Securing China's Energy Future

Interesting article, but I tend to distrust research made or led by political scientists, 'cuz political scientists are NOT scientists, but politicians pretending to be smart. Politicians are just really good at manipulating people. In addition, US reports on China tend to be accurate in some regards, but completely wrong in others. I want to see China's reports, too.

I would like to point out that China's population concentration is a lot higher than America's. This is greatly due to the fact that China has only 1 major shoreline. America has 4 major shorelines:

1. Alaska's entire coastline (Alaska does have an extremely low population density)
2. East coast
3. West coast
4. South coast

Imagine if America concentrated its 4 coastal populations into 1 major shoreline like what is going on in China. Imagine the pollution and waste that would be concentrated. Think about the concentration of social problems, political problems, economic problems, and cultural problems. Then think about how America's central territories are also vastly more inhabitable than China's central territories. America has far more inhabitable land than China, so America can spread out its population and pollution, unlike China.

Also remember that China is in an industrial revolution so it typically has fast growth for both good stuff and bad stuff. Nonetheless, China needs and is trying to refine its economy to focus on positive growth and minimize negative developments.

China’s Strategic Petroleum Reserves in Sino-Venezuela Relations

By Jianjun Tu

After inviting two Russian strategic bombers capable of carrying nuclear weapons to land in Caracas as part of a joint military maneuver—whose significance was downplayed by the Russian authorities—Caracas expelled U.S. Ambassador Patrick Duddy on September 11. Venezuelan President Hugo Chavez has since embarked on a whirlwind diplomatic tour that took him to Beijing and also includes stops in Moscow and Havana, with the obvious intent to throw salt in Washington’s eyes by cozying up to U.S. competitors and adversaries. After holding talks with his Chinese counterpart Hu Jintao in Beijing on September 25, 2008, Chavez told journalists that he was committed to further strengthening Venezuela’s energy cooperation with China. Apart from tripling Venezuela’s oil exports to China to one million barrels a day by 2012, other plans include joint projects to build three oil refineries in China capable of processing Venezuela's heavy and sulphur-laden crude oil, the construction of four oil tankers, and even a military contract for the purchase of 24 K-8 aircraft from China in 2009. Though Chavez claimed that Venezuela would not immediately suspend crude exports to the United States on increased supplies to China, closer Sino-Venezuelan ties sweetened by military deals is a cause for legitimate security concern from Washington (International Herald Tribune, September 10; September 23; BBC News, September 25; Press TV, September 25).
China’s Energy Cooperation with Venezuela in Sino-U.S. Relations

China’s thirst for oil and resources fuelled by the country’s breakneck economic growth has been the primary driver behind its proactive engagement in forging ties with Venezuela and other regimes with troubled relations with the West. Though oil exports had long been an important source of the Chinese government’s revenue since Beijing began exporting its crude to Japan, the Philippines, and Thailand in the wake of the 1973 Arab oil embargo, China eventually lost its long cherished status of energy independence in 1993. Since then, China’s net oil imports including crude and refined petroleum products increased rapidly at an astonishing rate of 22 percent annually, reaching 197 million tonnes (Mt) in 2007. China’s 93 Mt increase in petroleum imports between 2002 and 2007 accounted for 19 percent of world oil trade growth during the same period, and is widely regarded as one of the primary reasons behind the recent oil price spike from around $25/barrell in 2002 to a critical level that has hovered around $100/barrell [1]. With an unprecedented crude output of 3.7 million bbl/d in 2007, China is also the fifth-largest oil producing country in the world. However, China’s domestic crude production could not keep pace with its economic growth. After China overtook Japan as the world’s second largest oil consumer in 2003, China’s nominal GDP grew at 16 percent annually, but its crude production only increased marginally by 2.4 percent on a year-over-year basis. According to the International Energy Agency (IEA), China’s dependence on oil imports will rise from about 50 percent today to near 80 percent in 2030 [2].

