest energy companies – Russia’s Yukos Oil Company and
China’s National Petroleum Corporation (CNPC) – teamed up to build a Siberian oil pipeline from
Angarsk to Daqing in 1999. Through the 2,240 km oil pipeline, according to this initial agreement,
Russia’s Yukos would provide CNPC 20-30 million tonnes of crude oil per year for 25 years. It became
an “interstate agreement” among the Chinese State Planning Committee, CNPC, Yukos, and Transneft in
July 2001. The plan subsequently went through a further substantiation process and was officially signed
by the heads of the two countries in May 2003, when President Hu Jintao made his first trip abroad to
Russia.
In the meantime, Japan grew increasingly worried about China’s gaining monopoly access to East
Siberian oil and presented a competing plan to Russia. In late 2002, Japan offered a Angarsk-Nakhoda
pipeline proposal with a financing program exceeding $15 billion. This counter-offer was officially
confirmed by Japanese Prime Minister Juinchiro Koizmi at the time of his visit to Russia in January 2003.
Following the Hu-Putin agreement of May 2003, Japan undertook a desperate lobbying effort.
Closely following Hu’s visit, Koizumi made another visit to Russia in the same month and met with Putin
in St. Petersburg. At this meeting, Putin finally showed a favorable response by saying, “There is an
argument that the China route pipeline could be constructed more quickly and more cheaply, but
developing the undeveloped resources of Siberia and sending them to the Asia-Pacific region and world
market are also important.”22 This evidently signaled that Russia was ready to seriously reconsider the
decision to build Angarsk-Daqing pipeline after many years of talks with China. Since then, China and
Japan began to stage an intense competition over the pipeline route. The competition was accompanied by
a series of Sino-Russian and Japanese-Russian memoranda of understanding, joint communiques, and
declarations of intent, each ostensibly negating the one before it.
After two years of deliberation, Moscow decided the “final” route on December 30, 2004: the
pipeline, named ESPO, was to be built from Taishet to Kozmino Bay on the Pacific coast with a branch
line planned to run from Skovorodino to Daqing. The Kremlin might have reasoned that the Pacific route
could open bigger markets in the Asia-Pacific than just the China route. Another consideration might
have been that Japan could make investments on a larger scale than China to cover the costs of pipeline
construction and the development of energy resources in East Siberia and the Far East.
This final decision – the ESPO to the Pacific coast with a branch line to China – could be a
22
http://www.mofa.go.jp/policy/economy/summit/2003/russia.html
18
compromise incorporating the demands of the both China and Japan. However, it is possible that in effect
the Chinese have lost to Japan since Russia has offered no concrete timetable to build the branch line to
China, while the construction of the second leg of the ESPO is scheduled to start sometime between 2015
and 2017. Moscow, nonetheless, is doing its best not to make Japan look like the winner in the ‘scramble
for Siberia’ and is intent on keeping China as a contender. It would only be better from Russia’s
standpoint to keep as many countries as possible as intense bidders for the East Siberian resources.
Russian officials, including former President Putin, have repeatedly underlined that it will keep the
“official promise” to China to construct a branch pipeline from Skovordino toward the Sino-Russian
national border from which CNPC plans to build a pipeline to Daqing, but as yet no concrete timetable
has been suggested.
4. Failure of Russia’s energy diplomacy toward Norteast Asian countries
Although Russia has tried to get the most by keeping China and Japan competing for its resources,
the policy has not produced the results for which it aimed. So far Russia’s ‘divide and rule’ strategy does
not look to be as effective in Northeast Asia as it was in Europe. Many factors have intervened to make
Russian policy less effective.
(1) China reconsiders
With the ESPO route officially chosen by Moscow, the earlier Angarsk-Daqing project has been
virtually buried and Beijing’s hope for a direct pipeline route from Russia has practically been betrayed,
no matter what Russian officials continue to claim. The Kovykta project was another case of China’s
disappointment. After a three-year’s feasibility study, the project took off under the consortium of RUSIA
Petroleum, CNPC of China and KOGAS of South Korea in November 2003. It was a symbol of tripartite
energy cooperation between Russia, China and South Korea, but it also has been “shelved” like the
Angask-Daqing pipeline.
