China’s New Moves in the Central Asian Energy Sweepstakes

In December 2005 China and Kazakhstan opened the Atasu-Alashankou pipeline, the first intended to export Kazakh and Russian oil to China. This 988 kilometer pipeline is expected to be fully operational by 2007, when China’s domestic pipeline and refinery capabilities are adequately updated, and is estimated to deliver 100-200,000 barrels/day of crude oil to the Chinese market. In addition to Kazakh crude, the pipeline will carry Russian oil: there is an insufficient amount of Kazakh oil to supply the necessary volume, and Russia would otherwise block or impede the project by threatening Kazakh energy interests elsewhere if not allowed a share of exports to China. These considerations underscore China’s other recent moves in Central Asia to acquire new energy sources.

China has also leaked hints that it expects the Shanghai Cooperation Organization (SCO) to set up an energy working group later this year to study proposals for construction of pipelines among the members. Since China has its own parallel negotiations with Russia for gas and oil pipelines underway, both of which have a checkered history, this suggests intensification of China’s search for Central Asian energy—in part because it cannot rely on Russia living up to its past promises. Although PetroChina has found 2.4 billion tons of oil more than expected in China and internal pipeline construction is underway to link up China’s northwest, east, and southwest territories to bring foreign gas and oil to the interior, China is also searching for energy sources elsewhere. It has just signed a gas deal with Nigeria and another with Myanmar, but the Central Asian sources promise greater security because of their proximity to China itself.

Thus it was recently announced that China expects to sign a gas deal with Turkmenistan in April 2006 and seeks to build a parallel gas pipeline to the Atasu-Alanshankou pipeline to obtain Kazakh gas (and possibly link that secondary pipeline with explorations now underway in Uzbekistan and the projected Turkmen project (Interfax January 19, 2006). Despite the deal with Myanmar that evidently came at India’s expense—Delhi has sought for a long time to sign a gas deal with that state—China has hoped to moderate its rivalry with India over bidding for foreign energy sources and filed a joint bid with ONGC for Syrian pipelines late in 2005. Some Chinese scholars and officials are also echoing Indian calls for some sort of association, as yet undefined, of Asian oil consumers to gain more leverage in international energy markets (Associated Press, January 13, 2006). When Indian Energy Minister Aiyar came to China earlier this year, his Chinese interlocutors even engaged in admittedly speculative, but nonetheless revealing discussions about connecting China in the future to the Iran-Afghanistan-Pakistan-India pipeline that is slated for construction. Moreover, if a Turkmenistan-Afghanistan-Pakistan-India pipeline project that has been discussed for a decade gets off the ground, it is likely China will also seek inclusion in that project.

There are many reasons for China’s interest in these projects, but one that does not receive enough visibility in international commentary on Chinese energy policy is Russia’s refusal to give Beijing the energy it requires and on the terms it desires. Both the Kovytka gas project and the oft-discussed Angara-Daqing pipeline remain purely notional, even though Russia has most recently stated that the pipeline to Daqing will be built before the one to Nakhodka and Japan is constructed. Chinese efforts to obtain equity in Russian energy firms or fields remain suspended in midstream, and it is clear that the Russian state energy agencies—Gazprom, Rosneft, and Transneft—which control the pipelines refuse to surrender any part of their monopoly over gas, oil, and transportation routes to China or to allow non-state firms or foreign and domestic consortia to act independently. Although China currently receives oil by rail from Russia, it does so at an exorbitant price and is thus subsidizing the renovation of Russia’s decrepit railway system.

It is a measure of the urgency of China‘s quest for energy and its skepticism—if not outright disappointment at Russian obstruction and unreliability—that these moves suggest reversals in its foreign policy. For example, so far despite rhetoric about multipolarity, China has shunned multilateralizing discussions about its access to energy. Now it will do so with both India and the SCO. This suggests a search for venues to discuss acquiring energy from both Central Asia and Russia, and in which Moscow is not the only actor at the opposite end of the table. It also suggests a rising interest in multilateral energy associations that would work against what until now has been a wholly unilateral approach to the question of energy security. Such multilateralization will take a long time to accomplish, but the signs of Beijing’s interest in this are due to policy failures with regard to Russia.

