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. Last Updated: 07/27/2016

From Pipe Dream to Pipe Reality

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Chinese President Hu Jintao's visit to Moscow on Monday will provide ample opportunity for Russian and Chinese leaders to sit down and assess the past, present and future of energy cooperation between the two countries. While Moscow and Beijing already work together in a variety of areas including trade, arms and diplomacy, energy has the momentum at present. With Russia rivaling Saudi Arabia to be the world's largest oil producer and China the second-largest oil consumer, the logic for cooperation is clear. Yet distrust, suspicion and envy have stymied the development of this relationship.

China's thirst for oil is clear from the numbers. Although the country was self-sufficient in oil as late as 1993, unprecedented economic growth in recent years has drastically changed the situation. Since 1995, for example, China's gross domestic product has grown by 8 percent to 10 percent per year, while oil imports have increased by an average of 22 percent.

And the appetite continues to grow. According to a September 2005 report from China's Energy Research Institute, China's oil demand will top 11 million barrels per day by 2020. By the same year, China will have to be a net importer of almost 8 million barrels per day, versus about 4 million now. How will it make up the difference?

Russia, which is sitting on top of some 75 billion barrels of oil (more than 6 percent of the world's total) and is the world's second largest exporter, could play a part in the solution. Russia's current output of 9.8 million barrels per day is above that of Saudi Arabia, which has to adhere to OPEC quotas. Russian exports run close to 5 million barrels per day, of which only a small fraction, 320,000 barrels per day, was sent to China by rail in 2006. Saudi Arabia, Angola and Iran each export more oil to China than Russia, which is right next door. Sharing a 4,200-kilometer border, Russia and China would seem to be a natural fit for oil and gas pipelines.

But Russian-Chinese oil collaboration has been very slow to develop. In 1995, China was not yet importing any crude oil from Russia, and over the next five years Russia never exported more than 7,500 barrels per day to China. Due to the development of railroad infrastructure in eastern Russia and northern China, Russia exported almost 26,000 barrels per day to China in 2000.

By 2005, the Russian-Chinese energy relationship had reached a new level. Following a number of major intergovernmental agreements, including the Agreement on Goodwill, Friendship and Cooperation, Russia exported 256,000 barrels per day to China, becoming its fourth-largest source of imported oil. Russia is still in fourth place today but could rise in importance.

Cooperation on the corporate level has registered significant progress in recent years as well. Last July, China National Petroleum Corporation, or, or CNPC, bought a $500 million stake during Rosneft's IPO, currying favor with both the Kremlin and the Russian oil giant. Within four months, the two established a joint venture, Vostok Energy, which will focus on exploration and production in eastern Siberia. There even has been discussion of CNPC participating with Rosneft in the acquisition of Yukos assets and of joint cooperation in building a refinery in China. Going forward, it would be logical for this type of cooperation to expand -- with Russian companies gaining market share in the Chinese downstream sector and Chinese companies receiving limited access to Russian upstream assets. The role that the Russian government will give to independent companies like TNK-BP and LUKoil in building these corporate relations with Chinese companies is still being decided in the Kremlin.

Ambitions in Moscow and Beijing run even higher. Under the Kremlin's energy strategy to 2020, Russia plans to export one-third of its total oil exports to Asia by 2020. If all goes according to plan Russia will be China's largest crude supplier next decade with more than 600,000 barrels exported daily.

But for the energy trade to become truly robust -- and for Moscow to meet its export target to Beijing -- the two sides still need to resolve issues of infrastructure, sourcing and political will. The most important is the East Siberia-Pacific Ocean pipeline, an ambitious project that has received strong Kremlin backing and is intended to bring eastern Siberian oil to the Asian market. The project, which will only be completed by 2015 at the earliest, is likely to cost more than $16 billion and will be capable of transporting 1.6 million barrels per day. China may be the first to benefit from a direct pipeline link from eastern Siberia to northern China, but unresolved disputes over whether to export by rail or pipelines may stall progress. For now, however, competing interests fighting for access to east Siberian oil (which will be used to fill capacity of the pipeline) and the ability to export the oil has created a bottleneck in the bureaucratic process.

Another issue is sourcing. Russia has already committed itself to exporting the vast majority of its west Siberian oil through its far more developed -- and for now far more profitable -- pipelines to Europe. Reserves in eastern Siberia, estimated to total 3 billion barrels, are not only much less developed but also far more difficult to extract given the permafrost in the area, the lack of infrastructure and the high levels of associated gas and helium. The lack of a concerted strategy by Russian companies to invest sufficient resources into east Siberian oil extraction, compounded with questions over the rising costs of the East Siberia-Pacific Ocean pipeline, has led some skeptics to wonder whether Russia will be able to meet its targets vis-a-vis China and other Asian buyers.

Politically, Kremlin officials have a complicated relationship with China. On the one hand, they view it as a land of huge economic opportunity. On the other, however, they question whether it is in their interest to fuel the growth of potentially the world's next superpower sitting right next door.

Chinese officials, meanwhile, have their own concerns. They are anxious to diversify their ever-increasing energy needs away from the Middle East, from which they currently receive about 40 percent of their crude imports. But they are becoming increasingly irritated with corporate and administrative infighting in Moscow. For all the logic behind cooperation, the relationship is still fraught with apprehension. There are also, of course, fears in Europe over the future of Russia as their leading gas supplier and uneasiness in Washington over the emergence of a new balance of power in this part of the world.

Despite the fact that Chinese-Russian energy cooperation has come a long way over the past decade, it has a long way to go to reach its full potential. To be sure, cooperation is logical and workable, but for now it remains something of a pipe dream.

Ilya Bourtman is a research associate and Julia Nanay is senior director of the Russia and Caspian Service at global energy consultancy PFC Energy.