IEEJ: January 2011

Special Bulletin
September 3, 2010
A Japanese Perspective on the International Energy Landscape (9)Progress Made toward Operations of China-Russia Crude Oil Pipeline
on Completion of Russian Portion
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
Institute of Energy Economics, Japan

On August 29, a ceremony took place in the presence of Russian Prime Minister Vladimir
Putin to mark the completion of the Russian portion of the planned Sino-Russian crude oil pipeline.
Of the planned 1,000-kilometer pipeline linking Russia’s Skovorodino (in Amur Region) to China’sDaqing (in Heilongjiang Province), the completed portion is about 70 kilometers from Skovorodino
to the Sino-Russian border. The Chinese portion, which has been constructed along with the Russianportion, is planned for completion within this year to pave the way for Russian crude oil exports toDaqing through the pipeline.
This pipeline represents part of a giant project known as the East Siberia-Pacific Ocean oilpipeline (ESPO). The Russian government approved the basic concept of the ESPO project in late2004, and the construction of the Phase 1 started in April 2006. The ESPO project envisages thedevelopment of oilfields in East Siberia as a frontier region in Russia and the construction of a4,600-kilometer pipeline to transport 50 million tons in crude oil annually (1 million barrels per day)from Taishet in Irkutsk State to the Pacific Coast after the completion of the Phase 2. The
Taishet-Skovorodino portion (i.e. the Phase 1) was completed in October 2009. An oil export
terminal was built in Kozmino on the Pacific Coast in December 2009, and oil exports to the Asianmarket started subsequently.
China and Russia have so far implemented crude oil trade via railways. China’s crude oil
imports from Russia in 2009 totaled 15.3 million tons. Russia is the fourth largest crude oil exporter
to China, following Saudi Arabia, Iran and Angola. The Skovorodino-Daqing pipeline as discussed
at the outset is a Chinese branch of the ESPO pipeline, linking Russia’s East Siberian oilfields toChina. But the portion between Skovorodino and Kozmino on the Pacific Coast does not exist now.
The planned Phase 2 ESPO project to increase the annual transportation capacity from 30 million
tons to 80 million tons has many problems and uncertainties. Under such situation, the Russia-China
branch pipeline construction has made steady progress in an attention-attracting manner.
How significant are the progress toward operations of the Chinese branch, the entire ESPO
project and Russia’s East Siberian oil development? I would like to analyze these questions from theviewpoints of Russia, China, international energy markets and Asian energy markets including
Japan.

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Russia may expect the construction of the Chinese branch pipeline to lead to theenhancement of Russia-China economic relations through the expansion and deepening of bilateral
oil trade. It may also be expected to provide Russia with many advantages including (1) its enhanced
access to the expanding Chinese energy market, (2) the diversification of oil export destinations thathave so far focused on Europe, and (3) the promotion of economic development in East Siberia as afrontier region. Just as was the case of the ceremony to launch oil exports at Kozmino in late 2009,
Prime Minister Putin was present at the ceremony of the Chinese branch pipeline to demonstrate theimportance of the project for Russia.
Meanwhile, the Russia-China pipeline project is very significant for China that has
expanded oil demand substantially and grown more dependent on imported oil. Like Russia, China
may expect to enhance bilateral relations through energy cooperation. In addition, China may expect
such effects as (1) secured massive energy supply from Russia’s East Siberia that is geographicallyclose to China and (2) the reduction of China’s dependence on the Middle East to diversify energy
supply sources. Furthermore, the project could provide CNPC and other Chinese state-run oil
corporations with opportunities to participate in the development of energy resources in Russia
including East Siberia.
The Chinese branch pipeline is thus very significant for both Russia and China and theirgovernments have fully recognized the significance. This may be the reason for the Chinese branch
construction making faster progress than the overall ESPO project. Another contributor to theprogress might have been a $2.5 billion loan that China provided to Russia (for state-run oilcompany Rosneft and state-run oil transporter Transneft) amid difficulties facing the energy industryin February 2009 after the Russian economic situation deteriorated in the course of the financial
crisis. As noted by experts, China and Russia may still have mutual distrust or a sense of caution
against each other from national security and other viewpoints. Their relations might haveambivalent aspects as well as deepening economic relations through energy cooperation. Regarding
basic energy interests, however, the two countries undoubtedly need each other in some areas. In thisrespect, we may be able to conclude that their relations are deepening steadily.
Lastly, how Russia would go ahead with energy resources development through ESPO andother projects may attract attention when we consider Russia’s influences on international energy
markets. As indicated by the North Sea oil development, the construction of pipelines as
infrastructure can trigger energy resources development. How Russia will develop East Siberia (andthe Russian Far East) with apparently rich energy resources in connection with infrastructuredevelopment is important for anticipating the medium to long-term international energy
supply/demand balance. We may also have to pay attention to how Russian energy resources
development will influence energy procurement by China that has become the mostattention-attracting buyer in international energy markets. China’s increasing energy imports from
Russia are expected to affect the overall market supply/demand balance as well as other majorenergy suppliers’ export and market strategies. As such energy suppliers as Middle Eastern oil
producers pay attention to the Chinese market, I am deeply interested in how they will develop their2

IEEJ: January 2011

Chinese market strategies. Considering that ESPO crude oil exports, which have started at Kozmino,
and expanding Sakhalin crude oil exports have begun to influence the supply/demand balance andprices in the Asian oil market, we may have to carefully analyze the future effects of Russia’s
expanding energy trade with Asia including China.
Contact: report@tky.ieej.or.jp

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