Chinese Go in Central Asia

By bne IntelliNews September 23, 2013

Clare Nuttall in Astana -

President Xi Jinping's tour of Central Asia in early September was an economic coup for China, which scooped up energy deals across the resource-rich region. While China is still competing for political influence in Russia's traditional stomping ground, as the world's second largest economy its greater financial clout means it is winning the economic battle.

With Xi's visit focusing on the region's three main oil and gas producers - Kazakhstan, Uzbekistan and Turkmenistan - Beijing's priority was clearly securing access to more oil and gas. The visit was highly successful in this respect. China National Petroleum Corp (CNPC) sealed the deal to buy an 8.33% stake in Kazakhstan's offshore Kashagan oilfield, the world's largest discovery of the last three decades. China has also agreed to finance the second phase the development of Turkmenistan's Galkynysh gasfield, the world's second largest. Agreements on expanding the Central Asia China gas pipeline will ensure a steady increase in the supply of gas from Turkmenistan and other Central Asian countries to energy-hungry China, but the expansion - including a new line of the pipeline taking an alternate route through Kyrgyzstan and Tajikistan - will lock all five Central Asian republics into China's pipeline network whether as suppliers or consumers of gas.

While the emphasis was on energy, Xi also outlined his vision for deeper economic cooperation, the Silk Road Economic Belt, and sought Central Asian support in the security sphere, demonstrating that Beijing's agenda goes beyond access to raw materials.

Turkmen ties

Xi kicked off the tour in Turkmenistan, China's top natural gas supplier, on September 3, joining his Turkmen counterpart Gurbanguly Berdymukhamedov to open new infrastructure at the Galkynysh gasfield, which will allow Turkmenistan to start pumping gas from the field eastwards to China. That will help the Central Asian state boost exports to China in the coming years to 65bn cubic metres (cm) annually, according to officials in Ashgabat, having sent 20bn cm last year.

Xi and Berdymukahemdov agreed to start talks on funding for the development of the second phase of Galkynysh, for which CNPC will be the sole service contractor. This gives the Chinese state-owned company a level of access to Turkmenistan's vast gas reserves that has until now eluded international energy majors, who have made little headway in the closed, authoritarian country.

To enable the increase in exports, Turkmenistan and China plan to go ahead with the expansion of the Central Asia-China (CAC) gas pipeline. Two new lines will be built: Line C, which will follow the already established route from Turkmenistan through Uzbekistan and Kazakhstan to China, while Line D will follow a new route via Uzbekistan, Kyrgyzstan and Tajikistan to the Chinese border.

In addition to giving China an alternative route should there be a technical or security problem on the main CAC pipeline route, building Line D through the two Central Asian countries that are not currently gas exporters, has the effect of "tying in both Tajikistan and Kyrgyzstan to the Chinese hegemony," says Andrew Neff, senior energy analyst at IHS Global Insight.

Building through Tajikistan also gets the export infrastructure in place should the Bokhtar project that's being developed by CNPC, Total and Tethys Petroleum be successful enough to turn Tajikistan into an energy exporter. "There's definitely a tie-in," Neff tells bne. "Now there's the prospect of major gas production from Tajikistan, having an outlet to export this via the Central Asia China pipeline is a no brainer."

Cash in on Kashagan

Xi's visit to neighbouring Kazakhstan came shortly before the long-awaited launch of production at the offshore Kashagan oilfield, which is set to cause a rapid upturn in Kazakhstan's GDP growth and which in the longer-term the government hopes will establish the country as one of the world's top oil exporters.

An agreement on CNPC's acquisition of an 8.3% stake in Kashagan was signed during the visit on September 7. The $5bn deal was widely expected after Astana blocked the sale of the stake formerly owned by ConocoPhillips to India's ONGC Videsh, confirming the strength of China's position in Kazakhstan's oil and gas sector. China will also cover up to $3bn of Kazakh state oil and gas company KazMunaiGas' share of the costs during the second phase development of the field.

China's investment into Kashagan is likely to result in an increase in the share of oil from the field being sent eastwards to China, part of an existing trend towards a much closer relationship with Kazakhstan in the energy sphere.

Astana was unhappy when the Kashagan consortium blocked an attempt by Sinopec and CNOOC to buy into the consortium when BG Group announced it was selling its stake back in 2003. Since then, new legislation giving the government ultimate control over transactions at fields deemed to be "strategic" was adopted, allowing Astana to bring CNPC into the consortium 10 years later. "There is a realisation from the Kazakhstani government that the true potential of the Kashagan field is in danger of not being realised under the existing consortium agreement," says Neff, who points out that China has shown what it can achieve with the speedy construction of the CAC pipeline, as well as its support for the Beinau-Bozoi-Shymkent pipeline, which will bring gas from the Kazakhstani oilfields to south Kazakhstan as well as linking gas producing regions to the CAC.

"I think there was a sense when ConocoPhillips decided to sell [its stake], that pre-empting the sale and selling to CNPC would have the benefit of bringing fresh blood into the consortium," Neff adds. "The shift in the consortium is seen from the government viewpoint as a reflection of the decision that China is where the current oil demand is, where future demand is, and where future oil from Kazakhstan should be directed."