The problem arose from RUSIA Petroleum, the project’s chief operator and a subsidiary of TNKBP23. The Russian government threatened to revoke the license of RUSIA Petroleum for its alleged failure
to fulfill production quotas by designated deadlines. Eventually TNK-BP was forced to give up its share
in RUSIA-Petroleum to Gazprom in June 2007. Since Gazprom took over RUSIA_Petroleum, the
Kovykta project has made little progress for reasons such as a disagreement over the price of gas to China.
It is widely suspected that Gazprom is turning the Kovykta gas development from an export-oriented
project into more of a domestic-consumption project.
The failure of these two landmark projects has led China to lose trust in Russia’s reliability as an
23
TNK-BP is a joint British-Russian company. BP owns half, with the other half owned by a group of
prominent Russian investors: Alfa Group, Access Industries and Renova – together known as AAR. At
19
energy partner, in spite of the huge potential for greater energy interdependence.
(2) Japan also reconsiders.
When the ESPO project was chosen, it was widely understood that Moscow’s priority was Japan and
the broader Asia-Pacific market, rather than China’s competing lobby. Interestingly, there has not been a
rush of Japanese investment in the ESPO project. Uncertainties still remain on the future of RussoJapanese energy cooperation, even though the ESPO should provide Japan access to new oil sources and
reduce the risk of its reliance on Middle East resources.
A key problem is the enormous cost of energy development in East Siberia and the Far East, and
possibly high prices of Russian oil that would be exported to Japan through the ESPO. Unlike the “Urals”
crude oil developed in West Siberia, which is exported to Europe, the cost for oil production in East
Siberia and the Far East will have to be substantially higher because of the harsher development
environment. Therefore, the Russian oil Japan will import through the ESPO is likely to be substantially
more expensive than the equivalent exported to Europe. Japan fears that Russian oil may end up not being
very attractive in terms of price.
Russia may be expecting that it will be able to charge higher prices to Japan and other Northeast
Asian countries than to its European clients, a situation mirroring the current “Asian Premium” that
Northeast Asian clients have to pay Middle East oil exporters. However, it should be taken into
consideration that the Asian premium, which is a product of the Middle East’s near-monopoly supply, will
disappear once Russia begins to export to Northeast Asia. In short, Russian oil may not have a price
advantage over Middle East oil because of higher development costs. Over time, the share of Russian
energy in the Japanese market will solely depend on its price. Given this possibility, Japan seems to have
lowered its expectation of the benefits of the ESPO and has had second thoughts about investing in
development and infrastructure projects related to it.
In addition to this doubt about the price issue, the neo-nationalist trend in Russia’s energy policy also
deters Japan from making a large-scale investment. Japan already had a bad experience in the Sakhalin-2
oil-and-gas project. The project was begun in the 1990s—when the price of oil hovered at around $10 per
barrel—under an international consortium, Sakhalin Energy, in which Mitsui (25 percent) and Mitsubishi
(20 percent) participated together with Royal Dutch Shell (55 percent). As energy prices rose, however,
the Putin administration began to promote a strategy to place energy projects completely under national
control. In September 2006, the Russian Natural Resources Ministry froze a key environment permit for
the project, citing problems with conservation, but it was widely believed that the accusation was only a
veiled ploy to pressure Sakhalin Energy to renegotiate the original deal to the Kremlin’s benefit. Among
other things, the Russian government wanted to change the terms of the contract, or PSA (product-sharing
agreement). Under the PSA, the Russian government could not receive any profits until the project
more than $10 billion, TNK-BP represents the largest single foreign investment in Russian history.
20
operator recouped investment costs. Therefore, when the Sakhalin-2 operator, citing higher steel prices
and a weakened U.S. dollar, announced it would have to double costs to $22 billion, it meant that Russia
would have to wait a much longer time before receiving any profits out of the deal. Eventually, the
conflict was resolved with rearrangement of the shareholding structure of Sakhalin Energy: each of the
three foreign shareholders ceded half of their shares to allow Gazprom to secure more than 50 percent of
the shares. Now Gazprom has a controlling interest in the Sakhalin-2 project, with the two Japanese
participants’ shares reduced to 12.5 percent and 10 percent, respectively.
Through the experience of the renegotiation of the Sakhalin-2 deal, along with doubts about the
eventual price levels of energy resources produced in East Siberia and the Far East, Japan has been
withholding large-scale investments in energy development projects such the ESPO.