This is because Russia has consistently obstructed China’s quest for independent access to or ownership of Central Asian or Russian energy. Russian energy producers have steadily rebuffed China’s projects for obtaining energy supplies. Russian officials again recently reiterated their opposition to being merely China’s source for raw materials, and demand equal status in economic-technological exchanges with China (Eurasia Daily Monitor, September 30, 2005). Russia is also determined to maintain autarchic control over its strategic resources and to be able to manipulate prices in its favor of a monopolistic producer. As Sergei Kuprianov, Gazprom’s Press Secretary, stated in 2004: “Sharing mineral resources with foreign companies is against our policy. In fact, sharing oil with the Chinese would be even more inappropriate. After all, their stake in Yuganskneftgaz [the former main asset of the now defunct Yukos energy company] could complicate future price negotiations [for oil purchased by CNPC]” (Vedomosti, December 10, 2004).

Previously these officials also blocked the sale of Slavneft to China, successfully destroyed Yukos, the company that favored a direct Russo-Chinese oil sale and pipeline from Angara to Daqing, and for some time appeared to be winning the policy struggle over oil sales to Asia by proposing a much more expensive, but partly subsidized by Japan, pipeline to Nakhodka (U.S.-China Economic and Security Review Commission, 2004). Chinese buyers would then have to buy from Japan rather than directly from Russia. Similarly, Russian and American energy companies have obstructed—and are still obstructing—China’s efforts to buy energy holdings in Central Asia, forcing China to depend on external suppliers rather than gain equity holdings there (Ibid., 2003; Asian Survey, XL, 2000).

Moscow has regularly sought to monopolize the transport of Kazakhstan’s enormous oil and gas deposits, oppose Kazakhstan’s participation in the Baku-Ceyhan pipeline system (BTC), deprive Turkmenistan of free-market choices and pipelines for its gas, and obstruct efforts to build pipelines that would connect Turkmenistan with Pakistan and the Indian Ocean (Asia Times Online, March 5, 2003; Marco Polo Magazine, Acque et Terre, 2003). Not surprisingly, these efforts anger Kazakhstan’s officials, including its Minister of Energy and Natural Resources, who said “Russia must share the markets it controls” (Gazeta.ru, January 11, 2005). Moscow has generally adopted monopolistic behaviors vis-a-vis the transport of Central Asian and Azeri energy resources by regular efforts to coerce those states. Indeed, in November 2005 Gazprom concluded a deal with KazMunaiGaz, Kazakhstan’s main oil and gas pipeline firm to increase gas transit of Turkmen and Uzbek gas via Kazakhstan so that Gazprom will control virtually all of Central Asia’s gas exports. While observers say this is aimed first at Ukraine, it also will constrict Chinese options in Central Asia (Russian and Oil Gas Report, November 14, 2005; ITAR-TASS, November 11, 2005). Indeed, Moscow’s subsequent pressure upon Turkmenistan to join its requests for pricing Turkmenistan’s gas exports has been notable, even to the point of helping to facilitate an attempted coup there in late 2002 (News of Central Asia, December 12, 2005; Marco Polo Magazine, Acque et Terre, 2003). Thus its efforts to block independent Chinese access to Central Asia are hardly surprising.

While China’s motives for buying Central Asian energy include fear of reliance upon maritime imports that could be interdicted by the U.S. or other navies and internal security considerations in Xinjiang, no account of China’s energy policy can overlook its unhappy experiences with Russia. These experiences have led to new departures in Chinese energy policy that move away from what has hitherto been the norm in that policy—unbridled unilateralism. This unilateralism has proven to be expensive because it has led China to pay for equity ownership in fields at prices higher than the market price and often for energy yields that are not as large as hoped. The new policy, if it is indeed going to be implemented in a multilateral format, will probably prove to be both cheaper and more reliable over time, as well as another example of Chinese interest in and lessons learned from multilateralism and multilateral organizations. If this does indeed become the reality, it will work to erode the Russo-Chinese strategic alliance or partnership against the United States. From the perspective of Beijing and Moscow, while there are solid political and military grounds for such a partnership if not outright alliance, in fact the economic foundation—and especially its energy dimension—is inherently precarious and will likely remain so for a long time to come.