Christopher Pala in Almaty -

With Russia unwilling to let China buy a controlling interest in any oilfield or build an import pipeline from Siberia, the world's second-largest importer of oil has turned to its other energy-rich neighbour, Kazakhstan, to secure its supplies.

The latest example of this was the December 31 announcement by China's state-owned CITIC Group that it had obtained Astana's approval for the purchase of Nations Energy's main asset, the Karazhambas field near Aktau, on the eastern shore of the Caspian Sea, for $1.91bn.

The field produces over 50,000 b/d in a country that produces 1.3m b/d and exports over 1m b/d. Yet for President Nursultan Nazarbayev this is more than just a gesture to keep its giant neighbour happy: most of Kazakhstan's oil goes through Russia to get to its markets in Europe, and Kazakhstan too has been feeling the sting of the Kremlin's drive to increase control of all aspects of Russia's energy.

While Russia has shown that it is eager to partner with Kazakh oilmen in developing some of the Caspian Sea's more promising fields, the former colonial power is also unafraid to assert its interests when these collide with those of its close ally.

For instance, the Kremlin has for years refused to agree to a planned expansion of the Caspian Pipeline Consortium (CPC) pipeline, which was financed mostly by Western oil companies and carries the oil flowing from Kazakhstan's largest field, Tengiz, from the Caspian Sea shore to the Russian coast of the Black Sea. Transneft, the national Russian pipeline company, has long seen the CPC as a threat to its interests.

As a result of the lack of expansion, Chevron, which operates the field and contributed half of a $5bn upgrade that is expected to increase Tengiz's output by more than 200,000 b/d, will be unable to send that oil through the pipeline and is bringing back to life what was once the world's largest railroad transportation system for crude oil so it can get it to Black Sea tankers and international markets.

The system, more expensive and cumbersome, will eat into both the revenues of the California-based company and the royalties that it pays the Kazakhstan government. Tengiz produced its billionth barrel of oil in late December and is the country's top taxpayer.

So in addition to having Caspian oil shipped across the world's largest inland sea to Baku and continue on to Turkey's Mediterranean port of Ceyhan through the Western-financed Baku-Tbilisi-Ceyhan (BTC) pipeline, Kazakhstan is happy that China is providing a second outlet beyond the embrace of the Russian bear.

Chinese takeaways

Many Kazakhs remain deeply fearful of a neighbour like China, which has 100 times the population but is only three times Kazakhstan's size. But Nazarbayev, who has ruled Kazakhstan since 1989, has allowed the Chinese to buy majority or half-shares of several mid-sized fields as long as the Chinese pay above market value and involve the state oil company.

In the last two major Chinese purchases, the government, armed with laws giving it pre-emptive powers on the sale of any oilfield on its territory, was able to force the Chinese government buyers to cede large chunks of their new assets to state-owned KazMunaiGaz and to get them involved in the refining business, even though the main goal of the fields' new owners is to send the oil to China.

Shortly before the Nations Energy deal was announced in December, Nazarbayev made a five-day trip to China in which he had signed letters of intent on two significant pipeline deals illustrating that his eastward policy was here to stay.

In the first, the two countries agreed to add pumping stations and double the capacity of China's first import pipeline to 400,000 b/d. Inaugurated a year ago, it runs from Atasu, in the grassy steppes of central Kazakhstan, to Alashenkou, on the mountainous Chinese border. The second was to build the missing link in the pipeline route running 3,000 kilometres from the Caspian, where most of Kazakhstan's oil lies, to the Chinese border: a 500-km segment running from Kenkiyak to Atasu. Both deals would be financed almost entirely by China, as was the $800m Atasu-Alashenkou pipeline.

Three weeks after his return, Nazarbayev named a new, reformist prime minister named Karim Massimov who is well-regarded by foreign investors, happens to have worked in China and is fluent in Chinese, as is the long-time foreign minister, Kazymzhomart Tokaev.

Zhou Jiping of CNPC, center, shakes hand of Talgat Zhumadilayev, left, director of the Kazakhstan China Pipeline Company, after they turned the wheel that started the flow of China's first import pipeline

China inaugurated its "Go out" policy of securing energy assets abroad in 1997 by buying a series of oilfields in Kazakhstan, notably one called AktobeMunaiGaz, and promising to invest billions of dollars in rehabilitating these ill-treated fields and building pipelines to the Chinese border.

However, the Asian currency crisis of 1998 slowed these investments considerably, tarnishing China's image. The Chinese habit of bringing in tens of thousands of their own workers, even dishwashers and drivers, created widespread resentment among a population that had spent the previous decade in a state of economic collapse.

