Will Russia's oil help fuel Asia's economies?

AS OIL prices hovered near record levels, United States President George W. Bush welcomed a personal assurance this week from his Russian counterpart Vladimir Putin that Russia would lift its oil production and exports to help ease the world economy out of a tight spot.

The Bush administration recently complained to Moscow about the Kremlin's crackdown on Russian oil giant Yukos and its impact on oil prices, which raised doubts about the reliability of supplies from Russia, the second-largest oil exporter after Saudi Arabia and a major alternative energy source to the increasingly volatile Middle East.

Rising oil prices threaten to rekindle inflation, slowing the US economic recovery as President Bush heads towards a tight autumn election battle against Democratic presidential nominee John Kerry, who is making energy security for the US a major campaign issue.

But it is not only the US that is worried. The Kremlin-Yukos brawl has also caused alarm in China, which has been looking to its neighbour Russia for increasingly large amounts of oil and gas to reduce reliance on the Middle East and Africa. In the first half of this year, Russia became China's fifth-biggest crude oil supplier, accounting for 8.5 per cent of total imports. Last year, it exported 5.25 million metric tons of crude to China, or 5.8 per cent of China's total. All of this oil is supplied by Yukos, whose output last year accounted for nearly 20 per cent of Russian production and 2 per cent of global output.

The Wall Street Journal reported on Aug 11 that the Chinese government had sent letters to Mr Putin and his prime minister seeking assurances that deliveries to China will not be disrupted. Russian officials say China recently agreed to step in and pay Russian rail fees to ensure that it continues to receive Yukos oil if the beleaguered company cannot cover the transport costs.

China is also interested in buying Yganskneftegaz, the top Yukos oil-producing subsidiary, which may be sold within the next few months.

This manoeuvring, often carried out or directed by government leaders themselves, is part of what Singapore's Foreign Affairs Minister George Yeo has called 'a new Great Game' as established and rising powers jostle to secure their critically important energy imports from Central Asia and other parts of the world.

Unlike the old Great Game - carried on by Russia and Britain for control of Central Asia and ultimately the Indian sub-continent in the 19th century - the new energy supply-and-demand chessboard has many more players, including India itself, and even wider geopolitical implications.

The tug-of-war over Yukos began with the arrest last October of the company's founder, Mikhail Khodorkovsky, on charges of fraud and tax evasion after he funded opposition parties and threatened to challenge Mr Putin in presidential elections earlier this year. The Russian government has given Yukos until the end of this month to pay a US$3.4-billion (S$6-billion) tax bill. Otherwise, its biggest oil-production units will be sold, probably to interests friendly to the Kremlin.

Yukos said in March it would more than double deliveries of oil by rail to China to at least 300,000 barrels per day by 2006. This was seen as a consolation prize for Beijing after the Kremlin decided against a Yukos-backed proposal to pipe oil from fields in eastern and western Siberia direct to Daqing in north-east China for refining and distribution in the Chinese market. This pipeline could carry as much as 30 million tons of oil a year to China - or up to 25 per cent of its current oil imports, which now amount to about one-third of total consumption.

However, Moscow appears to prefer an alternative plan, backed by Japan, to build a longer pipeline through Russian territory from Angarsk in eastern Siberia to the port of Nakhodka on the Sea of Japan - a route that would enable Russia to export oil to Japan as well as other Asian countries and the US.

Japan depends on the Middle East for about 85 per cent of its oil consumption. Like China, it wants to diversify its sources of energy supply and sees Russia as a good bet. The Japanese-backed pipeline project appealed to the Kremlin because it would avoid Russian dependence on a single market, namely, China. It also includes pledges of billions of dollars of Japanese investment in the pipeline construction and in oil exploration in eastern Siberia.

This, too, is in line with Kremlin plans to use Russia's enormous energy resources to develop its vast but sparsely populated region in the far east to ensure that it remains firmly part of Russia and is not drawn into China's orbit.

In his annual state-of-the-union address in May, President Putin said that the choice of pipeline routes should be determined by national interests, not those of individual companies - an apparent reference to the Yukos proposal to pipe oil from its wells in Siberia direct to China.

Despite the efforts of North-east Asian powers like China and Japan to secure more energy from Russia and Central Asia, they are heavily dependent on oil imports from the Middle East or Africa. This oil is shipped to North-east Asia via key South-east Asian waterways, mainly the Strait of Malacca and Singapore.

Brigadier-General (NS) Yeo noted that as global oil demand surges, security of supply becomes a strategic preoccupation for many countries. 'A good part of world energy supply comes from regions in the world which are politically unstable,' he told oil traders in Singapore on Aug 3, when he was still the trade and industry minister. 'Terrorism is also a growing threat to stable supply. The security of choke points like the Panama Canal and the Malacca Strait becomes very important.'

HERE