During the first week in April, China and Turkmenistan signed a deal by which Turkmenistan will annually sell China 30 BCM of gas from 2009 to 2039 at a price to be determined with reference to the global market price. During Turkmenistan President Sapirmurad Niyazov’s visit to China from April 2-7, the two countries agreed, as stated in their joint agreement on the gas pipeline, to carry out “separate and joint actions necessary for the rapid implementation of the Turkmenistan-China gas pipeline project” and for its route to be “commissioned” in 2009 (Turkmenistan.ru, April 5). “The departments concerned will quicken their steps to study and implement” the pipeline project, said a separate joint statement issued by Niyazov and Chinese President Hu Jintao (Xinhua, April 5). In theory the pipeline would run via Kazakhstan and possibly Uzbekistan. China would “provide the bulk of raw materials” to facilitate the pipeline’s construction (Turkmenistan.ru, April 5). Both governments also stated that they would jointly explore and develop gas deposits and conclude a comprehensive gas purchase agreement.
Although many observers are skeptical that Turkmenistan can uphold this deal, it nonetheless is very important because of its repercussions. First, it completes a three-week period in which China signed major gas deals with Russia and a major uranium deal with Australia. These three deals, taken together, underscore China’s global and comprehensive search for energy to meet rising demand—in particular for substitutes for coal, which is polluting, and for oil, of which it does not have enough. Gas and uranium are critical in answering China’s present and prospective needs.
Furthermore, close examination of the Russian deal shows that it is actually quite insufficient for China, as several Chinese energy officials pointed out, such as Zhang Guobao, Vice Director of China’s National Development and Reform Commission. Russia still refuses to commit itself openly to an oil pipeline to China. Moreover, the gas deal called for construction of two pipelines, the first in Western Siberia to supply China with up to 80 BCM annually starting in 2011. The second pipeline will ostensibly then be built from Eastern Siberia. Yet this agreement destroyed any possibility for China to receive gas from the Kovykta field in Eastern Siberia that had been designated for this purpose several years ago. Several years of negotiations and feasibility studies have duly been tossed out as Gazprom has successfully throttled that TNK-BP project. So now it is clear China has to wait for several years for any gas from Russia.
This makes turning to Central Asia all the more imperative. Not only was this deal signed with Ashgabat, but China will explore for oil with Turkmenistan and is talking to Uzbekistan and Kazakhstan about gas pipelines from the latter through, or with branches to, Uzbekistan and Turkmenistan, so that it can avoid having to depend on Russia. Since neither of those Central Asian states wants to be permanently tied to subsidizing Russia at below market prices, the stage is being set for Sino-Russian rivalry in Central Asian gas affairs. This is all the more likely as Russian demand is increasing, while its pipeline capacity is insufficient, and while it is determined to subordinate Central Asian gas to its whims so that it can keep the region dependent upon it, maintain Gazprom’s monopoly over gas and pipelines and provide its own customers with cheap energy at subsidized prices. Thus Russia has consistently sought to organize a gas cartel under its domination to monopolize Central Asian gas projects and frustrate any efforts to sell independently to other markers.
China’s deals with Central Asian states like Turkmenistan indicate that it knows it cannot rely on Russian promises and is prepared to compete with it in Central Asia. Moreover, it is going global to avoid excessive dependence upon any one provider or form of energy. At home it is cutting energy imports, especially in oil, striving for energy efficiency, building new nuclear power plants, opening up new fields and seeking to revamp its energy bureaucracy to make it more able to enforce a rational energy policy upon Chinese consumers (China Brief, April 12).
At the same time, this deal with Turkmenistan indicates some continuing elements in Chinese energy policy. China has hitherto generally sought long-term contracts and vertical integration so that it can gain access or control over the gas and oil fields and also ensure that it has a stake in the pipelines. In its dealings with Russia and as appears to be the case with Turkmenistan, it also is seeking to obtain these long-term contracts at prices below those of the global market, a drive that clashes with suppliers’ and exporters’ determination to reap maximum economic benefits for their energy holdings.
This Chinese quest for cut-rate prices has helped stall the oil and gas deals with Russia and could still interfere with Central Asian deals. Since Moscow is enforcing below market prices upon them as well, they naturally seek to gain as much as possible from selling to China and will resist deals making them sell their products for less than market prices.
China may well seek to intimidate Turkmenistan into compliance and wholly employ its old tactics of buying up fields and pipelines at long-term contracts, which may be under the market price now but entail major costs down the road. Or it could hark back to the increasingly skeptical voices of many Chinese experts, such as Zhao Guohong of the Chinese Academy of Social Sciences, who believe that China is better served by moving toward more control by the market rather than by the state. These voices seek cooperation in Asia with India and even Japan in consumers’ associations and agreements to moderate the price paid for energy and for access to oil fields.
Hitherto China has bought oil on largely political grounds, to keep energy prices low at home and to pay even more than is justified for access to fields, e.g. SINOPEC’s 2005 deals with Saudi Arabia. As the Russian example shows, however, such tactics breed resistance that backfires upon China and it cannot much longer sustain the subsidization of energy consumption while paying top dollar for Gulf and other energy sources. The Turkmen and Australian deals not only suggest the global scope of China’s energy quest, but also its increasingly urgent search for gas and uranium rather than for oil and coal.
China’s recent oil and gas deals with Iran, including its recently announced joint prospecting with Iran in the Caspian and its overt interest even in an overland pipeline from Iran through Pakistan to China, also betrays its interest in secure global access that cannot be interdicted by the U.S. or other navies in the Persian Gulf or Indian Ocean. Its January 2006 agreement with India suggests as well the possibility of creating some kind of consumers’ league or association to moderate the price paid for new fields on the market or eventually for existing energy products. Similarly, its recent agreements with the European Union indicate a desire to reduce pollution and achieve greater overall efficiency in China’s use of energy.
Chinese energy policy is therefore dynamic on a global scale and comprehensive insofar as it searches for access to every form of energy. Yet it also is to some degree in transition from the old dirigiste and state subsidized consumption model to something new that possibly might have more elements of a market-based approach. This new approach could conceivably evolve into one that relies less on bilateral efforts to force suppliers into compliance by invoking extraneous political considerations—as is the case with Turkmenistan and even Russia—and more on market levers at home and abroad. Certainly the Russo-Chinese energy relationship to date demonstrates the utter inutility of the anti-market approach that puts politics in command, as it has led to China’s failure to secure access to the energy it had believed it was going to receive and to Russia’s failure to sell as much as it intended to China and other Asian countries. Worse, none of the pipelines that have been discussed for years have been constructed, so Russia’s energy ties to Asia have had to be put off for years amid growing suspicions in these countries of Russian unreliability.
A market based approach could certainly do better than this and it has the added virtue of stimulating a more cooperative approach to bilateral and multilateral relationships among Asian consumers—India, Japan, China, South Korea, and even potentially in the future North Korea. Yet it also provides an opportunity for the United States to support such a league that could reduce the burden of energy prices upon all these consumers and lead the global energy business toward a more market friendly system. This would not be a panacea but it would be a positive new departure.
Even if many analysts doubt Turkmenistan’s ability to meet this contract, that deal evokes the contradictions inherent in China’s transitional phase. In its substance it evokes the old approach: China subsidizing dictators by paying for pipelines as well as for gas and trying to knock prices down while tying up the producer for 30 years. Yet at the same time, seen in the light of the “triple play” of the last few weeks in regard to energy, this deal opens up and extends new possibilities that could lead China and its partners in new and unforeseen directions.