China Lays its Stake on Central Asia

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This is the second in a series of articles that looks at China’s borders. As China has grown in the last 30 years, so have the often complicated relationships it has with its many varied neighbors. In this article, we take a look at Kazakhstan.

By Joyce Roque

“The main thing is to make history, not to write it.”
-Otto Von Bismarck

Dec. 18 – Just like the spice trade of old where adventurers flung themselves in the uncharted world for the sake of country and above all for the business of spice, it seems China is no different with the lure of spice replaced by the hunt for oil. China is the second largest importer of oil in the world with a mission to lay the groundwork for stabilizing its energy security in the future.

The world’s thirst for oil overtakes its supply despite fears of global warming. According to government specialists, oil and gas demand will remain unhindered and could climb to as much as 50 percent in the coming 25 years.

Oil industry experts also estimate that for China’s case oil demand may reach 400 million tons by 2020 with an average increase of 12 percent annually.

“There are no easy barrels left,” J. Robinson West, chairman of PFC Energy told the International Herald Tribune. “The only barrels are going to be the tough barrels.”

China goes West
China seems to be in luck as it does not need to look far to find the solution to its oil needs. Central Asia is practically the country’s backyard with no less than the oil-rich bounty of the Caspian Sea up for the taking. In addition, the area’s landlocked proximity to the country makes oil delivered by pipeline less susceptible to any foreign military intervention to block China’s energy supplies.

The Caspian Sea sits on the borders of five countries: Azerbaijan, Kazakhstan, Turkmenistan, Russia and Iran. In no time, these states will soon gain prominence for the simple reason that under the politics of oil, energy power can trump military might. The Caspian will be vital in the hustle for barrels because it holds the possibility of becoming the next important oil and natural gas exporter of the world.

The U.S. Energy Administration and Information Administration (EIA) sets the region’s proven oil reserves at 17 and 49 billion barrels. For 2007, estimates run over 200,000 barrels per day of annual production growth. By 2010, the EIA foresees the region churning out between 2.9 and 3.8 million barrels per day.

So it’s no surprise then on its 16th Party Congress, a “Go West” strategy was adopted by the Chinese government for the purpose of fostering economic ties with its Central Asian neighbors. It has already made leeway with the construction of the gas pipeline from Kazakhstan to China and has inked oil deals for joint partnerships with Uzbekistan and Turkmenistan.

During last year’s two-day Central Asia Regional Economic Co-operation (Carec) business development forum, vice-minister of commerce, Yi Xiaozhun said, “Under the Western development strategy, China is to improve the investment climate, open more sectors in the region to foreign investment and encourage more domestic firms to go abroad to carry out economic and technological co-operation with Central Asian nations.”

China is looking to spend US$294 million in a span of 5 years to revamp the highways at the border trading areas of the Xinjiang Uygur Autonomous Region. The construction will hopefully boost trade with Kazakhstan, Russia, Mongolia, and Kyrgyzstan. The Xinjiang border will cover 5,600 kilometers including 15 custom posts and 101 highways for passenger and cargo transportation activity in the region.

As for Kazakhstan, a joint communiqué signed this year cemented goals to continue cooperation between the two with the aim of increasing trade between the two to US$15 billion by 2015. The agreement also mentions Chinese and Kazakh interest in cooperating on a natural gas pipeline project, a petrochemical project and a partnership on deep processing of gas and oil.

The two countries have also set-up a tax free trade zone along the their shared border called the China-Kazakhstan Korgas International Border Cooperation Center at an expense of US$1 million to be operational within the next 5 to 8 years.

More importantly, China is active as part of the multilateral coordination group Shanghai Cooperation Organization (SCO) which includes the Kyrgyz Republic, Russian Federation, the Republic of Tajikistan, the Republic of Kazakhstan and the Republic of Uzbekistan as its members. The group coordinates general exchanges in the topics of security, trade, economy, humanitarianism and social affairs.

The ambivalent partner
Kazakhstan is a country of one million square miles distinctly nestled between two titans – Russia and China – while sharing borders with Uzbekistan, Kyrgyzstan, Turkmenistan and the Caspian Sea. For much of its history, it had been waging a struggle to assert its independence from foreign rule. It was only in 1991 that the former member of the Soviet bloc was finally on its own. In Turkish, the word “kazakh” means free.

The Central Asian state is literally sitting on a goldmine with claims to possessing the world’s eight largest oil reserve and the world’s biggest reserves in lead, tungsten, barite, and uranium. Kazakh oil estimates for 2015 are pegged at 120-150 million tons annually. It also has the second biggest reserves of chromite, silver, and zinc; and the third largest of manganese. The country also claims to have significant deposits of gold, copper and iron ore.

Given the right export routes, Kazakhstan’s production potential could propel it to become a major player in the oil industry. Proof of its growing clout is its chairmanship of the Organization for Security and Cooperation in Europe (OSCE) in 2010. The country is the first former Soviet state to assume the position and head the 56-country organization.

The Sino-Kazakh relationship has been a late bloomer with formal diplomatic relations between the two starting only after the state’s independence in 1991. It has also not been without its share of controversy.

While Russia has been cautious in allowing China any access to its Siberian oil deposits or holding any controlling stakes in its oil fields, Kazakhstan has been more willing to cut a deal given the right price tag. In 2005, the China National Petroleum Company bought the Canadian-run, Petrokazakhstan, for US$4.18 billion while spending another US$700 million to have the 962.2-kilometer Atasu to Alashankou pipeline reach the Chinese border.

The buy-out was the biggest foreign purchase made by a Chinese company. It also eventually came with the stipulation that the company resell one third of its stakes of Petrokazakhstan to Kazakhstan state oil company, KazMunaiGaz.