While a sustainable world economy requires a steady flow of crude oil, the small absolute value of price elasticity in the global demand for crude oil means that even modest reductions in supply can result in dramatic price shocks, which will lead to adverse economic disruption to net oil-importing countries like China. Not surprisingly, securing oil supply from offshore sources has long become a priority for Chinese policy makers. As Daniel Yergin, chairman of Cambridge Energy Research Associates, observes, “If there was a single overarching principle (for energy security), it was the importance of diversification” [3]. Two years before China’s crude imports reliance on the politically unstable Middle East peaked at an “unacceptable” level of 61 percent in 1998, CNPC won the tender for the “Block 1/2/4” project in Sudan. In 1997, CNPC acquired 100 percent holding of the Intercampo Oilfield on Maracaibo Lake and the Caracoles Oilfield in the East Venezuela Basin [4]. These two single events highlighted both Beijing’s desire of diversifying its oil supply and the beginning of China’s aggressive oil diplomacy.

China’s heavy reliance on oil imports has made China vulnerable as other industrialized nations to oil supply disruption. Being a net oil-importer should, in principle, bring China’s national interests closer to those of the oil-dependent West. However, in practice, China has so far acted as a pariah courting major oil producers for exclusive rights to supplies while defying economic sense. Beijing’s political and monetary support that include military sales to Sudan, Angola, Iran and Venezuela has especially undermined the West’s agenda of pressing these regimes for political changes, thus attracted criticism from the West. Meanwhile, though China has reaped short-term benefits by defying the West’s sanctions on countries like Sudan and Iran, Beijing’s uncoordinated oil diplomacy nevertheless has increased geopolitical risks to the long term stability of the world oil market, which may contradict with its long-term interest as a net oil-importer.

China and the West largely played a zero-sum game in their oil diplomacy during the decade. For instance, no matter how Iran’s nuclear threat and the Darfur Crisis are perceived by the West, China always chooses to stick to its economic bottom line. In comparison, a number of events—such as the British Gas group’s existing partners’ (all established international oil companies) decision to exercise their rights to pre-empt CNOOC and Sinopec’s bid for the North Caspian Sea Project in 2003, the U.S. Congress’ vehement intervention on CNOOC’s unsuccessful Unocal acquisition in 2005, Chinese national oil companies’ failure to access Canada’s vast oil sands resources partially due to the Canadian government’s indifference in terms of diversifying its oil demand—have reinforced the mistrust between China and the West. Not surprisingly, a deeply insecure Beijing has tried every available method to improve its energy security including the establishment of a strategic petroleum reserve (SPR).

China’s Strategic Petroleum Reserves

Strategic Petroleum Reserves (SPR) are quantities of crude oil or petroleum products held either to facilitate draw-downs to reduce the economic impacts of crude oil supply disruptions or to deter purposeful reductions in crude oil supply for political ends. According to an official from the State Development and Reform Commission (SDRC), the development of China’s SPRs is based on a three-phase schedule: about 10 to 12 million tonnes for phase one, and 28 Mt for both phase two and three [5]. Though the preparation and evaluation for China’s SPRs began as early as 1993, the official approval of the establishment of the SPRs did not pass through China’s largely ineffective bureaucratic energy decision-making process until March 2004. The first phase includes four stockpiling facilities at Zhenhai (Ningbo), Aoshan (Zhoushan), Xingang (Dalian) and Huangdao (Qingdao). A combined storage capacity of 103 million barrels has been developed: Zhenhai by Sinopec; with 33 million bbl; Aoshan by Sinochem, 31 million bbl; Xingang by PetroChina, 19 million bbl; and Huangdao by Sinopec, 20 million bbl (Reuters News, April 2, 2007).

