Hard energy dialog: lose in the West, gain in the East

24.10.06
MOSCOW. (Igor Tomberg for RIA Novosti) - Russian state-owned oil company Rosneft and China's CNPC have signed a protocol to set up a joint venture, Vostok Energy, to develop and produce mineral resources in Eastern Siberia.
China will finance the development stage in exchange for access to Russian deposits and stable deliveries of oil and petrochemicals. The venture's authorized capital will be $10 million. Rosneft will control 51% in the company, and CNPC will hold the remaining 49%. CNPC became Rosneft's official partner in March 2006, when the two companies signed a memorandum to establish a venture. Among other things, the new company will conduct geological and exploration work in Russia, develop mineral deposits and obtain licenses for the use of mineral resources.
The partners have clear goals. China will gain access to production licenses, which will enhance its potential as a buyer of hydrocarbons. In turn, Rosneft expects the Chinese company to fund the exploration of East Siberian deposits and is seeking a stake in Chinese refining facilities in exchange for deliveries of oil and petrochemicals to China. Analysts believe today the Russian company's output exceeds its refining capacities almost tenfold. Refining its own reserves on Chinese equipment will enable it to capture part of China's fast growing petrochemicals market.
In this light, CNPC, China's largest state-owned oil and gas company, which plans to invest more than 180 billion yuans ($22.42 billion) in developing oil refining and petrochemical production, is clearly a good choice. By 2010, CNPC will own five oil refineries with an annual capacity of 10 million metric tons of oil, two aromatics plants, four facilities to produce mineral fertilizers and six large ethylene companies.
There are also plans to unfold a retail chain by 2010. Chinese oil companies are gradually getting closer to Russian mineral resources. The Vostok Energy project became another major step towards closer energy cooperation between the two countries after Sinopec, China's No. 2 oil company, and Rosneft bought Udmurtneft, a regional oil producer.
Though the venture has an ambitious program, it could look like an ordinary event but not today. The split between Russia and the European Union, the major buyer of Russian hydrocarbons, testifies to Europe's fundamental misunderstanding of or its unwillingness to understand Russian interests. The generous offer Russian President Vladimir Putin recently made to Germany was followed by a joint statement by France and Germany, rejecting Russia's latest energy initiatives. The powerful European countries declared their intention to set up a bilateral energy alliance and called on Russia to ratify the EU's Energy Charter, which many Russian officials have repeatedly said will be unbeneficial to Russia.
Europe has made it clear that it wants to develop direct contacts with oil producing countries in Central Asia and the Caspian region, and with transit countries, primarily Ukraine, which will not bring Russia any commercial advantages, nor will it be justified politically or historically. The powerful pipeline network built by the Soviet Union is Russia's competitive advantage. Unfortunately, all Moscow's calls on Europe to consider energy security for consumers and producers has so far been in vain.
Putin's statement that Russia will soon supply up to 30% of its hydrocarbons to Asia alarmed Europe, which is facing a shortage of energy resources for its evolving demands. Russia's attempts to prove its responsibility and reliability as an energy security guarantor in Europe are met with mistrust or demands for unjustified concessions. Russia is almost being ousted from Europe, and the East remains a viable alternative. Not accidentally, an agreement was signed on Sakhalin gas supplies to South Korea during a recent visit to Seoul by Russian Prime Minister Mikhail Fradkov. As a reaction to Europe's misunderstanding, the share of Asian consumers may exceed the president's forecast of 30%.
Dr. Igor Tomberg is a senior research fellow at the Center for Energy Studies, the Institute of World Economy and International Relations of the Russian Academy of Sciences