Oct. 17 (Bloomberg) -- Japanese officials, concerned China will receive most of Siberia's $18 billion in annual oil and gas exports, will urge Russian President Vladimir Putin to accelerate plans to build an oil pipeline to Japan.

Russia will first build a pipeline from East Siberia to China and then a smaller line to the Pacific coast near Japan, Putin said Sept. 5. Moscow-based OAO Gazprom, Russia's gas-exporting monopoly, will make China a priority in Asian sales, Deputy Chief Executive Alexander Medvedev said in Beijing Sept. 21.

At stake is untapped oil that would supply Japan for nine years, and enough gas to meet the nation's needs for seven decades. Japan plans to use a visit by Putin to Tokyo next month to push for an $11.5 billion Siberian oil pipeline directed to the Pacific, and not China. Russia is the world's second-largest oil producer, and Japan imports 99 percent of its fuel needs.

``The overall situation favors China compared to only a year ago,'' said Kang Wu, a research fellow at the Honolulu-based East- West Center. ``For the next 10 years China will need much more oil, and we know that Japanese demand is merely stable.''

Russia now directs most of its $100 billion a year of oil and gas exports to Europe. Japan last year received less than 1 percent of its oil from Russia, which supplied 8.8 percent of China's imports. Neither Asian nation currently buys gas from Russia, which holds the world's largest reserves of the fuel.

Request to Putin

Japan's Trade Ministry said on Oct. 7 that Putin will be asked to reconsider Japan's offer to fund the proposed oil pipeline to the Pacific coast and to help develop Siberian oil fields. Russian state-owned oil company OAO Rosneft, based in Moscow, is among companies planning to develop east Siberian oil fields that will fill the new pipeline.

China's booming economy, which grew 9.5 percent in the second quarter, helped it overtake Japan in 2003 as the world's second- biggest oil user behind the U.S. Russia has 18 billion barrels of untapped oil and 196 trillion cubic feet of gas to be developed in East Siberia and Sakhalin.

Chinese economic growth also helped oil prices reach records. Crude oil futures in New York rose to an all-time high of $70.85 a barrel on Aug. 30 and closed at $62.63 on Oct. 14.

China will get two-thirds of the 30 million tons of oil that Russia plans to export to Asia within four years, Putin, 53, said in Gleneagles, Scotland, on July 8. The rest will go to Pacific markets including Japan. The oil is worth about $13 billion a year at current prices.

Rosneft, China National

Rosneft, Russia's biggest oil supplier to China, said on Oct. 12 it granted China Petroleum & Chemical Corp. a 25 percent stake in a project to develop oil and gas fields near Sakhalin Island. State-owned Rosneft and the Chinese company, known as Sinopec, agreed to form a venture for the Sakhalin-3 project on July 1, the day after Chinese President Hu Jintao met with Putin.

Russia this month said it may cancel two planned oil pipelines to the Arctic Ocean, which could help supply the U.S., to focus on expanding sales to China and the rest of Asia.

China and Japan disagree on who owns as much as 200 billion cubic meters of natural gas deposits near the border under the East China Sea, enough to supply Japan for more than two years.

Japan wants China to halt drilling that it says will siphon gas from Japanese territory, a demand rejected by its neighbor. The governments will discuss in Beijing this month a proposal to develop the reserves jointly, Cui Tiankai, China's director- general of the Department of Asian Affairs, said in Tokyo Oct. 1.

Japanese Prime Minister Junichiro Koizumi on Oct. 4 called for a ``firm'' response to surging oil prices this year, to avoid a repeat of what he called the ``panic'' of the oil shocks of the 1970s.

`Wrestle Each Other'

``China and neighboring countries will wrestle with each other for energy resources,'' Dai Yande, deputy director general of the Energy Research Institute at the National Development and Reform Commission, China's economic policy planning ministry, said in a phone interview in Beijing on Sept. 28. ``China's demand is big, but per-capita it's way behind the developed countries.''

The average American uses 13 times more oil a day than the average Chinese citizen.

China's demand will rise to an estimated 6.7 million barrels a day in 2005, according to the Paris-based International Energy Agency. The proportion met by imports has risen from zero to about 44 percent. Japan's consumption has slipped to 5.3 million barrels a day from a peak of 5.8 million in 1995.