The IEA set a stock requirement for its members based on levels of imports. Specifically, each country is required to hold petroleum stocks, exclusive of military stocks and oil in transit at sea, equivalent to 90 days of net petroleum imports. After China’s remaining three stockpile bases in phase one were completed between 2007 and 2008, the storage capacity of China’s SPRs represents an equivalent to 24.7 days of China’s net oil imports in 2007 (or 12.6 days of China’s oil consumption in 2007). Coupled with industrial stocks, China’s total oil reserves would allow the country to operate as usual for more than two months without oil imports (or more than one month of China’s oil consumption). Moreover, 28 Mt of storage capacity is planned to be added both by and beyond 2010 under the second and third phases. According to the IEA’s projection, China’s net oil imports will rise sharply from 3.7 million bbl/d in 2007 to 7.1 million bbl/d in 2015 and 13.1million bbl/d in 2030. If so, the total capacity of China’s three-phase SPRs could only cover slightly over 70 days of China’s net oil imports in 2015. Nevertheless, the ultimate aim of China’s SPR plan is to meet the IEA standard, and Beijing is using a hybrid approach to establish its SPRs—while the government and state energy companies shoulder one-third and two-thirds of the financial burden to build the public SPRs, respectively. The industry also needs to meet the shortfall between the three-month net-imports criteria and the public oil stock, though much remains to be done in defining public, quasi-public and quasi-private roles in establishing and maintaining the oil reserves.

Due to its potential impact on the world oil market, the filling schedule of China’s SPRs has caught the attention of the international community. On October 10, 2006, the stockpiling of 3 million bbls of Urals oil from Russia to the Zhenhai base marked the beginning of a massive SPR buildup in China (Shanghai Securities News, October 11, 2006). However, apart from sporadic anecdotes like this, the lack of transparency is the main characteristic of China’s SPR filling strategy. To build a stock to meet the IEA standard by 2015, China needs to import 220 thousand bbl/d of crude oil, which translates into 0.24 percent of world crude output between 2007 and 2015. If China is willing to build up its SPRs at a longer time framework, meeting China’s SPRs requirement by 2030 only represents 0.14 percent of world crude output during the same period. Given the relatively small percentage of China’s SPRs to the world oil output, an appropriately designed and transparent filling schedule could minimize impacts of China’s SPRs on the international oil market, especially considering Beijing’s close ties with major oil-producing countries.

Similar to oil-importing countries, major oil-producing nations also need to observe the overarching principle of diversification. Given the enormous potential of China’s oil demand in terms of the scale of its economic growth, many oil-producing nations are keen to maintain close ties with Beijing, which explains why Saudi Arabia, Iran, Kuwait and Venezuela have all shown strong interest to help China fill its SPRs. Saudi Arabia, the swing producer of the Organization of Petroleum Exporting Countries (OPEC), so far possesses the greatest potential of producing significant amounts above its OPEC quota to fill Beijing's SPRs without disrupting the market. If Riyadh supplies an extra one million barrels per day for Beijing, it would only take less than two years to build up enough of a reserve to last China three months by 2015. To minimize market speculation, China should rely primarily on Riyadh or other oil-exporting countries’ spare capacity to fill its SPRs with long-term contracts. Unfortunately, even after the State Oil Reserve Office was created under the former Energy Bureau of NDRC on December 18, 2007, there was no sign that China has adopted such a strategy. To make matters worse, Beijing currently holds a strange view that filling SPRs with domestic supply or oil obtained from state oil companies’ overseas production sharing contracts could alleviate the impacts of China’s rising demand on the international market. Based on such an assumption, on December 6, 2006, Xu Dingming, deputy director of the former National Energy Leading Group Office at NDRC revealed that China had already started to fill the Zhenhai base with oil primarily from the domestic sources, which was widely regarded by policy analysts in Beijing that China will largely use domestic oil to fill its SPRs (Xinhua Net, December 8, 2006). However, as it is the volume of China’s net oil imports that really matters, sending contradictory signals can not achieve the intended goal of calming down market speculation, which is evident by the continuous oil price spike since then.

Sino-West Energy Relations at a Crossroads

In the past, Sino-West energy relations have been tainted by mistrust. As a result, the level of coordination between China and members of the IEA in the international oil market is significantly lower than it otherwise should be. As China quickly gains international political clout through multilevel engagement with third-country suppliers, continuing hostility toward China is unconstructive and may backfire sooner or later. Therefore, engaging China should serve the interests of the international community better; one good example is the IEA’s continuous dialogue with China on energy-related issues. Given the common interest of both as an oil importer, much could be done to coordinate China and the West’s moves in the international oil market. Therefore, admitting China into the IEA is an idea which warrants serious deliberation.

