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Kazakhstan: China Seeks Oil Investment With An Eye On Pipeline

China is making a major oil investment in Kazakhstan, joining the consortium for the Caspian Sea's giant Kashagan field. Beijing still has its sights set on a pipeline to carry Kazakh oil, but the latest deal may do little to advance China's goal.

Boston, 11 March 2003 (RFE/RL) -- China dug deeper into Kazakhstan's oil market with a big investment last week, but it is unclear that the move will speed plans for a 3,200-kilometer pipeline to the east.

On 7 March, the China National Offshore Oil Corporation (CNOOC) announced it would buy a stake in the mammoth Kashagan oil field from Britain's BG Group for $615 million. The price will bring the Chinese company an 8.3 percent share in one of the biggest oil discoveries in the past 30 years.

CNOOC Chairman Wei Liucheng said that joining the Kashagan consortium, led by Italy's Agip, "allows the company to gain a firm foothold in one of the world's most prolific oil and gas basins," the "China Daily" reported.

The 5,600-square-kilometer area in the Caspian Sea is believed to contain the equivalent of some 13 billion barrels of oil, making it a tempting prize for China's consumer market of 1.3 billion people. The country's oil imports grew 15 percent last year.

China now imports about 1.4 million barrels of oil a day, or some 30 percent of its demand. Beijing is also openly worried about relying on the Persian Gulf for nearly half its imports at a time when domestic production has hit a plateau. Kashagan is expected to start producing in 2006.

All that should make the CNOOC's investment a natural part of China's perennial plan to build one of the world's longest oil pipelines for its energy-hungry market. China's sales of cars and trucks jumped more than 36 percent in 2002 and are likely to rise another 20 percent this year, according to the "People's Daily."

But China's plan for a pipeline from Kazakhstan began long before its car sales started to take off, and there are several reasons why it may remain stalled.

Beijing first put forward the pipeline idea in 1997 as part of a $9.5 billion package of investments in Kazakhstan. Since then, few have panned out. The problems have been physical as well as political.

The obvious physical problem is distance. While Kazakhstan's oil riches are concentrated in the western part of the country, China's hottest markets are all in the east. The original proposal for a 3,200-kilometer pipeline, costing at least $2.4 billion, assumed that oil would come from Kazakhstan's Aktobe region to Urumqi in the Uighur Autonomous Region of western China. Reaching the eastern coastal cities would add another 4,000 kilometers to the length, a problem rarely mentioned in official reports.

The China National Petroleum Corporation (CNPC) also soon found that the Aktobe oil fields where it had promised to invest lacked sufficient reserves to fill a line that would have to carry at least 400,000 barrels a day to be economic. The company then sought rights to develop other fields. But Kazakhstan argued that Beijing had broken its pledge to build the pipeline.

The political impasse dragged on for years as China sold the little oil it produced unprofitably to a Russian refinery at Orsk. China succeeded in linking two of its oil-field holdings by pipeline in January, "The New York Times" reported. But the oil is exported to the west from the Caspian port of Atyrau, not to the east. Despite five years of involvement in Kazakhstan, China imported only 20,000 barrels of Kazakh oil per day in 2002, according to customs data reported by Reuters.

It is not clear that the CNOOC will be any more successful than the CNPC in getting the oil to flow east. "The Times" quoted CNOOC chief financial officer Mark Qiu as saying that a pipeline would only be an "additional benefit" of investing in Kazakhstan, if the line is built. The chief attraction seems to be profit rather than a direct oil supply for China. The CNOOC estimates that its exploration and development costs will be between $2 and $3 per barrel, according to the "China Daily."

Few of China's foreign oil investments seem to have reduced its dependence on Middle Eastern oil to any significant degree. In an interview last week before the CNOOC announcement, Robert Ebel, director of the energy and national-security program at the Center for Strategic and International Studies in Washington, told RFE/RL that China's diversification strategy in the 1990s has done little for its energy security.

Ebel said: "For China, it's been a failure, really. If the purpose was to provide additional volumes away from the Persian Gulf, it hasn't worked out."

China has still talked up the possibility of the pipeline recently, both in promotion of the idea and total volume. Last month, Interfax reported that China had approached Kazakhstan about more than doubling the target volume for the pipeline from 20 million to 50 million tons per year. But Lyazzat Kiinov, president of the state oil-and-gas company KazMunaiGaz, threw cold water on the plan, saying, "China is asking us to deliver 50 million tons of oil, but we are producing only 47 million tons."

In an interview, Amy Jaffe, director of energy research at Rice University in the United States, said, "The last thing that Kazakhstan should consider doing is selling all of its oil to one supplier." Jaffe said that by sending its oil to a variety of buyers in the west, Kazakhstan is assured of getting the international market price.