Siberia: The bear comes home…

Apart from periodic announcements regarding oil and gas, Sakhalin has hit international headlines prominently once in the past, when in 1983, a South Korean airliner strayed too close to a top-secret Soviet military installation and got shot out of the sky.

As an act of cold war hostility it was a prominent one, and the Reagan administration rushed in gleefully to expose the 'inhuman' face of the then ruling Soviet regime. The Soviets in turn pointed out, that by deliberately straying, hundreds of miles off course its declared flight path, the airliner had activated their top-secret anti-aircraft radar installations and consequently invited the kind of response that it did.

Currently every major oil and gas company in the world is camped in this 'top secret' area of old, investing money by the billions. With international prices of oil hitting $ 40 a barrel and more, the investments are all worthwhile – and surprisingly the handshake between the investors and the Russians here is firm and friendly.

Developments in LNG technology have transformed the delivery of natural gas around the world. Through super-cooling, LNG can be compressed and transported in tankers the same way as oil. Now pipelines do not need to feed the gas directly into the receiving terminal from the point of production. This technological development, along with the virgin reserves of Sakhalin, is now sparking off a different kind of equation around the world. The United States, China, South Korea and Japan, growing increasingly wary of their dependence on the shaky sheikhdoms and the increasingly volatile Muslim sentiment in the Middle East are now looking at Siberia as a more stable supply source in the future.

Sakhalin is a potential supplier to the US West Coast, which is the United States's largest consumer of petroleum products and energy resources. The US West Coast is only an 11 – 12-day sail for the tankers carrying the super-cooled LNG. An LNG import terminal proposed for the Baja California coast near Ensenada, Mexico, would receive Sakhalin deliveries, while another terminal is under consideration at Long Beach. "Our goal is to diversify our access to energy exports from around the world, and we would very much like to see the opportunity for the US to have access to larger amounts of Russian exports," US Energy secretary Spencer Abraham stated in unequivocal terms on a visit to Moscow in June 2004.

But Moscow may not be all that enthused about the US market, especially when customers like Japan and China are closer to home, and given their economic growth and potential, may turn out to be bigger customers than the US. Sakhalin producers have signed contracts for 3.4 mm tpy (metric million tones per year) of LNG deliveries to Japan. Japan in turn has stepped forward with major financing guarantees for a $12 billion, 2,500-mile pipeline that would carry Siberian oil to the eastern Russian city of Nakhodka, from where it would be shipped to Japan. Mid-east oil and gas is all set to become history for the Japanese, once Sakhalin gets into commercial production.

As for China, Russia has already announced that it will supply about 10-million tons of oil to its neighbour in 2005. This amount has been decided keeping in mind the fact that supplies cannot be increased further, as the Chinese railway infrastructure is currently unable to handle larger supplies. Russia expects China to be able to gradually take around 30 million tons by 2007-08.

China has always been acquiring Russian oil assets. Post the Yukos auction, Putin said, “One cannot rule out the possibility of Chinese CNPC (China National Petroleum Corporation) working with Yuganskneftegaz assets.“ Immediately after Putin's statement, Gazprom said a new memorandum signed two days before the auction covered strategic co-operation with China in the oil sector, particularly over oil projects in Russia. Gazprom said: “There is a real energy boom in Asia and particularly in China. In developing Gazprom...the eastern vector has been identified as a priority.“ Gazprom already has an agreement with CNPC over gas.

And now the Russian industry and energy minister Viktor Khristenko has confirmed that up to 22 per cent of the shares of Yuganskneftegaz would be offered to China National Petroleum Corporation (CNPC). The minister has said that this decision is based on the agreements signed earlier with CNPC, which also provide for Russia picking up CNPC's stakes in oil assets in third countries as well as Mainland China. These agreements, the minister pointed out are in line with strategic understanding reached by the leaderships of Russia and China about cooperation in the field of energy. Yegor Gaidar, a former acting prime minister of Russia sums it up, “…a joint venture with China signifies a long-term change of focus towards Asian markets.“

As far as India is concerned, investments by ONGC Videsh Limited (OVL) for its 20 per cent participating interest in the Sakhalin-I project in Russia are already at a whopping $2.77 bn. And so far OVL is not complaining, for the cost of finding and developing Sakhalin-I reserves will turn out to be lower than the cost of the re-development of Mumbai High South! OVL already has an agreement with the Russian company Rosneft for exploration of oil and gas. Lately, every other day an announcement emerges, indicating that OVL may pick up a stake in some Russian company or the other, only to be denied promptly. Kite flying certainly, but by the same token, indicative of the way the wind is blowing.

As far as Yuganskneftegaz is concerned, the on-off signals regarding Indian participation, are still on. "We are waiting for the completion of necessary legal formalities (on Yugansk status),“ the Indian ambassador to Moscow, Kanwal Sibal, has said.

With Indian investments in Sakhalin, and its increasing attempts to tie-up with Russian energy companies, Russia is now seeking to connect with countries that have traditionally been more in sympathy with its travails. A bear patrolling the Siberian wilderness would be looked on as a more benign entity, than it would be stalking its more traditional haunts of Europe, the Middle East and Central Asia. In these parts it is beset by too many foes!

China alone can keep the Russians happy as infrastructure in both the countries is upgraded; more supplies would emanate at the Russian end while the Chinese would increase their intake capacity. Coupled with Japan, USA, Korea and India, and with the ASEAN countries en-route, Russia is looking for Asia's friendlier markets. It's ambition to becoming a super power may not be realised in the areas which it has so far sought to dominate, but rather in a region where it hasn't really focused it energies so far –Asia.

With supply lines secure in its backyard and a ring of powerful, newly emergent economic and military powers, like China, India, Japan and Korea, as its customers and friends, the bear could then once again return to stalk its old hunting grounds – a truly Eurasian power.

Brzezinski's nightmare about a Eurasian power threatening the US would then have become a reality…a truly menacing figure, the bear would be stalking the squares of Brzezinski's grand chessboard once again.