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Kazakhstan: Pipeline Projects To China Become Pipe Dreams

Boston, 8 July 1999 (RFE/RL) -- Kazakhstan has all but given up hope for an ambitious oil pipeline to China, as Beijing seems to be investing in other projects where it has more to gain.

On Saturday, Kazakhstan's energy minister, Mukhtar Ablyazov, said the construction of a 2,800-kilometer pipeline to China is not feasible as long as oil prices remain low. Instead, oil swaps are seen as more profitable than long-term pipeline projects to sell Kazakhstan's oil, the minister said.

The statement quoted by Agence France-Presse comes at a curious time. Oil prices have been low. But they have now risen steadily to a 19-month high, nearly reaching the level of September 1997, when China agreed to pursue the pipeline plan.

The statement also seems to contradict a claim in May by the China National Petroleum Company that it was speeding up its construction and that nearly 500 kilometers of the pipeline has already been built.

Now it appears that China's comments may have been meant to reassure Kazakhstan. Judging from Kazakhstan's assessment, the progress has been a disappointment.

The line, which would cost over $3 billion, was one of several big projects that China announced as a part of an investment package with Kazakhstan totaling $9.5 billion. Among the projects was development of the Uzen oilfield, the second largest so far in Kazakhstan. At the time, the size of the commitment stunned analysts and convinced them that China was ready to be a major player in Central Asia and the Caspian region.

It may still be a major player, but skepticism has grown about the commitment as China has delayed development plans. There has been little progress on the third element of China's big designs for Kazakhstan, the construction of a pipeline through Turkmenistan and Iran to the Persian Gulf.

Even less has been heard about an even bigger scheme that was publicized two years ago, the construction of an 8,000-kilometer gas pipeline from Turkmenistan through Uzbekistan, Kazakhstan and China to South Korea and Japan. If completed, the project would be the longest gas line in the world. But analysts see little chance that the investment will proceed.

If China has delayed, its caution may be blamed on the Asian currency crisis which has forced it to conserve on finance. But China may also have sought to extend its influence over Kazakhstan with promises it was unlikely to fulfil.

In 1997, Beijing won the bidding for the Uzen oilfield against competition from U.S. companies, including Amoco, Texaco and Unocal. One reason cited was its plan to invest in the pipeline projects that now seem in doubt. In June 1997, China also won the competition to develop Kazakhstan's Aktyubinsk oilfield after offering the incentive of export pipelines.

But Kazakhstan has stopped short of publicly criticizing its powerful neighbor. Instead, Ablyazov's statement shows support for the option of swapping oil, in which China also has an investment interest.

The China National Petroleum Corp. and China Petrochemical Corp., known as Sinopec, have joined in a consortium to build a pipeline from the Caspian to Iranian oil refineries to carry out the swaps. The line from the Iranian port of Neka to the refinery in Tehran will allow the use of Kazakh oil in northern Iran while equal amounts of crude are shipped from Iran's ports on the Persian Gulf.

Iranian officials expect the $400-million project to start in September. The Chinese companies are also working to extend the swaps to other Iranian refineries which they have agreed to upgrade for handling to other Iranian refineries which they have agreed to upgrade for handling Kazakhstan crude. The United States opposes the plan and has denied swap licenses to U.S. companies seeking to participate with their shares of Caspian oil.

But China's involvement in the swaps suggests that it may be doing more than seizing opportunities from which U.S. firms are banned. With the swap project, it may now exert control over Kazakhstan's exports both to the east and to the south. Beijing's role in two possible outlets for Kazakhstan at the same time is unlikely to be a coincidence.

Much of the international attention has focused on the country's export access to the north and west through Russia and its planned pipeline to the Black Sea. But in the meantime, transit from Kazakhstan remains difficult. Even the 390-kilometer swap line from Neka will take two years to build.

China appears to have calculated that its greatest interest will remain in oil transit by tanker through the Persian Gulf. Its involvement in the swap plan may allow it to influence Kazakhstan and Iran at the same time for a relatively modest investment.

If the project takes place on schedule, it could capture Turkmenistan's oil, as well as a portion of the larger volumes to come from Kazakhstan. If the swap route is delayed, Kazakhstan may wonder whether it made the right choice in awarding its oilfields to China two years ago.