The Dragon’s Drive For Caspian Oil

China’s insatiable energy thirst is causing it to undertake a global search for energy supplies to sustain its booming economy. Beijing has injected itself into the complex Caspian chess match to ensure itself as large a share as possible of resources being developed there. This complex political and economic maneuvering forces China to deal with the Caspian’s five riparian states – Russia, Azerbaijan, Iran, Kazakhstan and Turkmenistan.

Analysts estimate that within ten to fifteen years China will consume as much oil as the U.S. is consuming today and import about 75 percent of new global production. Beijing’s aggressive policies in the Caspian will unsettle both Russia and the U.S., which are themselves vying for control over the oil-rich region. The only certainty is that China will make a determined effort to secure as much of the Caspian’s exports as possible, as its future growth is critically dependent on continued access to reliable energy resources.

China’s economy expanded 9.7 percent in the first quarter of 2004, while its National Bureau of Statistics warns in a report that the country’s booming economy combined with rising production levels has resulted in a shortage of supplies and inflated prices. Inflation has impacted even production of native fuel sources; in March alone the wholesale price of coal rose 24 percent from the previous year. Demand for electricity has also increased sharply; China used 1,891 billion kilowatt-hours of electricity in 2003, an increase of 40.38 percent over the previous year’s usage.

Similar energy bottlenecks exist in China’s consumption of natural gas. With liquefied natural gas (LNG) demand rising 12 percent annually, analysts estimate that China’s annual consumption will reach 209-274 billion cubic yards by 2020. Experts estimate that by 2020, 49 percent of China’s gas consumption will come from imports, with 10 percent provided by Russian and Central Asian nations and the remaining 39 percent being provided by other countries.

According to recently released official statistics, China imported 91.13 million tons of oil in 2003, an increase of 31.3 percent over 2002. President of the China Petroleum and Chemical Industry Association Tan Zhuzhou said that China’s domestic crude oil consumption totaled 252.31 million tons in 2003, an increase of 10.15 percent over 2002. Oil industry experts predict that China’s oil demand may rise 400 million tons by 2020, with an average annual increase of 12 percent. China first began importing oil in 1993.

Compounding China’s potential for energy shortages, China’s per capita available energy reserves are much lower than the world average. In 2000, China’s exploitable oil, natural gas, and coal reserve per capita were 11.1 percent, 4.3 percent and 55.4 percent of the world average respectively. Meanwhile, China’s dependence on energy for social and economic development is greater than developed countries; in 2001, Chinese energy users spent $151 billion, 13 percent of the country’s GDP, as compared to the U.S. rate of 7 per cent.

China’s Oil Requirements

Of China’s 2003 total crude imports, 51 percent came from the Middle East. Like its neighbor and competitor Japan, China is desperately seeking ways to lessen its dependence on imports from the volatile region. Saudi Arabia supplied 15.18 million tons of oil to China in 2003, up 33 percent from the previous year. A short-term solution has been to increase imports from Russia. In 2003, Chinese imports from Russia rose 73 percent to 5.25 million tons. China National Petroleum Corp, which purchases most of China’s imports of Russian crude, predicts that its imports will exceed 6 million tons in 2004. These imports come from Siberian fields, not the Caspian, and Beijing has been sucked into Kremlin politics over East Asian pipelines with its rival Japan. Moscow recently decided against its proposed Daqing pipeline in favor of a Japanese route. Accordingly, China is looking for a level playing field in the Caspian, particularly in its approaches to Iran and Kazakhstan.

China’s second largest oil company Sinopec is leading the charge into the Caspian; in 2004 the company will receive its first shipments of oil totaling 300,000 tons from overseas production sharing contracts with Central Asian countries, including Kazakhstan and Azerbaijan. In Azerbaijan, Chinese companies are only involved in onshore fields. The Chinese National Petroleum Corporation has invested $800 million in developing a section of the Kursengi-Garabagly field and signed additional contracts to develop other sites worth an additional $120 million. China’s Shengli oil company in December signed a production-sharing contract with the State Oil Company of Azerbaijan to explore and develop the Pirsaat oil field. Shengli will also help Azeri companies extend the production life of old deposits in the Karamay oil fields.

