Russia's decision to favor an oil pipeline from East Siberia to Nakhodka, near Vladivostok, will have market effects more important than the diplomatic upsets likely to receive most attention in the news.
On the last day of 2004, Russian officials strongly hinted at support for the pipeline able to serve Japan, other Asian countries, and the US West Coast rather than an alternative dedicated to China.
Because Japan and China both lobbied strenuously for the multibillion-dollar projects targeting their respective markets, the Russian decision, said to be preliminary, will be seen as a rebuke to China.
Inevitably, diplomatic analysis will put too much emphasis on who takes first delivery of crude oil.
More significant than that in a fluid market is the amount of oil delivered to someone, somewhere—the amount of oil in trade, in other words.
The apparent Nakhodka decision represents one of several steps needed to raise Russian export capacity, which has come under strain and soon will, if not expanded, restrict production. That's what's most important here.
Two other market effects deserve notice.
One is Chinese aggressiveness as an oil buyer. With its oil consumption rapidly rising, the country acts desperate for supply. Reports last year that it had agreed to guarantee rail transport payments for oil from beleaguered OAO Yukos showed a willingness to pay a premium for crude (OGJ, Sept. 6, 2004, p. 33).
With prospects lowered for the pipelined Siberian oil it craves, where will China turn next?
The other market effect is rearrangement of oil flows when and if the pipeline enters service.
Obviously, increased movement of Siberian crude to Asia and maybe the US changes traditional trade patterns.
Less obviously, additional pipeline outlets for Russian crude, much of it now transported expensively by barge and rail, will discourage product exports, which move by rail to Baltic and Black Sea terminals. This will reduce availability to European conversion refineries of Russian resid, vacuum gas oil, and middle distillate (OGJ, Feb. 2, 2004, p. 64).
The diplomatic stirrings of Russia's pipeline decision are interesting. But the potential market effects are profound.
(Online Jan. 7, 2005; author's e-mail: [email protected])