Kazakhstan economy: China online—for oil
FROM THE ECONOMIST INTELLIGENCE UNIT
The first stage of a pipeline linking Kazakhstan and China has been completed, clearing the way for a sharp increase in the level of Kazakh oil exports to China. For China, the link promises to diversify its supply and to facilitate delivery of the oil that one of its companies, CNPC, now produces in Kazakhstan. For the Kazakhs, meanwhile, the link is the first major step towards reducing its export reliance on Russia. Yet the country’s hard-bargaining tactics, as well as diplomatic realities, could easily frustrate or delay plans for further diversification.
On December 15th Kazakhstan’s president, Nursultan Nazarbayev, formally opened a 900 km oil pipeline linking Atasu in central Kazakhstan with Alashankou in the north-western Chinese province of Xinjiang. Its initial capacity is 10m tonnes/year, or approximately 210,000 barrels/day. The US$800m line has been paid for by Kazmunaygaz, Kazakhstan’s state oil and gas firm, and the China National Petroleum Corporation (CNPC). Because Atasu is not currently equipped to receive oil from Kazakhstan’s oil-producing regions, the pipeline will initially be filled by crude delivered by rail from Aktobe and western Siberia (Russia). Within the next few years, however, an existing pipeline that links Atasu with the Kumkol field will be reversed to allow oil Kumkol’s oil to be delivered to China. And after 2010 a 700 km pipeline will be built between Kumkol and Kenkiyak to link China to other Kazakh oil fields. At that time, the capacity of the line is to be doubled to 20m t/y.
Kazakhstan currently produces around 1.3m b/d, the majority of which is earmarked for export. The lion’s share of its exports goes via the Russian pipeline system, although increasing quantities are now being delivered from the Tengiz field via the Caspian Pipeline Consortium (CPC) line to Novorossisk, the Russian port on the Black Sea. Much smaller volumes of Kazakh oil are exported via Azerbaijan and Iran (the latter through swaps), and to China via rail—in 2003, China imported 25,000 b/d from Kazakhstan. The new pipeline will facilitate a sharp increase in the level of oil trade between the two countries.
Every little helps
For China, which until a few years ago was self-sufficient in oil, a line with a capacity of 10m t/y or even 20m t/y will not solve its growing oil supply needs. It will, however, go some way towards meeting its import demand and by sourcing the oil from Kazakhstan it will avoid extending its reliance on the Middle East or Russia. During the course of negotiations on building the pipeline, the issue of transit fees—which had the potential to render exports to China uncompetitive—was highly contentious. However, its importance has receded because CNPC took over Petrokazakhstan, the Canadian-owned oil company that runs the Kumkol field, in October 2005. As a result, China can now be confident that the oil that CNPC produces in Kazakhstan will find its way to the home market. Against the background of growing Kazakh interest in the Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs from Azerbaijan’s Caspian coast to a deepwater Turkish port on the Mediterranean, the Petrokazakhstan deal and the completion of the pipeline to Alashankou gives China a guarantee that it will not miss out on Kazakh oil.
The construction and expansion of the line is unlikely to lessen China’s interest in securing Russian oil via the so-called eastern pipeline, however. This is a much larger-capacity project and offers access to the barely developed fields of eastern Siberia (although initially the line will be filled from mature west Siberian fields). Russia has commissioned the first leg of this line but has so far refused to decide whether the second leg will run to Daqing in China or to Perevoznaya on its Pacific coast—the preferred destination of Japan. Although Russia aspires later to build a spur to the destination not chosen, this is a distant project and depends on sufficient oil being available.
Loosening Russia’s grip
For Kazakhstan too, the pipeline’s initial impact is limited but its longer-term significance is considerable. The link to China marks the first major move away from Russia’s near-monopoly on Kazakh oil exports, the majority of which currently goes via the Russian state-owned pipeline system and the CPC line that terminates on the Russian Black Sea coast.
Currently, most Kazakh oil is exported to the north and the west. A 20m t/y pipeline to China offers geographical diversity by creating an eastern outlet. There is also the prospect that Kazakhstan could reach distant markets, such as the US and Canada, if it were to use the BTC pipeline (by shipping crude across the Caspian to the BTC terminal near Baku). Because Ceyhan is a deepwater port with unimpeded access to the oceans, it can serve supertankers that open the possibility of profitable long-distance exports. In May 2005 the Kazakh authorities made a verbal commitment to exporting some crude via the BTC line.