When China first decided to establish its SPRs in 2004, the economic assessment was based on a world oil prices of $30 - $40/bbl, with the underlying political driver of a potential conflict with the United States over the Taiwan Strait. However, after world oil prices skyrocketed to a level above $100/bbl, the economic net cost-benefit of developing China’s SPRs became increasingly unbearable. Moreover, after Taiwanese President Ma Ying-jeou’s victory at the polls in March 2008, ending 8 years of pro-independence Democratic Progressive Party rule, the danger of a Sino-U.S. military clash over the Taiwan Strait has diminished for the near future. Since there is no endogenous solution for China to fix its vulnerability toward oil supply disruption, this is an opportune time for the West to explore Chinese membership in the IEA in exchange for Beijing’s positive political and economic compliance to international norms. Currently, Chinese admission to the IEA faces several roadblocks, chiefly the prerequisite of Organization for Economic Cooperation and Development membership and the requirement of a three-month oil stockpile [6]. However, with China looming ever larger as a petroleum consumer and importer, if Beijing is not brought into the fold of major oil importing countries, its pariah-style responses in an energy crisis could potentially disrupt the coordination efforts of the major Western powers.

As an emerging power in an increasingly multi-polar world, China’s economic stakes—which are critical for regime security—may be best served if it maintains the condition of assisting the West in preserving world order when necessary, while keeping the United States at arms length and avoiding direct conflict over access to oil. Furthermore, with sufficient economic and political incentives such as a special status in the IEA, the West may open a window of opportunity to shape China to Western oil-importing countries’ advantage. Continuous engagement with Beijing is likely to foster cooperative Sino-Western energy relations in the years to come; otherwise, a deeply insecure China may form much closer strategic ties with whichever country offers it oil.

This energy article could have been talking about China, South Korea, Japan, India, America, or any nation in the European Union. Its fundamental events and lessons apply to any nation that consumer lots of oil or any resource at a net total level or at a per capita level.

The world better learn to work together on how to use world resources, or else we will be repeating the events that led up to WWI and WWII. The power grab will be slow, but when each major power realizes what the other major powers are up to, then every major power will run over each other to grab power only for itself.

I think this is the pebble-bed reactor finally going into commercial use in China. Hope it reaches its potential in safety, uranium efficiency & cost effectiveness, and reduce the dependence on coal.

08:31, October 08, 2008

Huaneng gears up nuke plant
China Huaneng Group, the country's largest power producer, yesterday signed deals with suppliers to equip its first nuclear power plant in Shandong province.

Makers of the equipment used for the plant include Tsinghua University, China Nuclear Engineering Group Co, Shanghai Electric and Harbin Power Equipment Corp.

The Huaneng nuclear plant, located at Shidao Bay in the city of Rongcheng, is expected to use high-temperature, gas-cooled technology. It is said to be the first nuclear power plant in China using the technology.

Construction of the plant, which is designed for a capacity of 200 mW in the first phase, will start in September next year. It is scheduled to start operations in 2013.

Compared with conventional technology, nuclear reactors using the new technology are safer, more efficient and more simply designed, analysts have said.

China, the United States and South Africa are considered to be leaders in the area.

"The project, which can be seen as a milestone in China's nuclear industry, will further boost the technological level of the sector," said Sun Qin, deputy head of the National Energy Administration.

As the world's fastest growing economy and the second largest energy consumer, China in 2005 had planned to increase its nuclear power capacity to 40 gW by 2020, when it would account for 4 percent of the nation's total power capacity.

But due to rapid development in the sector, the country this year readjusted its earlier goal, by increasing nuclear power provision to 5 percent of total power capacity in 2020.

China currently has a total of 11 nuclear reactors in operation, with a combined installed capacity of 9,080 mW, according to the China Electricity Council. The country has developed three nuclear power bases - Qinshan in Zhejiang province, Daya Bay in Guangdong province and Tianwan in Jiangsu province.

The country's major power companies have all attached increasing importance to the development of nuclear energy. Other domestic power companies such as Guodian and China Power Investment are planning or building nuclear projects.

Besides nuclear power, they are also paying more attention to clean energy. For example, Huaneng will accelerate the development of hydropower, wind power, solar power and biomass power. By 2010, installed power capacity using such clean energy will increase to 13,000 mW, sources with the company have said.

