Publication: Eurasia Daily Monitor Volume: 3 Issue: 1

At a solemn ceremony on December 15, Kazakh President Nursultan Nazarbayev pressed the button to officially begin pumping oil at the Atasu terminal along the new Atasu-Alashankou pipeline. The ceremony took place at the main control center of the Kazakh national oil transport company, KazTransOil.

Construction of the 988-kilometer-long Atasu-Alashankou route started in September 2004 and finished in ten months, a record time for such a colossal project. The planned extension of the Kenkyak-Atyrau pipeline built in 2003 to the Kumkol oil fields in Kyzylorda region (south Kazakhstan) will increase greatly the volume of oil to be delivered to the refinery in China’s Xinjiang Autonomous Republic.

Speaking at the ceremony Nazarbayev said that when he first mooted the project in 1997, only a few people believed the daring plan could be completed in such a short time, but Kazakhstan turned that dream into a reality thanks to the help of China, which he called Kazakhstan’s “strategic partner.”

Beijing shouldered the entire financial burden of the ambitious project, investing over $800 million. According to Kazakh Minister of Energy and Mineral Resources Vladimir Shkolnik, Chinese investments in Kazakhstan’s oil and gas sector are quite justified, as between 2010 and 2020 Chinese oil consumption is expected to rise from 355 million tons to 500 million tons annually, and China’s oil deficit will increase by 240 million tons (Izvestiya Kazakhstan, December 17).

The Atasu-Alashankou pipeline needs to pump 600,000 tons of oil before shipments begin in mid-2006. The initial volume of shipments will not exceed 10 million tons per year, but the executive director of the national oil company KazMunayGaz, Kairgeldy Kabyldin, believes that by the year 2010 the pipeline will be used to its full capacity of 20 million tons annually (Panorama, December 17).

Much of the oil needed to fill the pipeline is expected to come from the Kumkol fields in south Kazakhstan, which China gained after the acquisition of the PetroKazakhstan oil company, and Chinese-owned oil deposits in Aktobe region, west Kazakhstan. However, China needs Russia’s Siberian oil to make the pipeline profitable. The endeavor requires a great deal of diplomatic skill not only from Beijing, but also from Astana.

Russian oil could be delivered from Western Siberia through the Omsk-Pavlodar-Shymkent pipeline, which currently needs substantial reconstruction. But there are at least two political impediments to a productive partnership with the Russians. First, Moscow did not welcome the construction of the Atasu-Alashankou pipeline, which is Kazakhstan’s first oil-shipment route to bypass Russia. Currently Kazakhstan delivers 16 million tons of its oil to outer markets via Russian territory. Alternative routes mean dwindling transit fees and greater independence for Kazakh oil companies. Second, Moscow is increasingly becoming aware of the growing competition from Astana for oil markets traditionally dominated by Russian companies.

One recent case is the agreement concluded between the Ukrainian Ukrtransnafta and KazMunayGaz companies about establishing a joint venture, Transmunay, to build a 52-kilometer-long extension of the Odessa-Brody pipeline to bring Caspian oil located in the Kazakh sector of the Caspian Sea to European markets. In the long term, the pipeline would allow Kazakhstan to transport up to 10 million tons of oil annually, while currently Russian oil deliveries through Odessa-Brody do not exceed 6 million tons. Kazakh oil officials hastened to assure Moscow that Kazakhstan does not intend to drive Russian suppliers from Odessa-Brody. But given Astana’s unrestrained drive to capture as many markets as possible for its increasing oil output, little credence can be given to such friendly assurances. Another gloomy prospect for Moscow is the looming oil alliance among Ukraine, Kazakhstan, and Poland, countries all tied to the Odessa-Brody pipeline. Poland would like to see the pipeline extended to its seaport at Gdansk. Odessa-Brody is also highly attractive for Azeri oil companies (Panorama, December 17).

Ironically, the need for west Siberian oil to pump through Atasu-Alashankou coincides with the unsettled row between the Russian oil shipment company Transneft and KazMunayGaz around the Lithuanian Mazeikiu Nafta oil company. In autumn 2005 KazMunayGaz bid $1 billion dollars for 53.7% of the shares in Mazeikiu Nafta, lowering the acquisition chances of its Russian rival, Lukoil. In response to competition from KazMunayGaz, Transneft unilaterally backed out of an agreement on delivering Kazakh oil to Lithuania’s Butinge terminal. Although the management of Transneft denied any political reasons for renouncing the agreement, experts interpret this move as Moscow’s attempt to deny Kazakh oil suppliers access to Baltic markets (Megapolis, November 21). Not discouraged by the severe blow from Transneft, the Kazakh oil company is looking for other possibilities for shipping oil to Lithuania while bypassing Transneft. KazMunayGaz chairman Kabyldin traveled to Vilnius to meet Lithuanian Prime Minister Algirdas Brazauskas. Lithuania also sees political implications from the Russian demarche (Panorama, December 17).

Atasu-Alashankou offers Russia a good opportunity to gain access to the growing Chinese oil market. Considering the enormous economic potential of a Kazakh-Chinese-Russian oil triangle, Moscow would be well advised to discard political considerations. Kazakhstan apparently is ready to go behind expanding its oil delivery routes, and is also considering the construction of a gas pipeline from west Kazakhstan to China. It is also possible that India might join the gas pipeline project. In any case, time is on the side of Beijing and Astana.