(3) Sino-Japanese cooperation
Contrary to Russia’s expectations, China and Japan began to move beyond the competitive scramble
for Russian energy sources and sought to improve their relationship and cooperate in the field of energy.
It seems that Beijing and Tokyo increasingly find that competition over the Siberian pipeline is not in
their best interests, as this reduces their bargaining power vis-à-vis Russia.
The Japanese government under Prime Minister Shinzo Abe made the strategic decision to initiate a
dramatic rapprochement toward China, which included efforts to promote energy cooperation and bring
an end to the competition. Sino-Japanese ties had been deteriorating, especially over then-Prime Minister
Koizumi's repeated visits to Yasukuni Shrine, where several Class A Pacific War criminals are entombed.
The annual visits resulted in large-scale anti-Japanese demonstrations in Beijing, Shanghai, and other
parts of China, which in turn ignited anti-Chinese sentiment in Japan. Also, Japan and China have sparred
over energy rights in the East China Sea, which is believed to hold reserves of natural gas.
Shortly after coming to power, Abe visited China in October 2006 in an effort to reverse Japan’s
deteriorating bilateral relationship with China. In his summit meeting in Beijing with President Hu – the
first Japan-China summit held in China since October 2001 – the two leaders agreed, for the first time in
the two nations' bilateral relations, to work toward a "strategic partnership" in which energy was cited as a
priority area for cooperation. As far as energy diplomacy was concerned, Japan’s Trade Minister Akira
Amari noted, “Cooperation between the two countries is much preferable to competition that gives
suppliers the upper hand and increases uncertainty.”24
Wen Jiabao, China’s Prime Minister, returned Abe’s China visit in April 2007. In Tokyo, Abe and
Wen confirmed the decision to establish annual ministerial-level dialogue on energy, in addition to
broader dialogue on economic issues. Akira Amari and Ma Kai, head of China's National Development
and Reform Commission, also signed a joint statement on comprehensive bilateral cooperation in energy.
24
“Japan and China pledge energy dialogue,” International Herald Tribune, December 17, 2006.
(http://www.iht.com/articles/2006/12/17/business/summit.php)
21
Concerted efforts by Japan and China to improve their bilateral relationship led to a state visit by Hu to
Japan in May 2008, which was the first occurrence in a decade. In that summit meeting, the two sides
reconfirmed to continue ministerial-level dialogue to explore ways of developing energy cooperation.
(4) A multilateral framework for energy cooperation in Northeast Asia
There has emerged a movement probing for a multilateral framework for energy cooperation among
the major energy consumers in the Asia-Pacific. In December 2006, energy ministers of China, Japan,
South Korea, India, and the United States, which together account for nearly half of the world’s energy
consumption, gathered in Beijing to discuss collective ways to ensure a stable energy supply and energy
conservation. This was the first time an energy conference was organized to promote the interests of
importing countries in the Asia-Pacific. It was a nascent attempt to forge a common energy policy among
major energy importers to respond to the resurgence of producer power and to smooth over differences
over the best strategy to achieve energy security.
In comparison to the EU, Northeast Asian countries have a much longer way to go to develop a
common strategy for energy security vis-à-vis Russia. A major impediment is the fact that they have little
experience building regional institutions. There are several territorial disputes among many Northeast
Asian countries, and many of them also have yet to overcome historically-accumulated enmities.
Still, Northeast Asian countries have discerned that any attempt to secure external supplies
exclusively for a single nation will be counter-productive because it will induce others to take similar
measures and only strengthen the position of energy-supplying nation. Thus far, they have at least come
to the realization that any attempt for sufficient energy procurement sacrificing interests of other regional
countries will not help them to achieve their desired objective. That is progress.
If major consumers such as China, Japan, and South Korea cooperate with one another to negotiate
energy contracts with Russia, the process alone could improve the reliability of their joint energy supplies.
Furthermore, the United States’ increasingly proactive initiatives towards energy issues in the AsiaPacific have helped not simply to multiply policy coordination channels, but also to consolidate SinoJapanese energy dialogue, given that Washington and Tokyo share a common interest in engaging Beijing
as a “responsible stakeholder” in the region, to include issues related to energy security.