For the first seven months of this year, the Atasu-Alashankou pipeline has so far delivered an estimated 4.06 million tons of crude oil to China. At its peak, the pipeline will eventually be able to accommodate 20 million tons of crude oil annually.

The Atasu-Alashankou pipeline route has also piqued the interest of Gazprom Neft, the oil arm of Russia’s gas giant Gazprom to possibly deliver 1 million mt of crude to China. Other oil companies interested in the route also include Russia’s Rosneft and TNK-BP.

There are already plans between China and Kazakhstan to develop the existing crude pipeline to connect oil fields located in the Caspian Sea to China’s western regions. The second phase of the China- Kazakhstan oil line will then run from Kenkyiak to Kumkol.

Last January, China’s China International Trust & Investment Corp. Group was granted permission to purchase the Karazhambas oil field from Canada’s Nations Energy for US$1.91 billion. The sale gave China access to a source with proven oil reserves reaching more than 340 million barrels and with current production estimates of more than 50,000 barrels a day.

The deal will also come with the Nations Energy’s other assets in Kazakhstan: Argymak Trans Service LLP, a wholly owned transportation services company, and Tulpar Munai Services LLP, an oil-services provider, reported the San Francisco Chronicle.

Needless to say, such an ambitious buying strategy by China led to ripples of dissent even in the Nur Otan Party of President Nursultan A. Nazarbayev. Prevailing sentiment saw the major purchases as China encroaching on the country’s independence.

“Before our eyes a lot of work is being carried out [for China] to acquire a number of oil companies working in Kazakhstan,” said deputy Valery Kotovich in a speech according to The New Europe.

He added: “I have figures that say that if it buys these companies China will control about 28 percent of production in the country. If a deal that is currently being carried out with Mangistaumunaigaz is closed, this indicator will exceed 40 percent of production in Kazakhstan.”

Mangistaumunaigaz, is one of the biggest oil producers in the country and controls oil from: the Asar, Burmasha, Kalamkas, Zhetybau East gas fields; the Alatobe and Karagie North oil fields; the Oimasha oil and gas field and the Zhetybai South oil and gas condensate field accounting for 698 million tonnes of oil for 2006. Currently, the company is still owned by Central Asia Petroleum Ltd (Jakarta).

Also adding to the controversy then was the Kazakhstani energy minister, Bakhytkozha Izmukhambetov who had said on air that he would resort to “extreme measures” to hinder the Nations Energy deal, a threat that eventually never materialized.

Rebuilding a legend
Another important factor that will foster China’s closer ties with Kazakhstan and its other Central Asian neighbors is the rebuilding of the legendary Silk Route. The approved US$18.7 billion project will be the modern day version of the famous route that once land linked Europe with Asia through the ties of commerce and trade.

The strategy hopes to stimulate more trade by land with the establishment of six new transport corridors covering road links, airports, railway lines and seaports. It will snake through China, Russia, Southern Asia to the Middle East. Funds for constructing the network will come from aid from multilateral organizations and the countries themselves.

The eight countries affected by the plan will include, Afghanistan, Azerbaijan, China, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan and Uzbekistan.

A joint declaration issued during the 6th Ministerial Conference of the Central Asia Regional Economic Cooperation (CAREC) Program states: “Central Asia is becoming a pivotal region in Eurasia, a vital land-bridge linking Europe, Russian Federation, People’s Republic of China, South Asia, and the Middle East.”

The statement went on to say that, “The strategy will establish competitive transport corridors across the CAREC region, facilitate movement of people and goods across borders, and develop safe, dependable, effective, efficient, and fully integrated transport systems that are environmentally sustainable.”

The politics of oil
The future of China-Kazakhstan relations will lie in how the politics of oil will play out in the region.

While Kazakhstan considers China as a major partner, even more than the United States, as a whole, the nation still cannot shake off the looming influence of Russia. Kazakhstan’s ties with Russia run deep both historically and economically. The arteries of the country’s top oil routes run through Russia: the Caspian Pipeline Consortium (CPC) to the Black Sea Port of Novorossiysk, the Atyrau to Samara route, and finally oil shipped via railroad.

What China offers Kazakhstan is another pathway to offset its dependency on Russia. Kazakhstan produced 20.38 million metric tons of fuel oil in the first 10 months of this year, 58 percent of which was exported to China, Munal Izbergenov, vice president of the crude oil and products sales department of Kazakhstan’s ministry of energy and mineral resources told Bloomberg.

In 2006, although trade between the two countries reached US$8.3 billion, Kazakhstan was still in the red with a trade deficit of US$1.14 billion due to most China exports consisting of raw materials. Kazakhstan has yet to diversify the range of their products which rely heavily on oil and gas exports to literally fuel the economy at 30 percent of its GDP.

But it seems oil money flushed Kazakhstan, is also not without its own ambitions. It dreams of facilitating trade passing through China, Asia, the Gulf States and Europe by allocating US$26 billion for a transport infrastructure overhaul by 2015.

There is also the question of President Nazarbayev’s 17-year rule of the country. A foreseeable end to his reign could possibly cause political instability and stunt the country’s economic pace. Although according to a Kazakhstan constitutional amendment specified for Nazarbayev, he can run for re-election as often as he wants.

Recently, the Kazakhstan Parliament approved a rule that will allow the government to change or discontinue international energy contracts unilaterally should they be deemed as going against the nation’s interests.

The legislation will be implemented on cases in which actions “lead to a significant change to the economic interests of the Republic of Kazakhstan, causing a national security threat, and it gives the government the right to ask to change the contract conditions,” said Valery Kotovich, one of the legislation’s authors, reports The New York Times.

The new law is a palpable risk for current and future investors in the country because it does not define specifically what makes a national security threat making it open for abuse.

This is the second in a continuing series that focuses on China’s borders. The complete series to date can be found here.

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