Publication: Eurasia Daily Monitor Volume: 1 Issue: 99

Last week Kazakhstan began construction of a 962-km oil pipeline from the Atasu settlement in Karagandy region of Kazakhstan to Chinese Alashankou. Although Kazakhstan’s huge oil and gas reserves have attracted the giants of the Western oil industry, including Chevron, ExxonMobil, and Shell, perhaps the most successful has been the last to arrive: the Chinese National Petroleum Company (CNPC). On June 30 CNPC signed an agreement in Astana with the Kaztransoil joint company to set up the Kazakh-Chinese Pipeline Company.

The deal is extremely attractive for Kazakhstan. From the very beginning of the pipeline project, the Chinese side has met the Kazakh government halfway on many provisions of the agreement. Nearly 60% of the workers hired to construct the Atasu-Alashankou pipeline will be from Kazakhstan. The projected cost of the pipeline ($700 million) will be covered by Kazakhstan and China on an equal basis. Most importantly, the construction of the pipeline is expected to create thousands of job sites in the Karagandy, East Kazakhstan, and Almaty regions, areas hard hit by chronic unemployment. Government experts in Kazakhstan believe that the partnership with China will foster an integrated national oil infrastructure, which has been long neglected due to financial reasons.

Uzakbay Karabalin, president of the state-run Kazmunaygaz oil company, told journalists that the Atasu-Alashankou pipeline creates an opportunity for Russia to join the Kazakh-Chinese partnership to facilitate the export of West Siberian oil to China (Khabar TV, October 3). Theoretically, the creation of such an oil triangle is quite feasible. But the recent sale of shares in Russia’s Lukoil company to Conoco Phillips and the lukewarm attitude of Russian oil officials toward the Chinese market raise doubts about a Russian-Chinese partnership for pipeline construction. Russian firms still hope to work on Iraq’s oilfields. Under these circumstances, at least at the moment, China sees Kazakhstan as its most reliable oil partner.

Kazakhstan still relies on a single pipeline, owned by the Caspian Pipeline Consortium and running through Russian territory. To attain greater independence from Moscow, Kazakhstan has opted for alternative routes to bring its oil to world markets. The Chinese offer came at a time when some leading oil experts in Kazakhstan were expressing doubts about the economic expediency of the U.S.-favored Baku-Ceyhan route. Kazakhstan’s oil officials had many rounds of unsuccessful talks with their Azerbaijani counterparts on the issue, but failed to reach a compromise. Estimates suggest that it will take at least 50 million tons of oil annually to make the use of the Baku-Tbilisi- Ceyhan pipeline economically efficient. The director of the Neft scientific center, Nadir Nadirov, has questioned whether Kazakhstan’s oil industry has the capacity to produce that amount of oil. The head of the Astana branch of the Tengizchevroil company, Tolegen Khasenov, maintains that the Chinese pipeline is more important for Kazakhstan than the politically motivated Baku-Ceyhan route. He says that to use the existing and projected pipeline routes to their full capacity, Kazakhstan would need to produce 100 million tons of oil annually (Egemen Kazakhstan, September 15).

Kazakhstan’s search for alternative oil transport routes reflects its multi-vectored approach to foreign policy. Western Kazakhstan’s social infrastructure has benefited significantly from the presence of Western oil companies in the region. At the same time, Kazakhstan would not risk spoiling its good relations with Iran, a key importer of Kazakh grain and oil. That partly explains the lack of enthusiasm for Baku-Ceyhan route.

But Kazakhstan has no such political constraints on its relations with China. In talks with Chinese party leaders during his visit to the Xinjiang Uighur Autonomous Region on September 24, Kazakhstan President Nursultan Nazarbayev almost exclusively focused on economic and trade issues.

But that does not mean that bilateral relations are free from stumbling blocks. The problem of cross-border river usage remains a source of irritation for both sides. Labor migration between the two countries also needs to be regulated. Seventy-five percent of China’s 1,300,000 ethnic Kazakhs live in the politically explosive Xinjiang Autonomous Region. Xinjiang needs Kazakh oil for its burgeoning economy and, more importantly, for its border security. At the same time, Kazakhstan’s ongoing resettlement of Han Chinese to Xinjiang, as part of a plan to eventually outnumber the Muslims who make up 60% of the local population, is not conducive to building trust.