(5) The Central Asian factor
In trying to mitigate their excessive dependency on the Middle East, Northeast Asian countries are
also knocking on the doors of Central Asian republics. At the same time, Central Asian energy producers
are also looking to expand export markets to avoid excessive dependence upon their hitherto single buyer,
Russia.
China has been the forerunner in opening up the path to Central Asia, but Japan and South Korea are
not far behind. China strengthened its approach to Central Asia when they lost to Japan in the race for
22
Siberian oil pipeline. For example, in late 2005 the 1,000 km Atasu-Alashankou pipeline, the first
pipeline to bring Kazakh oil directly to China without going through Russian territory, was opened and
200,000 barrels of oil are being imported through it each day. The pipeline is supposed to be extended
farther westward to Kazakhstan’s oil fields in Atirau on the Caspian coast. China is also seeking to build a
gas pipeline to link Shanghai with gas fields in Turkmenistan, and possibly Uzbekistan. China has also
discussed and signed numerous other deals with Central Asian energy producers. For example, China
landed a major deal with Turkmenistan to construct a multi-billion dollar gas pipeline to Gangzhou,
which is expected transport some 30 billion m3 a year.
Japan has also begun to seek access to oil and gas in Central Asia, with greater interest being a part
of efforts to diversify energy import sources. In August 2006, Koizumi traveled to Kazakhstan and
Uzbekistan. Japan has also approached Azerbaijan to seek increased opportunity for Japanese investment
in new oil and gas projects. Aside from these energy-focused approaches, Japan has tried to build
programs for improved diplomatic ties with Central Asian countries on a broader basis. For instance,
shortly before Koizumi’s trip to Central Asia, Japan opened the “Central Asia plus Japan Dialogue,” a
meeting of foreign ministers in Tokyo between Japan and four Central Asian countries (to include an
observer from Afghanistan). In the meeting, an action plan for regional cooperation was discussed in
which Japan will help those countries to improve their border management and fight terrorism and the
drug trade in the region. Japan and the Central Asian Republics also signed an agreement to promote
cooperation, which included a plan to build roads in Tajikistan to transport natural resources via
Afghanistan to the Indian Ocean. Although Japan does not directly import oil from Central Asia at the
moment, it is keen on laying out a diplomatic foundation as a part of long-term energy diplomacy toward
the region.
South Korea is not neglecting Central Asia, either. Former President Roh Moo-hyun began energy
summit diplomacy with Central Asia countries in May 2006. The trip included a visit to Azerbaijan,
where he signed contracts for a sizeable stake in a joint oil development project in Inam, estimated to be
worth two billion barrels of crude oil. It was later learned that South Korea’s KNOC considered buying
shares of Azerbaijan’s state oil company (SOCAR). South Korea also has promoted energy cooperation
with Uzbekistan. The two governments agreed to explore oil fields estimated to have 820 million barrels
of crude oil. Uzbekistan also agreed to give South Korea’s KNOC a 20 percent stake in an international
consortium to develop a gas field in the Aral Sea.
The current government under President Lee Myung-bak lost no time in strengthening South Korea’s
energy diplomacy toward Central Asia. Lee appointed Han Seung-soo, a veteran diplomat, as his first
Prime Minister, primarily to assign “resource diplomacy” as his primary mission. He chose Central Asia
as a region deserving major focus for energy diplomacy, making a tour of four countries—Uzbekistan,
Kazakhstan, Turkmenistan, and Azerbaijan—to discuss joint development of energy and natural resources
while trying to improve economic and diplomatic cooperation with those nations. South Korea’s
23
activation of energy diplomacy toward Central Asia is partly a result of Seoul’s disappointment at the lack
of tangible results in its own oil and gas deals with Russia.
III. Conclusion
In Europe, Russia has been quite effective in consolidating its dominant position as energy suppliers,
and has been equally successful in nullifying the EU’s attempt to produce a united front by forming
individual energy relationships with various EU member states. A strategy of ‘divide-and-rule’ has been at
the center of Moscow’s energy diplomacy toward Europe.