In total, around $30bn worth of deals were signed during Xi's visit to Kazakhstan, including an agreement to build a refinery and petrochemical complex in Kazakhstan, and two credit lines worth $8bn for the Baiterek National Holding Company, which was set up in May to develop and diversify the Kazakhstani economy.

A further $15bn worth of deals were signed with Uzbekistan, including one on the construction of a $455m rail tunnel in the Uzbek Fergana Valley as part of the planned China-Kyrgyzstan-Uzbekistan railway. Uzbekistan, which started exporting gas through the CAC in mid-2012 - to the detriment of domestic gas consumers - is planning to step up exports through the pipeline. CNPC also signed a deal to join the Uzbek-Singaporean UzIndoramaGasChemical consortium, which is building a $2.5bn gas-chemical complex in the Kashkadarya region.

Kyrgyzstan will receive $3bn in loans for energy and infrastructure projects, including for the Kyrgyz section of the CAC pipeline. Though Tajikistan was not included in the tour, Xi met Tajik President Emomali Rakhmon during the September 13 Shanghai Cooperation Organisation (SCO) summit, agreeing to start building Line D of the CAC, which will pass through Tajikistan, as soon as possible.

Smooth as silk

China is now the top trading partner of most of the Central Asian republics, and among the top three for every country in the region. Trade between Kazakhstan and China will exceed $30bn in 2013, China's ambassador to Kazakhstan, Le Yucheng, told Kazakhstani state media. Xi's Central Asian tour coincided with the third China-Eurasia Expo in Urumqi, the capital of the Xinjiang region, which highlighted the already booming trade between China and its western neighbours, as well as the potential for their use as a transit route for Chinese exports.

While in Astana on September 7, Xi outlined his vision for the future, the co-called Silk Road Economic Belt, in a speech at the Nazarbayev University. The proposal envisages a free trade zone spanning China and Eurasia; a region that "boasts a 3-billion population and a market that is unparalleled both in scale and potential," Xi said, according to Xinhua.

It is not clear how the belt would fit alongside the existing Russian-led Customs Union, which is also planning expansion within the Eurasian region. However, Russia was not ignored during Xi's Central Asian tour, with a flight to the G20 summit in St Petersburg sandwiched between his Central Asian visits, and the tour ended with the Shanghai Cooperation Organization (SCO) summit in Bishkek, which includes both China and Russia.

The Chinese Silk Road Economic Belt concept was also proposed as the 2014 withdrawal of international troops from Afghanistan is expected to signal a drop in US interest in the Central Asian region. The Chinese proposal appears far more ambitious than the US' own New Silk Road strategy, which envisages helping Afghanistan to remain stable by enmeshing it into the regional Central Asian economy.

As China's geographic backyard, Central Asia is highly important to Chinese security. Across the region, concerns are growing about the impact of the withdrawal from Afghanistan, which borders China's Xinjiang region as well as three of the five Central Asian republics. Beijing is looking to neutralise the threats of insurgency from beyond China's borders, and growing Uighur nationalism and unrest within Xinjiang. Building strong security relations with Central Asia is seen as a tool for achieving these goals. "Countries in the region not only face the opportunity to achieve common development by taking advantage of their economic complementarity, but also face the common threat of external intervention and the three evil forces," Chinese Foreign Minister Wang Yi said in a statement at the conclusion of the SCO summit.

Despite the economic benefits, the steadily growing trend of Chinese engagement in Central Asia has not yet gained full political acceptance at the grassroots level, where there is a growing tide of anti-Chinese sentiment. In an extreme example, work has been suspended twice at a mine operated by China's Kaidi in south Kyrgyzstan after violent protests. With chronic underemployment in Tajikistan, the use of Chinese construction workers for road building and other construction projects has also sparked resentment, while Kazakhstan has seen sporadic clashes between local and Chinese oilfield workers.

However, at a government level Central Asia has become increasingly reliant on Chinese support since the onset of the 2008 economic crisis, as other sources of finance dried up. China's policy of non-interference in the internal affairs of the Central Asian republics - a point reiterated by Xi during his visit - is also a welcome contrast to western leaders who have tried to balance their hunger for Central Asia's natural resources with enough criticism for their lack of democracy and respect for human rights to appease audiences back home. "The rapid development of economic cooperation and China's de facto sponsorship of Central Asia's weaker states (which have been unable to attract foreign investment, and have been surviving only with international assistance) is inevitably leading to a situation where the Central Asian states are, to varying degrees, falling into political dependence on China, which in some cases is even taking on a neo-colonial character," writes Aleksandra Jarosiewicz of the Centre for Eastern Studies (OSW).

Most importantly, although actors from many other parts of the world - from the US to India, Europe to the Middle East - have tried to woo Central Asia, none have made the impact that China did with its quick construction of the 1,833-kilometre CAC pipeline, which will soon be expanded to encompass the entire region. The project established China's reputation for getting things done, quickly and efficiently, making China increasingly the go-to place for Central Asian governments.

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