CHINA RISING: Beijing's insatiable appetite transforms Central Asian oil and gas flows

CHINA RISING: Beijing's insatiable appetite transforms Central Asian oil and gas flows
By bne IntelliNews July 11, 2017

Middle Eastern countries and Russia have traditionally dominated the energy markets of Western Europe, leaving the little known but vast reserves of Central Asia neglected. That is, until China revealed its insatiable appetite for the region’s resources.

If China continues its current trend, the International Energy Agency estimates that half of Central Asia’s oil and gas exports could go east by 2020, in a marked shift from historic flows to Russia and Western Europe.

In Kazakhstan, the leading energy exporter in the region, the lion’s share of the country's oil production is still done by Western companies. US giants Chevron and Exxon Mobil together hold a 75% stake in Tengiz, one of the country's largest oil fields, whereas Italy’s Eni is the leading shareholder of the giant Kashagan field, which launched in October 2016.

The Western grip on Kazakh energy is, however, a waning phenomenon. “Although today, according to official figures, Chinese companies account for about 25% of annual production, independent experts say China has about a 40% share in Kazakh oil,” Kazakh independent oil industry analyst Sergey Smirnov tells bne IntelliNews.

China began shopping for Central Asian oil and gas in the late noughties, but the fall in world oil prices has provided an opening for Chinese buyers to expand their stake in Kazakh oil. The Russian giant Lukoil sold a 50% stake in a Kazakh oil producer to China Petroleum & Chemical for $1.09bn in 2015, as falling oil prices made production less attractive.

China’s expansion should be viewed as ongoing rather than recent, Smirnov says, and it is not triggered by current low asset prices. On the contrary, China was “often acquiring shares of Kazakhstan’s companies at prices [as much as] twofold above their real value”, Smirnov notes.

The three major Chinese companies operating in Kazakhstan are CNPC, SINOPEC and CITIC. CNPC owns stakes CNPC-Aktobemunaigaz (94.4%), Mangistaumunaigas (50%), Buzachi Operating (50%), PetroKazakhstan Kumkol Resources (67%) and Kashagan (8.4%); SINOPEC’s subsidiaries include Sazankurak (100%), Prikaspian Petroleum Company (100%) and Sagis Petroleum Company (100%); CITIC retains a 50% stake in Karazhanbasmunai.

Chinese companies own several key oil fields close to the southern town of Kyzylorda and the western city of Aktobe. Even as some of the China-owned oil fields passed peak production or became unfeasible, it began investing into oil processing, including oil refineries in Chymket and Atyrau. Kazakhstan also transits gas through the Central Asia-China Gas Pipeline (CACGP) from Turkmenistan and Uzbekistan and exports oil via the Kazakhstan-China oil pipeline.

“China will certainly keep trying to strengthen its influence in [Kazakhstan] in the long run,” Smirnov maintains. Kazakhstan has agreed to supply 5bn cm of gas to China in 2017, compared to yearly volumes of around 300mn cm. Line-C of the Central Asia-China gas pipeline is the most probable candidate for the transport route of the new volumes.

Turkmenistan exports its gas directly to China through Line-A and Line-B of CACGP. The country delivered 35bn cm in 2016, head of state run Turkmengas, Myrat Archayev, said in May. That includes at least 13mn from the China-run Amu Darya Project at Turkmenistan’s Bagtyyarlyk field. In addition, the 1,300km-long Line C, once it reaches full capacity in 2017, should carry 10bn cm of gas from Turkmenistan, 10bn cm from Uzbekistan and 5bn cm from Kazakhstan.

Turkmenistan plans to increase its natural gas exports to China to 38bn cubic metres (bcm) in 2017. It had planned to export 65bn cm by 2021, with the CACGP pipeline supplying 55bn cm of gas or one-fifth of China’s total consumption, but since construction of the final segment, Line-D, came to a halt in early 2017 because of the Chinese economic slowdown, these goals remain murky.

Uzbekistan also managed to secure a niche with its huge $15bn gas deal in 2013, and now exports around 4bn cm a year to China. Uzbek President Shavkat Mirziyoyev announced in June an agreement with China to boost Uzbek gas exports to 10bn cm. Beijing has also financed two refineries of Kara-Balta and Tokmok in Kyrgyzstan, supplied by CNPC-owned Kazakh oilfields and producing approximately 1.4mn tonnes oil products per annum.

China’s grasp has even managed to reach Tajikistan – the last country one would associate with hydrocarbon riches. China’s CNPC is one of the three foreign companies with a stake in the exploration of the barely known Bokhtar field. Bokhtar, covering an area of around 35,000 square kilometres, is seen as potentially transformational for Tajikistan, with the possibility to put the country on a par with countries like Kazakhstan or Russia in terms of oil and gas reserves per capita. In 2012, Tethys revealed that the field, based on an independent audit carried out by US-based Gustavson Associates, held estimated gross “unrisked” mean recoverable resources of 27.5bn barrels of oil equivalent (boe).

This is part of a series looking at the implications of China's growing interest in Central and Eastern Europe and Eurasia.