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Russia is changing its energy export policy vector as strong demand for hydrocarbons in both in China and in India continues to grow. The recent unease in both the U.S. and Europe over Russian President Vladimir Putin's March 17 annexation of Crimea has only added to Moscow's efforts to diversify its markets beyond Europe.
Now Russia and India are planning to construct a $30 billion oil pipeline through China's restive Xinjiang province. If successful, the pipeline will be the most expensive in the world.
The groundwork for the project was laid on October 21, 2013, during Indian Prime Minister Manmohan Singh's visit to Moscow for the 14th India-Russia Annual Summit. Singh and Putin issued a joint statement that said, "Russia and India have agreed to establish a joint group to study the possibility of direct ground transportation of hydrocarbons."
That announcement reaffirmed the two countries' joint commitment to implement the Agreement between the Government of the Russian Federation and the Government of the Republic of India on the Enhancement of Cooperation in Oil and Gas Sector, which was concluded on December 21, 2010.
The project has been on the drawing boards for nearly a decade, as Russia and India first began discussing it in 2005.
Four years later, in 2009, the foreign ministers of Russia, India and China agreed to enhance energy cooperation. Sergei Lavrov, S.M. Krishna and Yang Jiechi met in Bangalore to discuss energy security, the fight against terrorism and climate change. In a joint declaration, the diplomats said, "India, Russia and China are seeking to intensify international energy cooperation on a new basis to help make the energy market more open, transparent and competitive and reflect the common interests of all the parties involved."
At the end of last year, India's biggest oil and gas company, Oil and Natural Gas Corp. (ONGC) confirmed its interest in the pipeline project, saying, "The pipeline from Russia seems appropriate. The details of the project will be clarified with the Russian partners."
India currently buys very little crude oil from Russia. According to the Indian Embassy in Moscow, fuel and oil imports from Russia in 2012 were only $176 million even as bilateral trade increased by 24.5 percent to $11 billion. Indian exports accounted for $3 billion while Russian exports, primarily weaponry, were valued at $8 billion.
Political support in Russia for the Xinjiang pipeline project has increased in the wake of worsening relations with the U.S. and EU over Crimea. On February 26, Russian Deputy Prime Minister Dmitry Rogozin observed, "This is one of the major infrastructure projects that can be implemented." But he also added, "I think it has a right to exist, but we should make calculations to see how profitable it can be."
The pipeline also has political support in China. China's Center for Strategic Studies in Energy Director Xia Yishan recently said, "The project is beneficial for both India and China, as it would allow China to become an oil transit in addition to its 'status' of recipient of the Russian oil."
The pipeline project will strengthen India's intention to become a member of the Shanghai Cooperation Organization (SCO), of which Russia and China are charter members.
The pipeline still faces substantial impediments, aside from its astronomical price tag. Up to 35 percent of its route runs through mountainous terrain, a factor that has set back completion schedules to 2020-2022.
Any pipeline to India through China would also become subject to the two states' complex relationship, which is fraught with border disputes and mutual suspicion.
As Russian Center for Current Politics expert Dmitry Abzalov observed, "If a significant portion of the pipeline passes through the Middle Kingdom, there is a risk that it could be used to exert pressure on India."
But evolving political relations may yet hasten the pipeline's development. Russia is seeking to broaden its energy markets, India remains a major energy exporter, and China would strengthen its relations with both countries should the pipeline be built. While the last couple of years have seen major pipeline projects such as Nabucco abandoned, rising political and security considerations in this case may trump costs and end up propelling the project forward.
Written by John Daly at Oilprice.com.