Embracing diversity—hesitantly
In one Chinese commentary, Kazakhstan is now portrayed as having three “strategic” oil export routes—via Russia, via China and via BTC. In practice this is stretching the truth. With regard to BTC, there is likely to be sufficient available capacity in the 1m b/d pipeline from the end of the next decade to warrant calling it a “strategic” option. At that time, Kazakhstan expects to be producing around 3.5m b/d. Yet Kazakhstan’s commitment to the route is not certain—despite the apparent advantages. It may be that the Kazakh authorities hope to extract further concessions from BTC’s operators, whether on the construction of an undersea pipeline to link Kazakhstan to BTC, or on the terms (or facilities) for shipping oil across the Caspian and thereafter via the BTC line. The government has consistently engaged in hard-bargaining on oil deals, refusing to make concessions, apparently in the belief that it can dictate terms because the country is sitting on huge oil reserves.
There is a clearer Kazakh commitment to the third “strategic” route, the line into China—although Kazakhstan has made no obligations to fill the pipeline, which will initially rely on fairly large quantities of Russian crude delivered by rail from Omsk. However, if the route has a capacity at the start of the next decade of 20m t/y it will not be on a par with the Russian export routes, including the CPC line, nor BTC. That would require the pipeline to China to have a capacity closer to 50m t/y.
Kazakhstan’s hesitation in committing to new export routes—which is difficult to explain, given the dangers of reliance on a single transit state (in this case, Russia)—may reflect a desire to open a major southern export route, via Iran. In this way, most likely via a large programme of oil swaps, Kazakhstan could export via the Persian Gulf. This plan, however, is unlikely to be feasible in the foreseeable future because of US opposition. As long as the US administration opposes large-scale foreign investment in Iran’s oil industry, it is difficult to see how Kazakhstan can realise its hope for a major southern export route.
Clearly the Kazakh authorities are in no rush to make final decisions about where the country’s oil will be sold in ten years’ time. If an Iranian option is the government’s preference, the decision to avoid major commitments until capacity constraints begin to bite is entirely understandable. Nevertheless, the opening of the pipeline to Alashankou marks the start of export-route diversification—and more moves towards that goal are certain, even if their direction is not.
SOURCE: ViewsWire Eastern Europe
The first stage of a pipeline linking Kazakhstan and China has been completed, clearing the way for a sharp increase in the level of Kazakh oil exports to China. For China, the link promises to diversify its supply and to facilitate delivery of the oil that one of its companies, CNPC, now produces in Kazakhstan. For the Kazakhs, meanwhile, the link is the first major step towards reducing its export reliance on Russia. Yet the country’s hard-bargaining tactics, as well as diplomatic realities, could easily frustrate or delay plans for further diversification.
On December 15th Kazakhstan’s president, Nursultan Nazarbayev, formally opened a 900 km oil pipeline linking Atasu in central Kazakhstan with Alashankou in the north-western Chinese province of Xinjiang. Its initial capacity is 10m tonnes/year, or approximately 210,000 barrels/day. The US$800m line has been paid for by Kazmunaygaz, Kazakhstan’s state oil and gas firm, and the China National Petroleum Corporation (CNPC). Because Atasu is not currently equipped to receive oil from Kazakhstan’s oil-producing regions, the pipeline will initially be filled by crude delivered by rail from Aktobe and western Siberia (Russia). Within the next few years, however, an existing pipeline that links Atasu with the Kumkol field will be reversed to allow oil Kumkol’s oil to be delivered to China. And after 2010 a 700 km pipeline will be built between Kumkol and Kenkiyak to link China to other Kazakh oil fields. At that time, the capacity of the line is to be doubled to 20m t/y.
Kazakhstan currently produces around 1.3m b/d, the majority of which is earmarked for export. The lion’s share of its exports goes via the Russian pipeline system, although increasing quantities are now being delivered from the Tengiz field via the Caspian Pipeline Consortium (CPC) line to Novorossisk, the Russian port on the Black Sea. Much smaller volumes of Kazakh oil are exported via Azerbaijan and Iran (the latter through swaps), and to China via rail—in 2003, China imported 25,000 b/d from Kazakhstan. The new pipeline will facilitate a sharp increase in the level of oil trade between the two countries.