Huaneng is also currently developing wind power plants in Hainan, Guangdong, Jilin and Shandong provinces, as well as in the Inner Mongolia autonomous region. At present, the company's wind power operations and planned projects have a combined capacity of more than 1,300 mW.

Source:China Daily

Cuba suddenly seemed to have much potential.




Cuba claims massive oil reserves


Cuba currently produces 60,000 barrels of oil a day

The state-owned Cuban oil company says the country may have more than 20bn barrels of oil in its offshore fields - more than double the previous estimate.

Cubapetroleo's exploration manager said drilling in the offshore wells would begin as early as the middle of 2009.

Such reserves would place Cuba among the top 20 oil producing nations.

Cubapetroleo's estimates are based on comparisons to known oil reserves found within similar geological structures off the coasts of the US and Mexico.

The company said Cuba had undersea geology "very similar" to that surrounding Mexico's giant Cantarell and Poza Rica oil fields in the Bay of Campeche.

'More data'

Cuba's share of the Gulf of Mexico was established in 1977, when it signed treaties with the US and Mexico.

The US Geological Survey (USGS) recently estimated that as much as 9bn barrels of oil and 21 trillion cubic feet of natural gas could lie within that zone, in the North Cuba Basin.

However, Cubapetroleo exploration manager Rafael Tenreyro Perez said his company's estimate was higher because it had better information about Cuba's offshore geology.

"I'm almost certain that if [USGS officials] ask for all the data we have, their estimate is going to grow considerably," he told a news conference in the capital, Havana.

If correct, Cuba's oil reserves would be almost the same as those of the US - 21bn barrels, according to the Oil & Gas Journal - and nearly twice the size of Mexico's - 11.7bn barrels.

It could generate unprecedented wealth for the Communist-run state.

Mr Tenreyro said he expected the first production well to be drilled before the middle of next year by a consortium led by the Spanish oil company, Repsol, and that more wells could be started before 2010.

Cuba currently produces 60,000 barrels of oil a day.

It depends on Venezuela for an additional 93,000 barrels a day, which it receives at preferential rates in exchange for the services of thousands of Cuban doctors working in Venezuela.

China to build Pakistan two more nuclear power plants
ISLAMABAD, Oct 18 (AFP) Oct 18, 2008


Energy-hungry Pakistan said on Saturday that China had agreed to help it build two more nuclear power plants in a major boost to the country's long-term plans to end crippling electricity shortages.
Foreign Minister Shah Mahmood Qureshi announced the deal after President Asif Ali Zardari returned from a four-day state visit to China which Qureshi said had been "very significant."

Pakistan, which already has one Chinese-built nuclear power station and another under construction, would benefit from an extra 680 megawatts of energy from the two extra plants, he said without giving further details.

The government has an "energy security plan" envisaging an increase in nuclear power generation from the current 425 megawatts to 8,800 megawatts by 2030 to meet its growing energy demands.

China is one of Islamabad's closest allies as well as its largest arms supplier.

Pakistan's nuclear weapons programme has been under the spotlight since a 2004 confession by Abdul Qadeer Khan, the father of its nuclear programme, that he sold atomic secrets to Iran, Libya and North Korea.

Khan was pardoned by then president Pervez Musharraf in 2004 but has been kept at his Islamabad villa ever since, guarded by troops and intelligence agents.

Pakistan has rejected international demands for access to Khan.

All rights reserved. © 2005 Agence France-Presse.

UPDATE 1-China may lend Russia $25 bln as part of oil deal

MOSCOW, Oct 27 (Reuters) - Russia and China will sign a much-delayed long-term oil supply deal on Tuesday and Beijing is in talks to lend Russian companies $20-$25 billion in export-backed loans, industry sources said on Monday.

The deal will give Beijing access to 300 million tonnes of Russian oil over the next 20 years, accounting for 4 percent of its annual demand, while allowing Russian firms to sort out immediate financing needs during an acute liquidity squeeze.

The deal will be on the agenda when Chinese Premier Wen Jiabao meets Russian officials on Tuesday, at a time when Moscow's relations with the West are at a low ebb.

