RUSSIAN OIL TO FLOW TO CHINA EVEN BEFORE PIPELINE COMPLETED

In an apparent bid to secure a toehold on the lucrative Chinese market, Russian oil majors have moved to supply crude oil to China through Kazakhstan, rather than waiting for completion of Russia’s own Pacific oil pipeline.

Russia’s state-owned oil pipeline monopoly Transneft indicated on April 25 that it plans to funnel 1.3 million metric tons of oil (26,000 billion barrels per day) to China this year via the Atasu-Alashankou pipeline. Transneft head Semyon Vainshtok said companies have already supplied the pipeline with some 300,000 metric tons of oil (RIA-Novosti, April 25). Vainshtok named Russian-British joint venture TNK-BP as one of these companies, although TNK-BP reportedly clarified that it just provided “technical” oil that had to be there to keep pipes operational.

The state-owned oil major Rosneft also indicated interest in Transneft’s plan. Rosneft is keen to supply oil to China. The company’s vice president, Alexander Sapronov, described the Omsk-Pavlodar pipeline section as the only bottleneck, adding that upgrading this section would increase Rosneft’s motivation.

The Atasu-Alashankou pipeline now has a capacity of 10 million metric tons a year. Previous studies suggested the pipeline would need Russian crude from Western Siberian via the Omsk-Pavlodar-Shymkent pipeline to reach its full capacity of 20 million tons by 2010. Nonetheless, Russian executives appear keen to indicate that they have already used an alternative pipeline route to export crude eastward.

Russia’s Vedomosti daily commented that early supplies through the Atasu-Alashankou pipeline would give Russian oil companies access to the Chinese market years before the Pacific pipeline would be built (Vedomosti, April 26).

Meanwhile, Russia’s top oil company, Lukoil, is now considering transporting crude oil supplies from Kazakhstan to China via the Atasu-Alashankou pipeline. Lukoil CEO Vagit Alekperov said after a meeting of the Lukoil board of directors in Astana on April 25 that Turgai Petroleum, a joint venture in Kazakhstan co-owned by Lukoil and PetroKazakhstan, could be re-oriented to export oil to China.

During the board meeting Lukoil officials decided to raise crude output in Kazakhstan and to complete feasibility studies for the Khvalynsk and Tsentralnoye fields by the end of 2006 (Kazinform, April 25). Lukoil and Kazakhstan’s state oil company, KazMunayGaz, are developing the Khvalynsk and Tsentralnoye oil deposits on the Caspian shelf on a parity basis.

Alekperov said Lukoil seeks to raise crude production in Kazakhstan by 40% in four years. “The total volume of crude oil production in Kazakhstan is expected to reach six million tons (120,500 bbl/d) in 2006, and the company plans to reach 10 million tons (200,100 bbl/d) by 2010.”

Furthermore, the company’s investments in Kazakhstan by 2010 would amount to $300 million a year, or $1.5 billion over the next five years. Alekperov said production would be increased by raising the output of existing deposits; the company does not plan to acquire new deposits (RIA-Novosti, April 25).

Alekperov reported that Kazakh President Nursultan Nazarbayev had suggested that Lukoil should build a gas chemical complex in Kazakhstan, at the Karachaganak field (Kazakhstan Today, April 26).

Last fall, a meeting between Nazarbayev and Alekperov coincided with controversy over China National Petroleum Corp.’s (CNPC) acquisition of PetroKazakhstan. Lukoil was overpowered by CNPC in a legal battle for control of key energy assets in Kazakhstan. In October 2005, a court in Canada gave approval to CNPC’s $4.18 billion purchase of the Canada-registered firm PetroKazakhstan. CNPC’s purchase of PetroKazakhstan included the latter’s 50% stake in the Turgai venture with Lukoil.

The deal came as a setback for Lukoil, which had petitioned a court in the Canadian province of Alberta to block the acquisition on grounds that Lukoil had a preemptive right to take full control of Turgai Petroleum, a subsidiary jointly owned by Lukoil and PetroKazakhstan. Lukoil had also indicated it was prepared to match CNPC’s bid for PetroKazakhstan, which produces 150,000 barrels per day, or around 12% of oil production from Kazakhstan.

Lukoil and PetroKazakhstan have a long-running dispute regarding their Turgai joint venture. On July 6, 2004, PetroKazakhstan requested arbitration with the Stockholm Arbitration Institute against Lukoil, seeking compensation for lost profits that PetroKazakhstan would have received as a 50% shareholder of Turgai Petroleumhad Lukoil financed the joint venture. PetroKazakhstan claimed $200 million in damages. In April 2005, Lukoil Overseas Kumkol BV and Turgai Petroleum also requested Stockholm arbitration against PetroKazakhstan.

Also last fall, Lukoil acquired the Toronto-listed firm Nelson Resources, which pumps one percent of Kazakhstan’s oil, in a $2 billion transaction. Nelson has stakes in several oil firms and fields in Kazakhstan, including the Alibekmola, Kozhasai, Zhambai, North Buzachi, Karakuduk, and Arman fields. It said its net proven and probable reserves are around 270 million barrels, but its total reserves in place could be potentially as high as 2 billion barrels.

Lukoil has invested $4.5 billion in Kazakhstan, including the Nelson deal, and wants to buy more assets in Kazakhstan. Last October, Lukoil indicated plans to spend $550 million to $700 million in the next five years to increase production at Nelson. Lukoil oil output outside Russia rose 31% after Lukoil acquired Nelson Resources. Hence Lukoil is understood to have sufficient motivation to seek ways to funnel crude to China.

In the meantime, China also appeared keen to indicate it already uses a pipeline route to import crude, an alternative to maritime supply routes from the volatile Middle East. Chinese media reported that first Kazakh oil arrived at Alashankou in Xinjiang on April 30. The development “marked the beginning of cross-border land oil supply from other countries,” the People’s Daily commented (People’s Daily, April 28).

China views Atasu-Alashankou as the first phase of the 3,000-kilometer-long Kazakhstan-China oil pipeline that will run from Atyrau on the Caspian Sea through Kenkiyak; and it could be eventually be extended to China’s Dushanzi Oil Refinery in Xinjiang. According to Xia Yishan, head of China’s Energy Strategy Research Institute, the Chinese section of the oil pipeline from the Alashankou to Dushanzi is ready to receive the oil now. Xia said only one-half of the initial 10 million tons of crude oil per year would be supplied by Kazakhstan, while the other half would come from Russia.

The Atasu-Alashankou pipeline has given the Central Asia states new opportunities for energy cooperation within the framework of the Shanghai Cooperation Organization. Meanwhile, early oil supplies from Kazakhstan seemingly hastened the construction of the Russian Taishet-Nakhodka pipeline (People’s Daily, April 28). Therefore, China’s official mouthpiece indicated Beijing’s preference for multiple sources of hydrocarbon supplies and pipeline routes from Central Asia and Siberia.