Russia-Japan P/L Will Set Viable Oil Market & Boost Energy Supply Security In Asia.

*** The Oil Market Is So Tight That The Slightest Accident Can Raise The Price By More Than $1.50/Barrel Within Less Than 24 Hours

*** Crude Oil Prices Could Hit $50/B Or Higher If Yukos Goes Bankrupt And/Or If Chavez Opts For War On Bush Before The Nov. 2 American Elections; The Problem Is More On The Demand Side Than In The Exporting Countries; No Big Investment In Refining Or Oil Storage, Transport & P/L Capacity Has Been Made On Either Side Of Suez For Several Years!

*** Saudis Say Islamic Troops In Iraq Should Replace The US-Led MNF 

TOKYO - Russia and Japan are expected to sign an agreement here next January on building a $11-12.5 billion crude oil pipeline from East Siberia to Russia's Pacific port of Nakhodka, which will help establish a credible oil trading mechanism in Asia for the first time in its history, APS Energy Group President Pierre Shammas told a recent industry meeting in the Japanese capital. He said the agreement can be signed during Russian President Vladimir Putin's visit to Japan in January.

Addressing a meeting of prominent Japanese industrialists and business leaders in Tokyo last month, Shammas said this pipeline and several other projects he proposed were necessary for energy to become more competitive in East Asia. He said one of the biggest challenges to countries in East Asia, including China and Japan, was a combination of secure and competitive energy supply, energy efficiency and a healthier environment.

The projects he proposed are in the following order of importance relative to East Asia, as well as the rest of Asia/Pacific:

Massive Japanese-led investment in LNG and related gas utility and gas-to-power (GTP) ventures in coastal China. He warned that, unless such investment has been made within the next ten years or so, the risks of cancer in China and Japan will double by 2030. If investment on the scale Shammas proposes has materialised, by 2030 China will have overtaken Japan to become the biggest market for LNG in the world. In this scenario, costs across the chain from liquefaction plant at the source to GTP at the consumer end will have fallen to make LNG a most competitive source of energy. This will have enabled China and other rapidly developing countries in Asia/Pacific to become more energy efficient.

Shammas said the main sources of this LNG could be Russia from Nakhodka and Sakhalin, and Iran from Shah Bahar. Russia has the world's biggest reserves of natural gas. Iran has the second biggest gas reserves. "If LNG business in Iran is developed on the same scale (relative to the size of the country & its reserves) as that of Qatar, Iran would become the biggest exporter of liquefied gas in the world". Shah Bahar, outside the Staits of Hormuz, has the capacity for such a scale. A pipeline from Assaluyeh to that point would generate big business and lead to major gas finds along the route, with Shah Bahar to become a huge industrial free zone.

A combination of credible spot and futures oil markets in East Asia will depend primarily on the Russian crude oil pipeline to Nakhodka and a proposed crude oil pipeline from East Siberia to China.

Shammas noted that China in calendar 2003 overtook Japan as the world's second biggest oil market next to the US, with consumption last year having risen to almost 6m b/d. Oil demand in China this year is expected to increase by more than 700,000 b/d, he said.

Last June, Shammas noted, Russia became China's largest crude oil supplier for the first time, outpacing Saudi Arabia, Oman, Iran and Angola. In June Russia exported 1.656m tons (12.14m barrels) of crude oil to China, up from 595,946 tons (4.37m barrels) in June 2003. In the first half of 2004, Russian crude oil exports to China totalled 5.214m tons (38.22m barrels), up from 2.187m tons (16m barrels) in the first half of 2003. Russia's exports to China are transported by rail.

China, however, has become the biggest producer of pollution and thus the biggest source of acid rain in East Asia, Shammas warned, pointing to its massive consumption of coal. He noted that, in every spring, China's pollution travels to Japan where the sky becomes yellowish. This, he said, is bound to increase rapidly as China's fast economic growth depends on burning fossil fuels. He noted that about 2m people in China died last year from pollution.

The climate for foreign investors in China was not very encouraging, Shammas agreed, as some of the companies there like PetroChina were difficult to work with (see below). But in coastal China, he explained, "local governments can be partners in - as well as guarantors for the success of - LNG/GTP ventures". He said such a venture should also have a multinational partner along with a Japanese investor and a Chinese company of good reputation.

Shammas had first made those proposals on May 17 to a major conference organised on the occasion of his previous visit to Tokyo by the Institute of Energy Economics of Japan (IEEJ). He then noted: "While the Asian oil market has been expanding rapidly...,Asian importers are paying more than $1.20/barrel above market prices being paid by importers in the West. Until now, there has been no credible Asian marker against which Asian oil prices should be set". He explained the limitations of the sour crudes market for east-bound shipments that depends on the Dubai and Oman grades and those of the petroleum products' market in Singapore.

