WORLD / Wall Street Journal Exclusive

Energy at top of agenda for Putin visit
Updated: 2006-03-20 11:26,,SB114280807052102467-e439wjlGrbnpiMLfH_oHr_HOzLY_20060326,00.html?mod=regionallinks

Russian President Vladimir Putin is scheduled to visit Beijing tomorrow for talks in which energy will be high on the agenda. China intends to push its energy-rich neighbor to deliver on past promises to supply it with more power.

During Mr. Putin's two-day stay, his hosts are likely to convey growing frustration that Russia hasn't provided as much energy assistance as China has wanted. Beijing is expected to push the Russian leader to commit to specific plans for building oil and gas pipelines to China.

"China isn't satisfied with the development of cooperation in energy," Zhang Guobao, vice chairman of the National Development and Reform Commission told Russia's Interfax news agency early this month, in a rare display of open concern. "The practical level of cooperation in my view is still very insignificant."

The lack of progress is disappointing to China, which has scoured the globe for energy to supply its fast-growing economy, even though Russia, the world's largest gas producer and No. 2 in oil, is next door. At present, Russia supplies no gas to China and roughly 5% of China's oil imports.

A legacy of Cold War tensions between the two giants, there are no major pipelines and limited rail links across the shared border. Last year, Russia shipped 7.7 million metric tons of crude by rail to China. It had promised 10 million tons.

This week's discussions are expected to center on reviving talks to build a spur that would carry oil directly to China from a $7 billion pipeline Russia plans to build across east Siberia to the Pacific, as well as a stalled gas pipeline.

For years, China has pressured Russia to build more links and expand shipments. But Kremlin politics, Russia's legendary bureaucracy and Moscow's persistent suspicions of its more-dynamic neighbor have led to delays and broken promises. Beijing's efforts to buy up Russian energy assets, meanwhile, have run into roadblocks from the Kremlin.

China is particularly eager to foster closer energy ties with Russia because routing resources by land could be more secure than sea shipping. Currently, some four-fifths of China's oil imports pass through the Straits of Malacca in Southeast Asia, which Chinese planners fear could be easily blocked.

Officials on both sides say a deal on a spur for the oil pipeline to the Pacific could be signed during Mr. Putin's visit, although Russia's record on following up pledges has Beijing wary.

"Take the question of building the oil pipeline. ... One Russian official says Russia has made the decision, another says it hasn't," Mr. Zhang told Interfax, in comments that were confirmed by his office in Beijing last week. "The whole process is unsatisfactory."

Japan, meanwhile, has been pressuring the Kremlin to ensure that any pipeline runs to the Pacific -- not directly to China -- thus preventing Beijing from monopolizing Russian supplies. Despite Russian assurances that there will be enough oil for both customers, Tokyo officials are concerned that China's surging demand could mean that no Russian crude flows to the Pacific Ocean, and on to Japan.

Within Russia, meanwhile, there is infighting over who will carry the oil. The national railroad was planning to spend more than $1 billion to expand lines to carry crude to China. It now wants the government to guarantee that the planned pipeline won't divert those flows, even though rail shipments are more costly.

Russian officials insist they want to see more oil flow to Asia, especially China, and hope the planned pipeline will stimulate growth across the desolate Siberian region. When completed in 2008, the line is slated to carry 600,000 barrels of crude a day. Moscow has said it will expand daily capacity to 1.6 million barrels, although officials have given no indication of when that might happen.

Han Xiaoping, senior vice president of Beijing-based energy consultancy Beijing Falcon Pioneer Technology Co., said the negotiations may still take time. "Russia isn't market driven. But maybe this [Putin] visit is slowly the turning point."

Moscow is only beginning talks on links to supply gas to China. An official from the state gas company OAO Gazprom said it will sign an agreement in Beijing this week spelling out planned volumes and the pricing formulas for future gas shipment. But officials indicate key issues including where the multibillion-dollar pipelines will be run remain unresolved.

"In Russia, the contract signing is only the beginning of the negotiation," said Stephen O'Sullivan, an analyst at United Financial Group, a Moscow brokerage. "The Chinese are increasingly strident in their view that 'We're not just going to wait for you.' "

While Beijing would clearly prefer the security and low cost of pipeline gas from Russia, the Chinese government could also build more terminals for liquefied natural gas from elsewhere in Asia as an alternative.

Beijing had been working with BP PLC on a deal to bring in gas from the huge Kovykta field, which lies relatively close to the Mongolian border near Lake Baikal. But Gazprom blocked that project, saying it wants to determine where pipelines are built.

In an interview with Chinese media Friday, Russian First Deputy Premier Dmitry Medvedev, who also serves as chairman of Gazprom's board of directors, seemed to provide a ray of hope for Kovykta, citing it as an example of what he called "significant potential for cooperation in the gas sphere."

Russian officials have expressed concern that building a gas pipeline directly to China would leave them hostage to a single buyer. Analysts and officials said Gazprom needs to decide quickly on its plans for fields and pipelines to be able to deliver gas by early in the next decade.