Friday, 03 May 2013

China Deepens Energy Cooperation In Central Asia

Published in Analytical Articles

by Robert M. Cutler (05/01/2013 issue of the CACI Analyst)

Days after the conclusion of the late-March summit in Moscow between Russia’s President Vladimir Putin and his Chinese counterpart Xi Jinping, Kazakhstan’s President Nursultan Nazarbaev met with Xi during a visit to China to attend the multilateral Boao Forum of Asia (BFA), which styles itself the Asian Davos. The two leaders established a new bilateral business council, signed numerous agreements for economic cooperation including infrastructure construction, and deepened still further Chinese participation in the development and bringing-to-market (and especially bringing-to-China) of Kazakhstan's impressive raw materials resources, most of all energy.


BACKGROUND: China has had an energy footprint in Kazakhstan for more than a decade and a half, since its then-Prime Minister Li Peng signed, in September 1997, a series of agreements including one to acquire control over the AktobeMunaiGaz (AMG) and UzenMunaiGaz (UMG) oil and gas fields, respectively in the northwest and the west of the country, during post-Soviet privatization competitions. Those agreements also included a planned oil pipeline from Kazakhstan to Iran, which was never built, and one to China, which was. Negotiations over contracts to implement the AMG and UMG acquisition and the pipeline construction agreement between the two countries were difficult, taking years, but they finally produced the intended results.

China took losses from AMG and UMG for years, just to maintain a physical presence, and it is now gas from Aktobe that has allowed Kazakhstan, with Beijing's financial and pipeline construction assistance, to eliminate the former dependence of the south of the country upon gas from Uzbekistan. The line from Aktobe to Shymkent is a part of the much longer line from Turkmenistan to China, and gas from Kazakhstan will also enter China after domestic demand is met. The volume of this gas from Central Asia to China continues to ramp up, having now hit a total of 50 billion cubic meters (bcm) since 2009 with a reported current throughput of 20 bcm per year, a figure set to double if not triple over the long term.

China has wanted a piece of the huge offshore Kashagan deposit for a decade and has periodically made offers each time a Western member of the consortium has sought to relinquish its share. However, in the past the other consortium members have snapped up the offers by right of first refusal, and after the latest restructuring Kazakhstan and its “national champion” KazMunaiGaz (KMG) also have this right. If KMG were to take the 8.4 percent ConocoPhillips stake that has been on offer, then that would give it a 25.21 percent share in the operating company. Earlier this year Kazakhstan appeared to approve the offer by India's state-owned ONGC from last year to pay ConocoPhillips US$ 5 billion for its Kashagan stake. India has been trying to increase its profile in Central Asia in general and the Kazakhstani energy sector in particular. Less than two years ago, for example, ONGC’s foreign arm OVL acquired a 25 percent stake in Kazakhstan’s offshore Satpaev exploration bloc, not far from Kashagan and other significant deposits; but that deal had been continually delayed in the works for over three years.

However, Astana’s right to refuse the deal also gives it the right to acquire the stake itself and then hand it over to whomever it wishes. And in the wake of Nazarbaev’s most recent visit to China, it has emerged that Kazakhstan may now be leaning towards a Chinese firm for purchase of the ConocoPhillips stake in the offshore Kashagan field. Delhi is understandably upset at new competition from Beijing, although Astana might just want a better deal. Thus Kazakhstan’s energy minister Sauat Mynbayev says no decision is yet taken and the criteria for it will be commercial considerations, i.e. the terms offered by the eventual winning side. But given Beijing’s longstanding interest in Kashagan and deepening energy cooperation with Astana, the deal may indeed end up tipping eastwards instead of southwards.