Russia also has been turning the attention of its energy diplomacy toward Northeast Asia, where the
energy consumption has been rising most remarkably. Russia’s goal of becoming a major energy supplier
to Northeast Asia, however, has stalled even though there is an apparent harmony of interests among the
major energy consumers of the region. Russia needs markets, pipelines, and investment capital for its
untapped resources in East Siberia and the Far East; China, Japan, and South Korea need reliable and
affordable energy sources to meet their rising demands and reduce their excessive dependence on supplies
from the Middle East. But, the progress of energy cooperation between Russia and Northeast Asian
countries has been slower than both sides initially hoped. This slow progress was the result of many
factors, particularly the five factors discussed in this paper. Overall, the primary reason for delays has
been Russia’s failure to gain the trust of Northeast Asian countries in the course of its energy diplomacy
under the Putin administration.
Today Russia is providing only a fraction of the oil and natural gas consumed in Northeast Asia
([Table 19] and [Table 20]). This is largely due to a lack of infrastructure needed to develop the resources
and transport them to Northeast Asian consumers. If Russia wants to become a major energy provider in
Northeast Asia, as it has established itself in Europe, the Russian government should do everything it can
to provide attractive incentives and a hospitable environment for regional neighbors to invest in resource
development in East Siberia and the Far East to increase dependence on those resources. Moscow’s policy,
however, has not been so successful in convincing Northeast Asia that the investment is justified, either
economically and politically.
Economically, it still is hard to estimate how much it will cost to develop the untapped energy
resources located in Russia’s harsh natural conditions and transporting that energy more than 4,000 km to
Northeast Asian consumers. As a result, the price competitiveness of those resources is not certain in
comparison with oil and gas imported from other areas, such as the Middle East. It is true that Northeast
Asian countries are worried about their excessive dependence on the Middle East, where chronic political
instability threatens reliable supplies of energy resources. But, price and cost also matter; if oil and gas
developed in East Siberia and the Far East should cost too much, Russia won’t have markets in, or draw
investment from, Northeast Asia.
24
The need for Northeast Asian countries to reduce their reliance on the Middle East may be similar or
comparable to how EU countries feel about Russia’s dominant position as their energy resources provider,
but their diversification needs are quite different in nature. In the case of the EU, the most urgent reason
for diversification efforts is that Moscow has actually flexed its energy muscle at its partners. Russia has
tried to impose its policy on, and has suspended oil supplies to, Latvia (January 2003), Lithuania (July
2006), and natural gas supplies to Ukraine and Georgia (January 2006), Poland (October 2006), and
Belarus (January 2007). Therefore, the threat perception that the EU has about Russia is a real, rather than
potential, one. In the case of Northeast Asian countries, by contrast, the risk presented by the Middle East
is a potential, rather than an immediate, one. Oil producers in the Middle East have not used their supply
of energy resources as a policy weapon since 1973. Furthermore, unlike the situation with Russia,
Northeast Asian countries import oil and gas from a wide range of oil producers—not a single oil giant—
in the Middle East. Therefore, Northeast Asian countries do not have as desperate a need for
diversification as the EU.
In political terms, Northeast Asian countries are not convinced that investment in Russia is safe. The
neo-nationalist tendencies and arrogance of the Putin government has dampened the desire of Northeast
Asian countries to invest. China saw the Angarsk-Daqing pipeline project, which had been in discussion
for nine years and was finally agreed to at a state summit, overturned overnight. Japan saw how the
Kremlin pressured Mitsui and Mitsubishi to give up their shares of Sakhalin Energy and turn the
Sakhalin-2 into a Gazprom project. South Korea also has numerous experiences with energy projects that
were agreed to with the Kremlin get stalled later on after Moscow’s unilateral change of mind, as the
Kovykta gas project showed.
Moscow seems to forget the reality that Russia is in competition with other energy producing
countries. In other words, Russia is not the only alternative energy source to which Northeast Asia can
turn if they indeed need to reduce their high reliance on the Middle East. Central Asia, including the
Caspian region, is actually in competition with Russia for energy deals with Northeast Asian countries.
While Russia has failed to create a favorable investment climate in East Siberia and the Far East,
Northeast Asian countries have their own weaknesses to overcome: they lag far behind the EU in
developing a multilateral coordination body to collectively deal with Russia on energy resources. A
nascent movement has only recently emerged, joined by other major energy consuming countries like the
United States and India. This will certainly strengthen their bargaining power vis-à-vis oil exporters like
Russia, but it will also be a long while before those regional actors are able to overcome impediments to
the successful progress of that movement.
25