The Kremlin is seeking to diversify its export routes away from the West and is targetting China as the main market for its East Siberian oil.

"It is a huge deal. The biggest ever between Russian and Chinese oil firms," said one source with the knowledge of the situation.

Sources said that if the loan was agreed, Russia's state-run oil major Rosneft (ROSN.MM: Quote, Profile, Research, Stock Buzz) would get three-fifths of the funds, while state pipeline monopoly Transneft would obtain the other two-fifths. Rosneft and Transneft declined to comment.

Russia's government has pledged $50 billion from its $500 billion reserves, the world's third largest, to help Russian firms repay and refinance some $120 billion in foreign loans, due by the end of 2009.

China has the world's largest reserves of $1.9 trillion.

Rosneft borrowed $6 billion from China in 2004 to help fund its purchase of assets belonging to bankrupt oil firm YUKOS.

Under that deal, Rosneft pledged its entire railway exports of around 10 million tonnes of oil to China, but has warned that it would not extend the deal beyond 2010 because it considered it poorly priced.

The new export-backed loan would come at a time when Russian companies find it difficult to refinance Western loans they have amassed to fuel growth at home and abroad in the past years. Rosneft owes over $20 billion to creditors.

Transneft also needs cash to finish construction of Russia's first pipeline to Asia, which will have a spur to China and a link to the Pacific.

The 600,000-barrels-per-day pipeline is estimated to cost over $14 billion and it needs to be finished by the end of next year. It will become the main link for exports of crude from East Siberia, mainly from Rosneft's fields, to China.

This looks like a big one.
Sino-Russian oil deals were stalled for a long time in the past due to differences over prices, what I'd really like to know is if China managed to use the current low prices & the Georgia situation to extract a good deal from the Russians for this agreement.

Btw, the export backed loans is also probably not a bad way to diversify some of China's foreign exchange reserves away from US IOUs to secure some resources.

Trade ties with Russia strengthened
(Agencies)
Updated: 2008-10-29 07:58
Comments(15) PrintMail


China's Premier Wen Jiabao (L), Russia's Prime Minister Vladimir Putin (C) and Vice Premier Alexander Zhukov attend the Russian-Chinese Economic Forum in Moscow October 28, 2008. The two countries Tuesday signed a deal on building a trans-Siberian pipeline that will pump 15 million tons of crude to China each year, according to Global Times. [Agencies]

Brief look at making of the proposed Skovorodino-Daqing oil pipeline.




China ties up Russia's crude - again
By John Helmer

MOSCOW - After years of on-off negotiations and recriminations between Beijing, Moscow and Tokyo, Russia's state pipeline company Transneft agreed this week to complete construction of a pipeline to deliver crude oil between Skovorodino, in southeastern Siberia, and Daqing, the oilfield and refinery hub in northeast Heilongjiang, in China.

The agreement, signed during Chinese Premier Wen Jiabao's visit to Moscow to meet with Prime Minister Vladimir Putin, will be sweetened by up to US$15 billion in long-term Chinese credits for Russian state oil producer Rosneft, and up to $12 billion to Transneft. In return, the Russians will commit to delivering not less than 300,000, and up to 600,000 barrels of crude oil per day to Daqing, including pipeline and rail deliveries.

Just 60 kilometers separate Skovorodino from the Chinese border, but getting the Russians and Chinese to agree to pump oil over that distance and join a Chinese-built pipeline on the other side of the border has been a protracted affair lasting for more than four years. There's just one catch to the new agreement - it has been agreed more than once before.

On December 31, 2004, then Prime Minister Mikhail Fradkov signed an order that was intended to resolve a question that had been much debated for several years before: what priority Russian export of crude oil to Asia should target - to China overland, or to Japan and other Asian markets by pipeline to port, and then by tanker delivery in the Pacific. Fradkov appeared to opt for the Japan priority over the China one, but his order did not provide
clear direction to Transneft, which had been designated lead contractor for the project.