Iran is China’s second-largest provider of oil from the Middle East after Saudi Arabia, and despite Washington’s displeasure, Sinopec has been actively lobbying in Teheran for oilfield contracts. Though the Bush administration is trying to dissuade oil giant, a senior Sinopec official observed, “Sinopec is paying no attention to the U.S. request” and “will do its utmost to carry on its bidding for an exploitation project in an Iranian oilfield.” According to Sinopec’s management, officials at the US embassy in Beijing contacted the company in January with a request that Sinopec withdraw from the bidding. On January 28, Iran’s Oil Ministry’s Vice Minister Seyed Mehdi Mirmoezi invited multinational oil companies to bid on exploitation rights on the 16 oilfields, part of 51 prospective areas identified by the National Iranian Oil Company (NIOC). China is angling for a piece of the action in three fields in northern and southern Azadegan and Kushkhosseineh, that Iran is opening to foreign investment.

Nor is oil China’s only Caspian energy interest. Iran is pressing forward in negotiations to sell up to $20 billion worth of LNG to China over the next 25 years under terms of a memorandum of understanding (MOU) that the National Iranian Oil Company (NIOC), signed on March 3 in Beijing. The agreement could be the largest Iranian energy deal since 1996. The MOU envisions the start of LNG supplies in 2008, when Beijing’s government-sponsored oil trading company, Zhuhai Zhenrong Corporation, would begin importing 2.5 million metric tons of Iranian LNG annually. Beginning in 2013, imports would increase to five million tons per year. This month, China’s Tianbao Energy, will also renew a contract to buy 80,000 tons of fuel oil a month from the state-owned NIOC under a contract lasting through March 2005.

However, it is in Kazakhstan that Chinese interests have been the longest lasting and the most potentially profitable. Sinopec has signed a MOU 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. And 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. Abuseitov said that Kazakh President Nursultan Nazarbayev will make a state visit in May to China, where an agreement will be signed if the final details can be worked out.

The 1,800 mile-long, $3 billion pipeline is designed to carry a minimum of 20 million tons of oil annually. The first 279-mile section of the pipeline sector between Atyrau and Keniyak was largely finished in 2002. The second 807-mile phase stretches between Atasu and the Chinese border Druzhba-Alashankou railroad terminus. It is hoped that this stretch will be completed in two years, following the start of the construction. 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 currently 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.”

That the pipeline is needed is not an issue. An unexpectedly strong demand for the railway delivery of agricultural materials in China since the beginning of 2004 has led to a major shortage of railway tanker cars used 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 same period in 2003. 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 the Allah Mountain Pass Customs said, “There is a shortage of rail cars 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 the spring cultivation, the delivery of grain and other agricultural materials, such as fertilizer and seeds, became especially high in February and March.” The rail link remains the sole source of Kazakh crude until the proposed Kazakh-China pipeline is completed.

The final wild card in China’s Caspian calculations is Turkmenistan, whose geographical isolation and mercurial leadership have largely thwarted foreign attempts to exploit the country’s energy reserves. China, like every other oil and natural gas consumer, is drawn by the country’s estimated 45.44 billion tons of oil and gas reserves. Turkmenistan’s infrastructure is in need of massive investment, however. Oil and Gas Industry and Natural Resource Minister Kurbannazar Nazarov recently said that the country’s oil and gas industry will require $25 billion in investment over 2001-2010, of which over $7 billion is needed to buy oil and gas equipment. Nazarov said that the government’s plan to unveil a new program to grant licenses to foreign companies to explore and develop fields both offshore and onshore would be presented at the international conference TIOGE-2001 in Ashgabat on October 17-18.

China has already developed a toehold in Ashgabat; in January the Chinese ambassador signed agreements with the Turkmen Deputy Prime Minister Yelly Gurbanmuradov to provide a $1.8 million grant and $3.6 million worth of interest-free loans used to buy equipment and parts for Turkmenistan’s gas industry. The money comes on top of 1998 and 2000 loans, totaling $12 million, to finance Turkmen purchases of state of the art Chinese drilling rigs and lifting systems for Turkmenneft and Turkmengaz. Overall, Turkmenistan increased oil production in 2003 by 11 percent to 10.004 million tons; natural gas production during the same period rose 11 percent to 65.5 billion cubic yards.

As China wangles for Turkmen concessions, it might use its good offices in Teheran to secure initial supplies of LNG. Iran is to build a terminal for Turkmen liquefied gas exports at Kiyanly on the Caspian. The $9.15 million terminal will be completed in August 2005 with construction costs covered by liquefied gas supplies to Iran. The Turkmen Statistics and Information Institute reported that Turkmenistan produced 295,200 tons of LNG in 2003, over half of which was exported.

In the complex diplomatic and economic infighting surrounding the exploitation of Caspian energy reserves, few things are certain beyond the fact that the former Soviet-Iranian monopoly is gone forever. Newcomers China and the U.S. will increasingly wrestle behind the scenes to acquire a dominant role; if numbers mean anything, then 1.2 billion consumers may well trump 290 million.