As Russian Prime Minister Vladimir Putin ceremonially filled the first oil tanker to leave the new eastern port of Kozmino, bound for Hong Kong, he said “It’s a great present to Russia for the New Year.”

Indeed. The terminal, which will ultimately connect with a 3,000 mile pipeline from oil-rich Siberia, is key to Russia’s energy security strategy – one that may supply the Eurasian oil and gas behemoth with substantial leverage over European and Asian markets alike, destroying what little consumer bargaining power the E.U. might still have.

Traditionally, Siberian oil was exported to Europe via a west-oriented Soviet-era pipeline network. While Russia struggled with its post-Communist economy after 1989 – and failed to invest in its oil industry – China’s oil demand increased dramatically, forcing it to become an oil importer in 1993. All the major Asian economies, China included, are now highly dependent on Middle Eastern oil, which must navigate the dangerous and American-controlled straits of Hormuz and Malacca.

The new ESPO pipeline connecting Eastern Siberia with the Pacific Ocean will provide South Korea, Japan, and China with a much closer source of oil and allow Russia to diversify its energy exports. The first segment of the pipeline from the oil fields around Taishet to Skovorodino near China’s border, which cost around $12 billion, was completed this week and the second segment ($10 billion) will connect Skovorodino with the Pacific port of Kozmino in 2014 (the oil currently travels the second section on rail). The final pipeline will carry 80 million tons of oil each year to the east, with a spur to China carrying 15 million tons per year, for which China has given Russia an advance loan of $25 billion.  A similar gas pipeline, to be completed in 2012, will also allow Russia to also arbitrage gas east and west. As for the gas already in Russia’s east, Gazprom yesterday announced a bid to buy much of the gas that will be produced in 2010 from the ExxonMobil-operated Sakhalin-1 project on the islands off Russia’s far northeastern coast, just north of Japan. Like the Siberian oil, the gas from all three Sakhalin projects will likely be sold to Russia’s new far Eastern customers who have traditionally relied on long-haul LNG tankers from Australia, Indonesia, and the Middle East.

The largest producer of crude oil at 10 million barrels per day last month, Russia’s combined gas and oil production makes it by far the largest energy producer in the world. There are upsides to the new developments for Western companies and governments: in order to develop the Siberian oil supplies, Russia will likely ease its restrictions on foreign oil companies, and the new pipeline routes will arguably increase global energy security through diversity of supply routes, taking some pressure off the traditional ocean routes. However, many commentators, such as Liam Halligan from the UK Telegraph, argue that the outcome of the interconnected Eurasian pipeline network will be diminishing bargaining and naval power of Europe and the United States, respectively.

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