IMPLICATIONS: A sign of the further deepening of already significant bilateral commercial ties, both inside and outside the energy sector, was the summit signature by Kazakhstan’s sovereign wealth fund Samruk-Kazyna of an agreement with the Chinese state-owned investment company CITIC Group to establish a Kazakhstan-China Business Council. In this context, a principal motivating initiative was the framework agreement also signed for the expansion of the Atasu-Alashankou oil pipeline, a joint development between KMG and the Chinese National Petroleum Corp (CNPC). Atasu-Alashankou was the first of three sections of a nearly 1,384-mile pipeline that now stretches from Atyrau on the northern shore of the Caspian Sea to Alashankou in Xinjiang, where it connects up with the 153-mile Alashankou-Dushanzi pipeline that supplies the Dushanzi refinery. The Atasu-Alashankou pipeline is one of Kazakhstan’s three main oil export routes. The others are the Atyrau-Samara and the Caspian Pipeline Consortium lines, both of which go to Russia. In addition, Kazakhstan sends oil from its Caspian Sea port of Aqtau to Azerbaijan by tanker. The government intends to expand Aqtau, already the country’s main seaport on the Caspian shore, into a multi-modal transit hub; and there are agreements with the Chinese for them to participate in the construction.

It is reported that annual throughput has increased on average by 20 percent each year since the Atasu-Alashankou pipeline's opening in 2006 to reach a total shipped volume of 350 million barrels by the end of 2012. By arithmetic calculation, this would mean that the initial volume in 2006 was 74,000 barrels per day (bpd), almost tripling to slightly over 220,000 bpd last year. Further calculations on the basis of volumes of additional segments of the pipeline that came online towards the end of the last decade, eastwards from Atyrau from western Kazakhstan, make this a credible figure. However, the newly announced plans for further volume upgrades would still be in line with the intention originally announced, when it opened in 2006, to reach to 400,000 bpd by 2011, a level so far barely met by half and which the planned upgrades would not yet meet either. As the current 220,000 bpd figure is slightly over the reported volume of the Alashankou-Dushanzi pipeline inside China, it too would have to be expanded, perhaps along with the capacity of the Dushanzi refinery.

Kazakhstan’s raw materials trade with China is not limited to oil and gas, nor even only its energy trade. To give but one example, Kazakhstan has since 2009 been the world’s biggest uranium producer, supplying in 2011 over one-third of the world market; and it is China’s largest uranium supplier. The new bilateral agreements follow on, and help to implement, the discussions Nazarbaev held last June with Hu Jintao and his then-deputy Xi Jinping, whom he has now encountered for the first time in his new leadership roles. The agreements concern a range of industrial projects including a planned petrochemical complex at Atyrau, linked to energy extraction in the region, which will cost several billion dollars.

China will also participate in the construction of vast new infrastructure in Kazakhstan, including an Almaty-Astana highway, a high-speed rail line between the two cities and also a railway between Zhezkazgan and Beineu, all as part not only of Kazakhstan’s drive to develop domestic infrastructure but also as part of the dynamic “Western China - Western Europe” Transit Corridor that is under way to link together the many intermediate regions particularly for commercial purposes through the intensive transport construction, the opening of new border crossings, simplification of customs procedures, and so on. 

CONCLUSIONS: If Putin’s greeting of Xi in Moscow on the latter’s first foreign trip as Chinese president represents Russia’s playing of the “China card” against the U.S. four decades after U.S. President Richard Nixon played it against (Soviet) Russia, then Xi’s visit to Moscow together with his focus on the Asia-Pacific region may be taken as his own reply to the American “pivot to Asia.” And if Putin appears to be seeking a grand bargain from Berlin to Beijing, excluding the U.S., then Xi may be seen as seeking his own, from Moscow to Manila (or Mindinao, or indeed Melbourne). From this diplomatic confluence, and given its richness in natural resources, Kazakhstan only gains advantage from both sides, by following its long-established “multi-vector” foreign policy strategy.

AUTHOR’S BIO: Dr. Robert M. Cutler is a senior research fellow at the Institute of European, Russian and Eurasian Studies, Carleton University, Canada.

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