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Monday, June 12, 2006

Great powers compete for Kazakh energy

By Elizabeth Wishnick for ISN Security Watch (12/06/06)

Last month saw a flurry of great power activity in Kazakhstan, as the US, China, and Russia accelerated their competition over energy resources in the central Asian state. Motivated by concerns over diversification of supply routes as well as by geopolitics and instability in global energy markets, each of the three great powers is seeking to assert its own interests in Kazakhstan in response to actions by the other two. Although cooperation is possible, and on the surface, already present in the case of Russia and China, each of the three is pursuing a distinct strategy in Kazakhstan.

On 25 May China received its first pipeline oil. It flowed from Atasu in Kazakhstan to Alashankou in China’s Xinjiang Uighur Autonomous Region. The 962-kilometer pipeline - built by Kazakhstan’s state oil company, KazMunaiGaz, and the Chinese National Petroleum Corporation (CNPC) - was completed in December at a cost of US$700 million. The pipeline will bring in up to 20 million tonnes of oil annually. As a result, Kazakhstan will quadruple its oil exports to China in 2006 - shipping 4.75 million tonnes by the new pipeline, and then 8 million tonnes in 2007. Ultimately, the pipeline will span some 3,000 kilometers to connect to Kazakhstan’s Atyrau fields in the Caspian Sea. Kazakhstan currently produces 60 million tonnes of oil annually and is planning to double its production by 2015.

After more than a decade of difficult negotiations with Kazakhstan and Russia over pipeline projects, the Kazakhstan oil pipeline is the first to be built to China, though Russian oil will also be shipped along this route. PetroKazakhstan, which CNPC purchased for US$4.2 billion in October 2005, will help supply the pipeline, but it cannot do so alone. Thus far, China has failed to purchase fields in western Kazakhstan where reserves are greater. Consequently, Kazakhstan has allowed Russia to ship up to five million tonnes of oil per year through the Atasu pipeline to China as well. In a 25 April agreement, Transneft, Russia's state-owned oil pipeline monopoly, agreed to send 1.3 million tonnes of oil through the pipeline in 2006. Both Rosneft and Lukoil have expressed interest in participating in the plan.

Once China became a net oil importer in 1993, the Chinese government sought to diversify its supplies and supply routes. In 2003, China overtook Japan as the second largest importer of oil. In 2005, China imported 43 per cent of the 319 million tonnes of oil it consumed, according to the Chinese National Development and Reform Commission. Currently, more than half of the oil China imports comes from the Middle East and 80 per cent of those imports pass through the Malacca Straits.

Although Chinese officials initially pinned their hopes on a Siberian pipeline to Daqing in Northeast China, Sino-Russian differences over pricing, reserves estimates, and routing caused considerable delays. The first spur, linking Siberian oilfields to Skovorodino near the Chinese border, only began construction on 28 April.

The new pipeline from Kazakhstan to Xinjiang also will help Chinese leaders address some of the regional disparities presenting a fundamental challenge to Chinese energy policy. The Daqing field, in China’s northeastern Heilongjiang province, once the center of Chinese heavy industry, has been producing oil since the 1960s and amounts to one-third of total Chinese output (46 million tonnes in 2004), but is now in decline.

Today, the country’s energy resources are located in less developed inland areas, while energy-intensive industries are concentrated in the northeast, and prosperous population centers with high rates of energy consumption and modern industrial complexes are found in coastal cities such as Shanghai, Guangzhou, and Beijing.

To respond to these disparities, the Chinese government announced a “Go West” policy at the March 2000 session of the National People’s Congress. The policy aims to boost the development of the inland provinces by exploiting their resources, which will then be directed to population and industrial centers in need of energy. The centerpiece of the project is the US$5.2 billion 4,000-kilometer West-East gas pipeline project, connecting gas deposits in Xinjiang’s Tarim basin with Shanghai. The project began supplying gas in September 2004 and has a capacity of 12 billion cubic meters per year.

Xinjiang is slated to replace China’s northeast as the new center of petrochemical industry, as China receives energy resources from Kazakhstan and develops its own Tarim Basin. An oil refinery with an annual capacity of ten million tonnes is under construction in Dushanzi in Xinjiang and will be completed in 2008.