Having put the currency crisis behind it, China tried more ambitious ways to secure energy assets abroad, but met with embarrassing refusals. In 2003, the partners in Kazakhstan's Kashagan field (ExxonMobil, ENI, Shell, Total and ConocoPhilips) declined to sell Beijing a slice in the world's biggest oil development project for $1.2bn when BG Group, the former British gas monopoly, sold its share. Two years later, the US Congress vetoed China's proposed $18.5bn acquisition of Unocal. All the while, Russia has never fulfilled its promises to let the Chinese build a pipeline from Russia's rich Siberian fields.

In the summer of 2005, Nazarbayev gave his blessing to the purchase of Petrokazakhstan, a Calgary, Canada-based company then producing 150,000 b/d in Kazakhstan, by China National Petroleum Company (CNPC) for $4.18bn. It was the biggest-ever purchase of any asset abroad by a Chinese company. The catch: CNPC had to agree to cede a third of it to KazMunaiGaz, which would pay for it from future revenues.

The next deal was this purchase of this Nations Energy field. However, the fate of this transaction had been in doubt since CITIC announced it reached agreement with the company's Indonesian shareholders in October because Valery Kotovich, a member of Nazarbayev's Otan party, caused a stir in parliament by claiming that China's aggressive purchasing policy posed a threat to Kazakhstan's independence.

"If they buy Nations Energy, they will control 28% of our production, and if they buy MangistauMunaiGaz, it will be 40%," he said in a speech that drew much comment in the local press. MangistauMunaiGaz is another producer that lifts about 115,000 b/d and has let it be known that it is looking for a buyer, preferably from China, since the Chinese have shown they are ready to pay a premium.

Two weeks later, the Kazakhstani energy minister, Bakhytkozha Izmukhambetov, said on television that he would use "extreme measures" to block the Nations Energy deal – only to backtrack into making noncommittal statements later.

Extraction of a better price

Was Kazakhstan's government pandering to anti-Chinese sentiment, as Chinese media have claimed?

There is no doubt that ethnic Kazakhs, who make up two thirds of the country's population, feel their ancestors were right in seeking the protection of the Tsars against Chinese invaders, even if the Russians took this as an invitation to colonize their country. Today, most people, not least the third of the population that is Russian, believe they were better off having spent the last two centuries under Russian rather than Chinese rule.

But oilmen in Almaty, the commercial capital, said the latest round of anti-Chinese rhetoric, particularly the part coming from a parliament that is tightly controlled by Nazarbayev, was more likely designed to intimidate CITIC into accepting a less-than-perfect deal. Nations Energy produces heavy crude and CITIC has said it would build a refinery that would make Kazakhstan, which produces mostly light crude, self-sufficient in bitumen. And when the deal was announced, it contained a clause that CITIC would resell to KazMunaiGaz half of the company – again by getting paid out of future revenues.

Addressing the concerns of the members of the parliament, Mikhail Dorofeyev, spokesman for KazMunaiGaz, said in an interview: "The government does not feel Chinese investments are excessive. There is in certain segments of our society some concern that Chinese investments too large, but this does not influence government policy." In fact, he insisted, "The government welcomes Chinese investments."

"Kazakhstan's real worry is Russia, not China," says Michael Lelyveld, a Russia-Caspian analyst with the consultancy PFC Energy. "The Russians have been playing a control game in the region, trying to control energy flows from Central Asia, increasing their monopoly in Russia and moving into distribution in Europe. China is Kazakhstan's escape valve."

In addition to their refusal to expand the CPC pipeline used by ChevronTexaco's Tengiz field, the Kazakhs have also been stung by the Kremlin's veto of Kazakhstan's bid to buy a port and refinery complex in Lithuania. Conversely, Kazakhstan has made energy investments in the Black Sea ports of Georgia, with which Russia has an increasingly hostile relationship.

"Yet Kazakhstan stays quiet about it," Lelyveld notes. "You wonder how pleasant a relationship it is behind the scenes."

Nazarbayev has earned high marks for his skills at keeping good relations with Russia, its main partner, with which it shares a low ranking in Transparency International's corruption index and an ideology that puts business development ahead of democracy and human rights; the United States, which uses no Kazakhstani oil and calls Kazakhstan a strategic ally in the war on terror even though Kazakhstan maintains only a tiny unit in Iraq and has virtually no Islamic extremists; and China, with whom it hopes to double trade volume in five years.

Until China paid Rosneft $4.5bn to help it buy the main Yukos unit, its attempts to buy Russian reserves were met with demurrals. Only now has its association with Rosneft allowed China's Sinopec to buy 25.1 percent of the Sakhalin-3 field, of which Rosneft owns 49.8 percent.

In the meantime, Hong Kong billionaire Stanley Ho, undeterred by anti-Chinese sentiment, has announced plans to invest $10bn to build a Las Vegas-like tourism and gambling resort on the shores of Lake Kapchegay, which is half an hour from Almaty and 150 km from the Chinese border.

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