Russia’s Energy Diversification Moves

Russia has begun constructing its first Pacific-bound oil pipeline in an effort to diversify energy export routes. The first two sections of the pipeline were joined outside Taishet in the Irkutsk region on Friday, a day after President Vladimir Putin warned the West that attempts to shut Russian companies out of Europe's retail energy market were forcing them to look for other destinations.

The 4,100-km trans-Siberian pipeline will have the capacity to carry 80 million tonnes of crude a year, with 30 million tonnes going to China and 50 million tonnes to be shipped from Russia's Pacific coast to Japan and other Asian buyers.

Earlier last week, President Putin ordered the route for the pipeline to be redrawn to bypass Lake Baikal. Original plans to lay the pipe 800 metres from Baikal's earthquake-prone northern shore prompted strong protests from experts who warned of an ecological catastrophe if oil spilled into the world's largest and deepest freshwater lake classified by Unesco as a World Heritage Site. The re-routing of the pipe 40 km away from Baikal will push up the cost of the $6.5-billion project by another $ 1 billion.

The East Siberia pipeline will dramatically shift Russia's oil flows from the West to the East. The bulk of Russia's 250-million-tonne crude exports currently go to Europe.

The decision on the pipeline despite the last-minute changes of route was taken as an energy row between Russia and the West reached boiling point. On April 27, President Putin lashed out at attempts to block Russia's natural gas monopoly Gazprom from acquiring stakes in Europe's distribution networks. "When people come to us, it is investment and globalisation, but if we plan to go somewhere, then it is expansionism of Russian companies," he said, commenting on reports that the British Government was planning to adopt a special law to block a potential takeover by Gazprom of the country's biggest gas supplier, Centrica.

"We constantly hear about some threat of dependence on Russia and that Russian companies should have limited access to the energy market," Mr. Putin said at a news conference after talks with German Chancellor Angela Merkel in Tomsk, Siberia. "Think about it from our point of view. What are we to do when we hear the same thing every day? We start looking for other markets."

Concern in the West

Russian plans to build Asia-bound oil and gas pipelines are seen in the West as attempts to blackmail Europe into letting Gazprom take over retail sales on the continent, while retaining monopoly on Russian gas reserves.

On April 29, the European Union urged the United States to jointly force Russia to accept Western rules of the game. European Commission President Jose Manuel Barroso told a transatlantic conference that the 25-nation EU and Washington should press Moscow to open up its energy market and adopt Western standards of democracy.

"We are seeing more frequently the use of energy resources as an instrument of political coercion," he said.

However, calls for a united Western front against Russia appear to have fallen on deaf ears in Europe. Germany has already broken ranks. Chancellor Merkel last week presided over the signing of a historic deal between Gazprom and BASF, Germany's leading energy company. Under the asset-swap deal, Gazprom will increase its stake in BASF's gas distribution firm, Wingas, from 35 per cent to 50 per cent and will set up a joint venture with BASF to sell gas in Europe. BASF, in turn, will become the first foreign company to get a stake in major Russian gas field, Yuzhno-Russkoye, which is predicted to have a potential annual output of 25 billion cubic metres.

Hours before the deal was signed, British Prime Minister Tony Blair backtracked on his Ministers' plans to block Gazprom's foray into Britain's gas market, vowing that all foreign companies would be free to bid for British shares. Earlier last week, the Netherlands promised to allow Gazprom access to its energy market.

President Putin has shown who holds the cards in the global energy game.