Publication: Eurasia Daily Monitor Volume: 4 Issue: 209

Chinese Prime Minister Wen Jiabao recently concluded a whirlwind tour of Central Asia following the sixth Shanghai Cooperation Organization (SCO) summit, held in Tashkent on November 2. While there, Wen met with Kazakhstan’s Prime Minister Karim Masimov.

While no details of the meeting emerged, Wen apparently succeeded in laying the groundwork for finalizing an agreement to build a Kazakh-Chinese natural gas pipeline, according to a November 8 announcement by KazMunayGaz, a 100% state-owned national oil and natural gas company (Kazinform, November 8). Six days later, governmental delegations headed by Chinese Deputy Prime Minister Wu Yi and Masimov met in Ukimet Uyi and signed an agreement between KazMunayGaz and the China National Petroleum Corporation on building a Kazakh-China natural gas pipeline, to be constructed in two phases in 2008-2009, with the first stage running from Kazakhstan’s Uzbek border to China, while the second will connect Kazakh natural gas to the trunk pipeline.

The announcement is certain to rattle Moscow, which up to now has been Kazakhstan’s sole significant export route for hydrocarbons, with the exception of minor oil swaps with Iran. Chinese energy companies are enjoying a bull market; when PetroChina issued an IPO on November 5, share values tripled in the first day of trading, netting nearly $1 trillion in capitalization, giving the company a higher market capitalization rate than ExxonMobil, previously the world’s largest energy company. As an indication that PetroChina’s capital will remain in China, the PetroChina shares listed on the Shanghai Stock Exchange were solely available to domestic Chinese investors and were not sold to U.S. investors. The company also has publicly traded shares on the New York Stock Exchange and in Hong Kong. As the state-owned China National Petroleum Corporation currently holds nearly 158 billion additional shares, the collective total shares outstanding provided PetroChina with a market value of more than $1 trillion, more than double that of ExxonMobil.

In pursuing the project Astana seems determined to adopt a more diplomatic manner than Azerbaijan’s trailblazing, but successful, attempt to wean itself from dependence on the Soviet-era Russian Transneft pipeline monopoly. Russia, at least for now, will keep control over Kazakhstan’s oil exports even as it seeks new outlets for its natural gas. Kazakhstan’s initiative will doubtless be the subject of “frank and candid” discussions between Kazakh President Nursultan Nazarbayev and Russian President Vladimir Putin the next time they meet.

Nor has Kazakhstan limited itself to its neighbors to the east. On November 8 Nazarbayev discussed United Arab Emirates investment in Kazakhstan’s energy infrastructure with the chairman of the Abu Dhabi International Petroleum Investment Company, Mansour bin Zayed al Nahyan in Abu Dhabi (Kazinform, November 8). Nazarbayev’s press secretary Yerlan Baizhanov explained, “The investment companies of the United Arab Emirates are interested in the projects in the sphere of oil and gas, petrochemistry, and metallurgy. It is quite possible that a joint investment fund or joint venture will be created for these purposes.”

If there is a silver lining for Russia in all this, it is that neither agreement deals with Kazakh oil exports, which Russia still controls via the Caspian Pipeline Corporation and the Atyrau-Samara and Kenkyak-Orsk pipelines, currently moving about one million barrels per day, or about 40 million tons per year, with an additional 10 million tons being shipped across the Caspian to Baku and the Iranian port of Neka. The Kazakh-China Atasu-Alashankou pipeline has been operational since 2006, but last year carried a paltry 2.2 million tons of Kazakh oil, while projected volumes for 2007 are only 4.5 million tons. But now Kazakhstan is second only to Russia in terms of net oil exports from the Soviet successor states, a situation that can only increase in the short term.

Kazakhstan is not the only Central Asia country to attract Chinese interest. Beijing and Moscow are also vying for control of Turkmenistan’s immense natural gas resources, which complicates Russian attitudes about Turkmenistan’s possible membership in the SCO. While all six current SCO members support Turkmen membership, including Russia and China, Moscow realizes that Turkmen SCO membership would advance not only Turkmen-Chinese energy relations, but provide China increased opportunities throughout Central Asia, an opportunity that Astana might quickly exploit under the guise of fraternal relations.

Since the proposed pipeline would carry natural gas, it will not affect current Kazakh-Russian energy trade, but the underlying premise that Astana has other export options is certainly a worrying one for Russia. Gazprom is going to have a tough sell to stay in the race for Central Asian energy, when Europeans are willing to pay Gazprom $260 for gas that Russia buys from Turkmenistan for only $100 per thousand cubic meters. In such a case Astana naturally seems to feel that, since Russia already benefits from its oil exports, its gas exports might more profitably go elsewhere.