Xinjiang is also home to the Uighur population, one of China’s Muslim minorities, and consolidating economic and social stability has also been a driving force behind China’s western development strategy as well as its interest in promoting greater economic integration under the auspices of the Shanghai Cooperation Organization (SCO).

Although Russia and China both hail this organization as an alternative to Western-dominated regional security organizations such as NATO, Russian leaders have been more wary of Chinese efforts to expand its influence in areas of the former Soviet space that Moscow considers its traditional sphere.

Under Russian President Vladimir Putin, as energy has been renationalized, it has emerged as a powerful tool of state diplomacy and a means of reasserting Russian leverage over members of the Commonwealth of Independent States (CIS). Russian policymakers are much more intent on creating a common economic space within the CIS than in the SCO, and have been using control over energy exports and prices to achieve that end.

At times, this leverage is used to reward cooperative partners like Kazakhstan’s President Nursultan Nazarbaev, who highlights the constructive partnership with Russia as a key foreign policy priority. In a meeting in the Russian port of Sochi on 20 May, Nazarbaev and Putin agreed that Russia would pay higher transit fees for gas from Kazakhstan that Gazprom exported to other states. This means that customers like Ukraine, where pro-Western political change incurred Russian wrath and a dispute over pricing led to a brief cut-off of gas supplies this winter, are likely to see their gas prices increase as a result.

Just two weeks before, US Vice President Dick Cheney paid a visit to Kazakhstan to urge President Nazarbaev to export oil westward through the Baku-Tbilisi-Ceyhan (BTC) pipeline that just began shipping Caspian oil to the Turkish port of Ceyhan on 28 May. Cheney’s trip to Kazakhstan came the day after his 4 May speech in Vilnius, Lithuania in which he accused Russia of using energy exports to acquire political leverage. After criticizing Russia for rolling back democratic freedoms, Cheney went on to praise the even more authoritarian Kazakhstan for its economic and political development.

Kazakhstan has long been at the center of US policy towards central Asia, considering that US companies, led by Chevron, have invested more than US$12 billion in the country since 1993, more than any other state.

In the past year, as relations between Uzbekistan and the US have deteriorated, ties with Kyrgyzstan have become more complicated, and European anxiety about dependence on Russian gas exports has grown, US relations with Kazakhstan have become all the more important. Although US ambassador to Kazakhstan John Ordway claimed Washington supported the new Kazakh-Chinese pipeline, clearly the Cheney visit reflected Washington's effort to anchor Kazakhstan to European and US economic interests.

Officials in Kazakhstan, for their part, have been seeking to balance their good relations with Russia, which the Baku-Tbilisi-Ceyhan pipeline circumvents, with its own desire for export diversification and interest in achieving a “multi-vectored” foreign policy that also values good relations with the US and China.

After demurring for some time, Nazarbaev is slated to sign an agreement with Azerbaijan on 17 June, pledging that Kazakhstan will export 7.5 million tonnes of oil through the BTC pipeline.

Kazakhstan is also considering participating in a Baku-Tbilisi-Erzerum gas pipeline that would ship gas from central Asia to Turkey, bypassing Russia. The perception of Russian unreliability as a gas supplier for Europe revived interest in the US$2.5 billion plan, which first came up in the early 1990s. EU Energy Commissioner Andris Piebalgs, visiting Kazakhstan just before Cheney, expressed European support for the central Asia gas pipeline, although many economic and political questions remain concerning its feasibility.

Due to its geographic location at the juncture of Asia and Europe, squeezed between Russia and China, Kazakhstan has long been accustomed to delicate balancing acts. To make matters more complicated, however, Azerbaijan, along with Ukraine, Georgia, and Moldova, announced on 24 May they would leave the CIS to form a new organization, the Organization for Democracy and Economic Development.

This means Kazakhstan will be a part of the CIS, yet joined to its pro-democratic rival through the BTC, as well as a member of the SCO and NATO’s Partnership for Peace program, among other regional organizations. Such a multi-pronged foreign policy means that great power competition over Kazakh energy resources is only likely to continue in the future.

Elizabeth Wishnick is an Assistant Professor of Political Science at Montclair State University and a Research Associate at the Weatherhead East Asian Institute, Columbia University.
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