Transneft had been waging its own battle over these priorities for the preceding two years. The Siberian pipeline project was originally the brainchild of Mikhail Khodorkovsky's Yukos Oil Company. Their idea was to build a more costly pipeline over a longer distance, at Yukos expense. By paying up front, Khodorkovsky thought he would have greater freedom to deliver more oil to China than Transneft and the government were allowing him to pipe in the state-owned pipeline system to Europe. He also figured he would improve his profit margin by cutting out Transneft's fees.

Naturally, Transneft saw Khodorkovsky's scheme as a way of breaking the state monopoly over crude oil exports by pipeline, and it lobbied the government to say "yes" to the pipeline and "no: to the Yukos role. In May 2003, Transneft got what it wanted, and Yukos the consolation prize. Then prime minister Mikhail Kasyanov announced that the government was putting Transneft in charge of the pipeline, including the financing terms; Yukos would supply the oil to be pumped.

Several months later, Khodorkovsky was under arrest, and he and Yukos were indicted for a range of offences that landed him in prison, other Yukos shareholders in exile, and Yukos in bankruptcy, its assets sold to the state oil company, Rosneft.

The argument between Beijing and Tokyo over who should have first option on the Russian oil was delayed, though lobbying continued by the Japanese to turn an existing agreement with China into a dead letter.

That deal, a non-binding memorandum of understanding signed in 2002, envisaged that China would receive 700 million tonnes of Russian crude through the pipeline over 25 years at a cost of about $150 billion. That amounted to 28 million tonnes per annum, or 560,000 barrels per day. The price formula Russia and China proposed using for the oil was not disclosed because it hadn't been agreed.

The Russians understood and were sympathetic to the strategic objective for Beijing: the Chinese wanted to reduce their country's dependence on oil shipped from the Middle East, Africa and South-East Asia, and lower both oil and delivery premiums. But until Khodorkovsky was out of the way, the Russian government couldn't make up its mind what its strategic objective was in the eastward movement of oil.

The then president Putin was clear what he wanted. As he explained, even before Khodorkovsky's arrest, he would give China deliveries first priority, starting by rail delivery of the oil. In time, when proposed new oilfields in eastern Siberia came on stream, their production could be pumped over the longer distance to the coast and thence by tanker to the highest bidder. In July 2004, Putin said building the pipeline to Skovorodino should start. That would move the oil 600 kilometers further to the east of the rail junction at Zabakailsk and Manzhouli, where railcar shipments of oil crossed the border going south.

Putin said he wanted to preserve Russia's flexibility and avoid single-market oil commitments - either to repay Japanese loans for the Nakhodka pipeline or to fill volume obligations to the Chinese. If exporting Russian oil proved to be more advantageous by shipping or piping to Europe, or North America, Putin's policy was to delay the Asian plan for as long as possible.

Transneft spokesman Sergei Grigoriev told Asia Times Online in mid-2005: "We are not building a pipeline to China or Japan. We are building a pipeline on the territory of Russia. The first part of the project is to Skovorodino [terminal]. Then for the project to start operations, we will send oil from Skovorodino by railroad. It is political lobbying that will decide where it will go - to China or Japan. After that, we plan to build a pipeline from Skovorodino to Nakhodka."

Grigoriev noted that since China had been seeking 30 million tonnes of crude per year, with an additional 50 million tonnes for tanker pickup from Nakhodka, "we are building an 80 million-tonne capacity pipeline to Skovorodino, and a 50 million-tonne capacity pipeline from Skovorodino to Nakhodka."

Japan's Minister of Economy, Trade and Industry at the time, Shoichi Nakagawa, reacted angrily: "In such a situation, Japan will not provide financial cooperation." That threat played directly into Transneft's hands, as it had more than once warned the Kremlin against allowing the Nakhodka oil port plan to be held hostage by Japan's financing formula, tying construction loans for the pipeline to repayment with guaranteed volumes of oil, and favorable pricing.

This is what has turned the Skovorodino-Daqing pipeline into the longest-running soap opera in the history of oil transportation. Five years and countless episodes later, have Putin and Wen really tied the knot this time? It seems so, not least of all because the color of China's money has proved more alluring because of the urgent short-term financing problem in which both Transneft and Rosneft currently find themselves. The Chinese financing turns out to be more than double Japan's last offer.