Russian interests, however, extend to areas other than Europe-the Far East and the Islamic world, for example-and Russian President Vladimir Putin shows a preference for maintaining his freedom of action on the international stage. This helps explain Russia's growing interest and desire for participation in the Asia-Pacific region. Writing in the Wall Street Journal, Putin outlined his plans for a new energy structure in the Asia-Pacific region, and above all in East Asia, through the creation of a system of oil and natural gas pipelines and tanker deliveries of liquefied natural gas from the eastern areas of Russia which have considerable hydrocarbon resources.

Significant Russian entry into the economies of the Asia-Pacific region with development of a new energy structure can be expected to have significant influence on worldwide markets. Russia obviously intends to develop a position as a major oil and gas supplier to the region as a political tool, as well as to further its own economic development. The United States should actively encourage and assist this process, for it is an opportunity to establish a strong presence in the Russian economy, the largest market in the region.

The major constraint on the growth of Russian oil and gas production nationwide is current pipeline export capacity, and several expansion programs are planned. Asian Russia currently has almost no export capacity, although proposals are under review for a system of oil and natural gas pipelines to Pacific export points. Vast potential reserves exist just northwest of Lake Baikal in the Irkutsk and Yakutia regions. These deposits are at the eastern end of the current Russian pipeline system, but the most desirable market for oil and gas in these areas lies farther east with the large and growing economies of China, Japan, South Korea and the United States, as well as other Southeast Asian countries.

In an attempt to expand into these markets, the Russian oil company yukos has proposed an oil pipeline to China, and bp plans a gas pipeline along the same route. Both could be built in about two years. But, while both companies have already committed reserves for transport to the Chinese market, neither has received Russian government approval. The government-owned pipeline companies have proposed lines to the Pacific that would be much longer and larger, provide more capacity and cost a good deal more. The private company lines to China would serve one market. The Pacific lines would put Russian exports in large quantity into the world market with flexibility as to destination. Putin's statements in the Wall Street Journal (not to mention the recent arrest of yukos ceo Mikhail Khodorkovksy) seem to indicate that the Russian government will endorse the routes to the Pacific.

The potential reserves in this inland region are characterized by low per-well production rates, necessitating hundreds of wells to supply the pipelines. Because of the high cost for field development and pipeline construction, the project is very sensitive to oil and gas prices. These reserves can be developed and the pipelines constructed only for markets that can sustain prices at sufficient levels for long enough periods to justify the investment. Long-term contracts between supplier and customer must therefore be signed at prices of $25-30 per barrel.

DROP CAP 

The oil and gas markets will undergo a major re-structuring as the world enters a period of oil supply shortage and the United States becomes dependent on the imports of non-North American gas. Introduction of long-term contracts at moderate, stable prices for large supplies of oil and gas to the U.S. market would gradually convert the pricing system for most oil and gas to such contracts.

Such a fundamental market change would serve multiple purposes. Large U.S. investment in Russia and continuing U.S. purchase of Russian oil and gas will balance growing European influence. Investment in Asian Russia will be particularly desirable because it will stabilize access to resources for China, the rest of Asia and the west coast of the United States.

By encouraging and assisting efforts to establish long-term contracts with new suppliers, the United States can accomplish several desirable geopolitical objectives. It can become a major investor in Russia and give real substance to a U.S.-Russia partnership, stimulate economic development in Latin America and diversify the West's oil and gas supplies out of the Middle East. Such accomplishments would be a crucial component to America's current war on terrorism and beneficial to its long-term national interests.

Dr. Charles A. Kohlhaas is a former Professor of Petroleum Engineering at the Colorado School of Mines and has worked for, founded, managed, and consults for major and independent companies in the international oil and gas industry.

1 Oil production is generally not contracted, earmarked or otherwise allocated for delivery to certain importing countries in specified amounts; rather, it is sold by the producing companies and countries into a worldwide market system from which refining companies and importing countries buy as, and when, they need oil. Particular tanker loads of oil may be bought and sold en route and re-directed from one destination to another. This system may be envisioned as a giant pot into which the producing countries sell their oil and from which the importing countries buy. The oil price is not established by the Organization of Petroleum Exporting Countries (opec), producing countries or major international oil companies; it is traded at nymex in the form of 1000-barrel contracts for future delivery of West Texas Intermediate oil (a domestic U.S. grade of oil). The price is established by traders' perceptions of the amount of oil going into the "pot" (supply) and the amount of oil customers want to buy (demand).

2. lng is not a new business or technology. lng systems were developed in the 1970s, mainly to supply Japan and South Korea with gas from Indonesia, but some lng was imported to the United States for short times in the past.