China will need more than 10 million barrels of crude oil a day by 2030 as it adds 100 million vehicles, the IEA estimated last year.

Jogmec's Plans

State-run Japan Oil, Gas & Metals National Corp., known as Jogmec, is among explorers seeking a share of deposits in Sakhalin and East Siberia.

``With such excellent oil and gas fields so close, they must be aggressively promoted for Japan,'' Masumi Motomura, chief researcher for Russia at Jogmec, said at a presentation in Yuzhno- Sakhalinsk, the capital of Russia's Far East region of Sakhalin, on Sept. 29.

Japan's government hopes joint development of oil fields with Russia will help return four islands that were occupied by Soviet forces at the end of the war and have prevented a peace treaty between the neighbors, Koichi Hirata, parliamentary secretary for the Ministry of Economy, Trade and Industry, said on Oct. 2 in Yuzhno-Sakhalinsk.

The islands lie near Japan's main northern island of Hokkaido and are known as the Southern Kuriles in Russia and the Northern Territories in Japan.

Japan's Chance

Putin's visit to Tokyo in November gives Japan another chance to lobby for a bigger role, according to Tsutomu Toichi, chief economist at the Institute of Energy Economics, Japan. Japan in 2003 offered Russia $7 billion of low-interest loans in return for an oil pipeline to the Pacific coast, enabling shipments to Japan.

Japan has lobbied Russia, which sells most of its 4.6 million barrels a day of oil exports in Europe, for a 4,100-kilometer (2,548-mile) pipeline to Perevoznaya Bay, near Nakhodka, on Russia's Pacific coast. Putin's comments suggest China National Petroleum Corp. and China's other state-backed oil companies will be first in line to receive oil through a 2,400-kilometer pipeline that would be built toward Daqing in northern China, via Skovorodino in Russia.

``It's unlikely Japan will fund a pipeline that only runs as far as Skovorodino,'' the Institute of Energy Economics's Toichi said. ``Transporting Siberian oil into China is more economic and sales are secured by selling to a national oil company. You have the risk of whether private companies will buy if you take it to Nakhodka.''

Gazprom's Pipelines

Gazprom plans to build its first two Asia-bound gas pipelines to China to supply 30 billion cubic meters a year, or 77 percent of the nation's 2004 consumption, Medvedev said Sept. 21. The fuel is worth about $5.4 billion a year.

In February, China's government paid $6 billion to Rosneft in advance for future oil deliveries, helping restore the company's finances after it paid $9.3 billion for what was once OAO Yukos Oil Co.'s biggest unit. China bought 37.5 million barrels of oil sent by railroad from Russia in the first eight months of 2005, 22 percent more than in the year-earlier period, according to data from OAO Russian Railways.

Closer ties between the nuclear-armed neighbors were underscored last month by their first joint military exercises.

Russia may agree to supply China with 38 military aircraft worth more than $1.5 billion, Vedomosti newspaper reported on Sept. 8, citing an unidentified official familiar with the talks.

`Military, Political Front'

``Certainly, the overall relationship between Russia and China on the military and political front helped this environment,'' said the East-West Center's Wu.

Further east, in Sakhalin, Japanese companies are investing in at least two of five oil and gas projects that may spend $50 billion to supply Northeast Asia and the U.S. Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc, the biggest publicly traded oil companies, lead three of the ventures.

Exxon's Sakhalin-1 venture, whose backers include Japan's Jogmec, Inpex Corp., Japan Petroleum Exploration Co., Itochu Corp., Marubeni Corp. and Teikoku Oil Co., may supply gas to China rather than Japan, partly because of disagreements among Japanese gas buyers. The venture is in talks to build an export gas pipeline to China within five years, said Stephen Terni, president of natural gas company Exxon Neftegas Ltd. on Oct. 2.

``Japan's government supported Sakhalin-1,'' the Institute of Energy Economics's Toichi said. ``The country feels bad as nearby resources are snapped up.''

To contact the reporter on this story: Hector Forster in Tokyo at hforster@bloomberg.net.

Last Updated: October 17, 2005 09:39 EDT