Shammas said it was "time for a truly Asian spot market, together with a local marker for sour crude oil and a marker for sweet crude, to be set up somewhere between Singapore and the Far East". There should also be "a futures market for crude oil and the main petroleum products being consumed in Asia". He proposed this to be set up anywhere between Tokyo and Shanghai.

Shammas said there was no need for specific physical crude oils to be adopted as markers for sour and sweet grades. "A synthetic marker can be established for each of the two grades, and then price differentials can be set relative to the marker's quality specifications". Brent or BFO, he said, "is no longer a suitable marker for Asia" because it is influenced by WTI which does not trade outside the USA. Dubai and Oman crudes are influenced by Brent and WTI.

It is important for Asian/Far Eastern oil importers to begin building up keen competition for market share between Russia and the Persian Gulf countries. If the 1m b/d Russian pipeline venture materialises, its capacity could be more than doubled within a few years and this will add to the competition.

Japanese Lobbying: Japan has intensified lobbying of the Russian government to encourage it to decide on a Pacific route for the pipeline before end-2004, so that an agreement can be signed during President Putin's visit to Tokyo in January. Japanese Foreign Minister Yoriko Kawaguchi and her Russian counterpart, Sergey Lavrov, discussed the project in mid-July, when they were preparing for Putin's visit. The pipeline would originate in Taishet city.

Japan has agreed to donate $77.6m to Russia's state-owned pipeline company Transneft, which Moscow has said would be responsible for building the pipeline, to conduct the feasibility study. Japan has been urging Transneft to complete the study sometime next year and that the pipeline start operation in 2006, or in 2007 at the latest.

Beijing had lobbied Moscow for a separate pipeline to originate in Angarsk and terminate at Daqing city, north-eastern China. But its proposal was rejected by Russia's Natural Resources Ministry last year due to environmental concerns. However, China is still pressing Russia to take up the project. The Russian-Chinese Bilateral Committee on Energy, established to facilitate co-operation in energy between the two nations, is expected to meet in August to discuss China's proposed route ahead of Chinese Premier Wen Jiabao's visit to Russia in September. China hopes Russia will at least build a spur line to Daqing. Russian Industry and Energy Minister Viktor Khristenko has reassured Beijing of Moscow's commitment to build an oil pipeline to China.

PetroChina Evicts Majors From Gas Pipeline: A consortium of Shell, ExxonMobil and Gazprom has decided to pull out of PetroChina's $5.25 bn West-East natural gas pipeline. A Shell official was on Aug. 3 quoted by Dow Jones Newswires as saying: "PetroChina issued a letter of termination for the joint venture agreement yesterday". The Shell official said all parties to the negotiations regret that they have been unable to reach an agreement on the project but look forward to future opportunities for co-operation. Despite the failure to reach an agreement on the project, the official said Shell's energy business will continue to grow in mainland China. "We expect that the total funding for the Shell share of projects in China during 2004 will amount to $1 billion, the highest-ever in a single year". He said Shell will continue to enhance its relationships in China and remains very positive about the potential in China.

Dow Jones quoted China-based industrialists as saying even though the group's withdrawal will have little impact on the operation of the pipeline, it will hurt the confidence of foreign firms to invest in China's energy sector in the long run. An official with a Shanghai-based energy consulting firm was quoted as saying: "PetroChina is cash-rich and isn't concerned about foreign participation in the project now because it has already begun operating (the pipeline)". He added that foreign energy companies need to realise that negotiations for energy projects may drag on for several years without leading anywhere.

The West-East system was China's first gas pipeline project open to foreign investment, as was encouraged by former PM Zhu Rongji in 2001. Beijing wanted to make this a model for other gas projects in terms of foreign investment. But foreign firms are cautious in investing in China's gas sector as Beijing lacks the necessary legal framework and long-term strategy. (Natural gas in China used to be of secondary importance compared with oil until a few years ago, when it found it was unable to bridge the gulf between energy supply and demand. Chinese energy firms led by PetroChina decided a few years ago to boost gas output to aid the country's economic growth. But they were not sure how the gas would be priced or where the markets would be. Despite the initial operation of the first section of the pipeline, PetroChina has not yet signed any take-or-pay contracts with power plants. It aims to raise sales to eastern China to 5 BCM in 2005, far lower than the pipeline's 12 BCM/y design capacity, mostly to household and commercial users. China's gas demand has been projected as 200 BCM/y by 2020. Local gas production will rise from 34 BCM/y to 120 BCM/y by 2020. But demand would be far higher if the LNG business is to be developed in China on a big scale).