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Kazakhstan: Oil Pipeline To China A Victim Of Diplomatic Dispute

Kazakhstan and China have been deadlocked for years over a plan to build an oil pipeline between the two countries. Officials say the problem stems from a misunderstanding over the meaning of an agreement signed nearly four years ago.

Almaty, 19 September 2001 (RFE/RL) -- Industry and official sources say China's plan to build an oil pipeline from Kazakhstan has been blocked by a long diplomatic dispute.

As one oil industry executive put it, "China and Kazakhstan have both been caught in a political trap."

But neither side has been able to find a way out, and the disagreement seems to leave little chance that the oil line to China will be built anytime soon.

In late 1997, Beijing announced that it would build a 3,200-km pipeline across Kazakhstan to China as part of a series of huge oil deals valued at $9.5 billion. The investments were supposed to help China meet its growing needs for imported oil.

The line was to run from Kazakhstan's western region of Aktobe. The China National Petroleum Corporation paid $320 million for a controlling stake in the province's oilfields and promised to invest another $585 million in the first five years.

The two parties signed a document on construction of the pipeline from Aktobe to China. The $2.4 billion project was supposed to bring oil to Urumqi, the capital of the Uighur autonomous region, a report by Bloomberg News said in 1999.

But after a feasibility study, the Chinese oil company known as CNPC found that the project would not be practical unless the pipeline could be filled with 20 to 25 million tons of oil per year.

The amount was far more than the Aktobe fields could produce. As a result, a dispute soon developed over the agreement that had been signed, industry and diplomatic sources say.

Kazakhstan insisted that CNPC had made a commitment to build the pipeline. The Chinese company argued that it had only signed a memorandum of understanding, not a contract. The disagreement has reportedly been going on for years.

A CNPC official in Kazakhstan was not available for an interview, despite repeated requests. One Western journalist in Almaty said the company has avoided the press.

Nadir Nadirov is an oil expert in Almaty and first vice president of Kazakhstan's Academy of Engineering. He told RFE/RL that he had yet to see the contracts myself, but added that the Chinese side had only provided one-fifth of the investment sum they originally pledged.

CNPC also agreed to invest in another large Kazakhstan oilfield to the north. The field known as Uzen might have contributed oil to the pipeline, helping to make it economically viable.

But Kazakhstan refused to give its permission. According to diplomatic sources, the government argued that the investment in Uzen would only be allowed under the 1997 agreement as a condition of building the pipeline from Aktobe first.

One Western diplomat said, "The Kazakhstanis viewed these as commitments. The Chinese viewed this as a memorandum of understanding." The two sides have been deadlocked on the pipeline project ever since.

As a result, China has been able to get only small amounts of oil by rail across Kazakhstan. Much of the oil from Aktobe has been sold unprofitably to a Russian refinery in Orsk for use on the local market.

Over the years, the CNPC venture at Aktobe has also been troubled by labor complaints and strikes, adding to frictions with the Kazakh government. But the company has reportedly made progress in addressing those concerns.

An effort is now under way to connect Aktobe with the Caspian Pipeline Consortium project. The link would allow CNPC oil to reach Russia's Black Sea port of Novorossiisk for export. CNPC could sell the oil at a higher price as a result, but it would still be unable to reach China.

While CNPC has succeeded in doubling output at Aktobe, the production remains a fraction of the amount needed to make a pipeline to China profitable. Sources say that even if oil from Uzen were added, it would probably still not be enough.

One Western diplomat suggested that the reason for China's costly oil investment in Kazakhstan may have been more political than commercial, saying, "I don't think this one ever made sense."