Kazakhstan Inks Oil Pipeline Agreement With China

It seems a marriage made in heaven. Growing energy giant Kazakhstan has tapped into China, the world’s biggest market and a booming economy. Kazakhstan and China signed an agreement on May 17 on the construction of the Atasu-Alashankou oil pipeline which will connect western Kazakhstan with China. This and several other trade and economic agreements were signed as part of Kazakh President Nursultan Nazarbayev’s current official visit to China. (Kazakh Khabar TV, May 17).

“Over 10 trade and economic cooperation agreements were signed today. The agreement on the construction of the Atasu-Alashankou oil pipeline was among the major agreements,” the television report said. The Chinese press is also closely watching the Kazakh president’s visit, according to the broadcast.

These agreements should resolve questions concerning the energy sector and China’s access to the Caspian Sea, the report said, quoting a Chinese newspaper.

Following a meeting with Chen Geng, president of the Chinese National Petroleum Corporation, Kazakhstan President Nursultan Nazarbayev met Chinese Chairman Hu Jintao, the report added. “At the meeting, the Kazakh president said that the purpose of his visit is to make China Kazakhstan’s closest partner.” (Khabar Television, Almaty, in Russian 1400 GMT, May 17, BBC Monitoring).

President Nazarbayev’s recent visit to Beijing underscores a renewed activity in Kazakhstan’s energy relations with China. China’s pipeline to Central Asia has taken on a new momentum since the Kremlin began stonewalling China over the Angarsk pipeline project. Moscow has moved in favor of Japan’s Nakhodka pipeline project (Interfax-Kazakhstan).

To date, Sinopec has signed a memorandum of understanding for a 90 percent stake in two Caspian blocks currently controlled by Kazakhstan’s state-owned oil and gas company KazMunaiGaz with estimated hydrocarbon reserves of around 700 million tons. China is also looking forward on how to transport its black gold; in May, according to Kazakh First Deputy Foreign Minister Kairat Abuseitov, a 1997 plan to construct a pipeline that would carry oil from Kazakhstan to China may be formalized. The 1,800 mile, US$3 billion Atasu-Alashankou pipeline is designed to carry a minimum of 20 million tons of oil annually. The first 279-mile pipeline section between Atyrau and Keniyak was largely finished in 2002. The second 807-mile phase stretches between Atasu and the Druzhba-Alashankou railroad terminus on the Chinese border. It is hoped that this second stretch will be completed in two years following the start of construction (Gazeta.kz., April 20).

Negotiations are underway about the precise route of the third and final section of the Kazakhstan-China pipeline. The existing 311-mile Kenkiyak- Atasu section will be rebuilt, as it has insufficient capacity. China National Petroleum Corporation (CNPC) and Kazakhstan’s KazMunaiGaz are constructing the pipeline. Beijing’s Chenbao newspaper commented that while “prospects for the Russian-Chinese pipeline to Daqing remain vague, the Chinese-Kazakh project is becoming a reality. Russia and Kazakhstan are potential rivals on the Chinese energy market. China would like both countries to become its partners if possible. China does not want to lay all its eggs in one basket. In addition, China wants access to oil fields on the Caspian shelf via Kazakhstan” (Chenbao, March 8).

However, the joint pipeline project has faced several major delays since talks began between the two countries in the late 1990s. Recently, Kazakh Prime Minister Daniyal Akhmetov publicly voiced these concerns by noting that Kazakhstan would like to retain a 51 percent controlling interest in any oil pipeline construction project with China. Akhmetov said that Kazakhstan placed a high priority on constructing and managing the project. (Interfax-Kazakhstan, April 14).

That the pipeline is needed is not an issue. An unexpectedly strong demand since early 2004 for rail delivery of agricultural materials in China has led to a major shortage of tanker cars to transport oil from Kazakhstan. According to statistics from the Allah Mountain Pass Customs checkpoint, railway delivery of oil from Kazakhstan to China in January-March 2004 was 257,300 tons, down 26.5 percent from 350,000 tons during the same period in 2003. Imports in January, February, and March stood at 67,500 tons, 90,300 tons and 99,400 tons, respectively, with a total import value of US$51 million.

The Allah Mountain Pass in Xinjiang province is the only border customs point between China and Kazakhstan for rail transshipment. Shi Cheng, an official with Allah Mountain Pass Customs said, “There is a shortage of railcars here, so we cannot guarantee the timely shipment of all the crude oil. The first quarter has traditionally been a busy season here for the rail transportation of goods. Plus there is the Spring Festival passenger peak. This year, for the sake of spring cultivation, delivery of grain and other agricultural materials, such as fertilizer and seeds, became especially high in February and March.” (Interfax-Kazakhstan, April 19). The rail link remains the sole source of Kazakh crude until the proposed Kazakh-China pipeline is completed.

The railway bottleneck illustrates the difficulties that Kazakh-Chinese energy cooperation must overcome. However, both countries are committed to making the Atasu-Alashankou pipeline a reality, despite its high initial cost. The US$3 billion price of the Atasu-Alashankou pipeline compares favourably with the US$3.6 billion Baku-Tbilisi-Ceyhan (BTC) pipeline, also designed for Caspian exports. In spite of its lower construction cost, the Atasu-Alashankou pipeline has a number of advantages over the BTC.

Unlike the Caucasus, the Atasu-Alashankou pipeline crosses only one border. It does not run near any areas of civil unrest, nor does it entail the added expense of maritime tanker shipping that BTC crude requires to reach eastern Asian markets. Furthermore, it will not be owned or dominated by Western oil companies.

The Atasu-Alashankou pipeline is a symbolic link between two of the 21st century’s rising powers, joining a booming producer with a cash-flush consumer.