Every little helps
For China, which until a few years ago was self-sufficient in oil, a line with a capacity of 10m t/y or even 20m t/y will not solve its growing oil supply needs. It will, however, go some way towards meeting its import demand and by sourcing the oil from Kazakhstan it will avoid extending its reliance on the Middle East or Russia. During the course of negotiations on building the pipeline, the issue of transit fees—which had the potential to render exports to China uncompetitive—was highly contentious. However, its importance has receded because CNPC took over Petrokazakhstan, the Canadian-owned oil company that runs the Kumkol field, in October 2005. As a result, China can now be confident that the oil that CNPC produces in Kazakhstan will find its way to the home market. Against the background of growing Kazakh interest in the Baku-Tbilisi-Ceyhan (BTC) pipeline, which runs from Azerbaijan’s Caspian coast to a deepwater Turkish port on the Mediterranean, the Petrokazakhstan deal and the completion of the pipeline to Alashankou gives China a guarantee that it will not miss out on Kazakh oil.
The construction and expansion of the line is unlikely to lessen China’s interest in securing Russian oil via the so-called eastern pipeline, however. This is a much larger-capacity project and offers access to the barely developed fields of eastern Siberia (although initially the line will be filled from mature west Siberian fields). Russia has commissioned the first leg of this line but has so far refused to decide whether the second leg will run to Daqing in China or to Perevoznaya on its Pacific coast—the preferred destination of Japan. Although Russia aspires later to build a spur to the destination not chosen, this is a distant project and depends on sufficient oil being available.
Loosening Russia’s grip
For Kazakhstan too, the pipeline’s initial impact is limited but its longer-term significance is considerable. The link to China marks the first major move away from Russia’s near-monopoly on Kazakh oil exports, the majority of which currently goes via the Russian state-owned pipeline system and the CPC line that terminates on the Russian Black Sea coast.
Currently, most Kazakh oil is exported to the north and the west. A 20m t/y pipeline to China offers geographical diversity by creating an eastern outlet. There is also the prospect that Kazakhstan could reach distant markets, such as the US and Canada, if it were to use the BTC pipeline (by shipping crude across the Caspian to the BTC terminal near Baku). Because Ceyhan is a deepwater port with unimpeded access to the oceans, it can serve supertankers that open the possibility of profitable long-distance exports. In May 2005 the Kazakh authorities made a verbal commitment to exporting some crude via the BTC line.
Embracing diversity—hesitantly
In one Chinese commentary, Kazakhstan is now portrayed as having three “strategic” oil export routes—via Russia, via China and via BTC. In practice this is stretching the truth. With regard to BTC, there is likely to be sufficient available capacity in the 1m b/d pipeline from the end of the next decade to warrant calling it a “strategic” option. At that time, Kazakhstan expects to be producing around 3.5m b/d. Yet Kazakhstan’s commitment to the route is not certain—despite the apparent advantages. It may be that the Kazakh authorities hope to extract further concessions from BTC’s operators, whether on the construction of an undersea pipeline to link Kazakhstan to BTC, or on the terms (or facilities) for shipping oil across the Caspian and thereafter via the BTC line. The government has consistently engaged in hard-bargaining on oil deals, refusing to make concessions, apparently in the belief that it can dictate terms because the country is sitting on huge oil reserves.
There is a clearer Kazakh commitment to the third “strategic” route, the line into China—although Kazakhstan has made no obligations to fill the pipeline, which will initially rely on fairly large quantities of Russian crude delivered by rail from Omsk. However, if the route has a capacity at the start of the next decade of 20m t/y it will not be on a par with the Russian export routes, including the CPC line, nor BTC. That would require the pipeline to China to have a capacity closer to 50m t/y.
Kazakhstan’s hesitation in committing to new export routes—which is difficult to explain, given the dangers of reliance on a single transit state (in this case, Russia)—may reflect a desire to open a major southern export route, via Iran. In this way, most likely via a large programme of oil swaps, Kazakhstan could export via the Persian Gulf. This plan, however, is unlikely to be feasible in the foreseeable future because of US opposition. As long as the US administration opposes large-scale foreign investment in Iran’s oil industry, it is difficult to see how Kazakhstan can realise its hope for a major southern export route.
Clearly the Kazakh authorities are in no rush to make final decisions about where the country’s oil will be sold in ten years’ time. If an Iranian option is the government’s preference, the decision to avoid major commitments until capacity constraints begin to bite is entirely understandable. Nevertheless, the opening of the pipeline to Alashankou marks the start of export-route diversification—and more moves towards that goal are certain, even if their direction is not.
SOURCE: ViewsWire Eastern Europe
posted by Marko at 12/16/2005 07:52:00 PM
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