BACKGROUND: The decision by British-owned BG International Ltd. to sell its entire 16.67% stake in the North Caspian Sea Project (NCSP) in Kazakhstan did not unduly surprise industry analysts. Many thought that, with 30% of its net assets held in Kazakhstan, the company was over-exposed in the Caspian region, especially in the light of the contractual problems experienced with the Kazakhstani government experienced by Chevron in December 2002. BG’s interest in NCSP was purchased in two equal stakes, a few days apart, by the China National Offshore Oil Corp. Ltd. (CNOOC) and Sinopec Group, the state-controlled parent company of the listed Sinopec Corp. The combined price was $1.23 billion. The other NCSP consortium members, which include ENI-Agip, Royal Dutch-Shell, Exxonmobil and TotalFinaElf can, should they wish, exercise pre-emption rights and purchase BG’s stake for the same price. Clearly unwilling to jeopardise future access to China’s potentially lucrative energy market, they will not do so. In the same week, Kazakhstan’s Ambassador to China, Zhanibek Karibzhanov, urged China to revive plans to build a pipeline direct from western Kazakhstan to the Xinjiang Autonomous Region (XAR) of China, pursuant to an agreement first reached in 1997. Since then, technical issues surrounding the pipeline’s extreme length (2600-2900 km), and whether its projected capacity of 20 million tonnes per year was sufficient for it to be a viable commercial proposition, had seemingly caused the project to be kicked into the long grass.

IMPLICATIONS: The explanation for the acquisition of the NCSP shares by the Chinese government, and the renewed encouragement given by the Kazakhstani government to a Sino-Kazakh pipeline, each have similar origins: the drive by each state to formulate a coherent national energy security policy. China imported 70 million tonnes of crude oil in 2002, paying over $12.7 billion. With domestic oil exploration still yielding unimpressive results, China is forecast to import 84% of its energy supplies by 2030. The Chinese government is keen to reduce its reliance on imports from the Persian Gulf, especially if the US retains unfettered control over Iraqi oil supplies after the military campaign. Bearing in mind that a series of strategic acquisitions worth $1.2 billion have been made by COOC in Indonesia and Australia over the past 12 months, and that Sinopec has hitherto largely focused on midstream and downstream activities such as refining and distribution, buying in to NCSP fits in within a pattern consistent with the objective of China wishing to develop a cheap, long-term national petroleum reserve. As a bordering state, Kazakhstan is a particularly attractive option, there being no transit fees or potential disruptions by intervening states. Applying strictly commercial criteria, the merit of constructing a pipeline from the Tengiz and Uzen oilfields in western Kazakhstan might appear borderline at best or dubious at worst. Within the context of a national energy security concept, however, it is highly logical. The likelihood of further commercial penetration of Chinese oil interests into the Caspian energy sector might, at first sight, appear to be unsettling for Kazakhstan. However, the construction of an oil pipeline eastwards also chimes in with Kazakhstan’s own national security aspirations. Currently, oil produced on the Caspian seaboard is either refined domestically or in the Volga region of Russia. With no internal East-West pipeline, the oil refineries in Shymkent and Pavoldar are processing decreasing amounts of Siberian oil. Paradoxically for an oil-rich sate such as Kazakhstan, its eastern industrial centres of Almaty, Oskerman and Pavoldar still remain dependent for their power supplies on Russia and Uzbekistan, a relic of Soviet era planning. A Sino-Kazakh line could be integrated within Kazakhstan’s own eastern network in order to ease this dependence. Should that eventuality come to pass, the response of Russia, which will find its leverage over Kazakhstan further diminished, will test the extent to which it continues to view Kazakhstan as a critical sphere of influence. The U.S. may also view the flow of significant quantities of non-Gulf oil east, rather than west, as an issue of strategic concern.

CONCLUSION: The focus of recent energy sector analysis in the Caspian region has largely been confined to issues involving the resolution of the legal status of the sea itself and the development or extension of new pipeline routes west and south – to link BTC to the oil port of Aktau in Kazakhstan along the Caspian sea bed, to construct pipelines from Kazakhstan to transit Turkmenistan and link up with Iranian networks, and to develop a southwestern route via Afghanistan to service the South Asian markets of India and Pakistan. Whilst all these projects merit close attention, the growing commercial and political leverage of China in the Caspian Basin is becoming increasingly evident. Whilst this re-engagement does not yet amount to a significant geopolitical configuration, the encouragement given by the U.S. for the development east-west transport and energy corridors may yet facilitate the emergence of an equally important west-east corridor.

AUTHOR BIO: Michael Denison is a PhD. Candidate at the University of Leeds, United Kingdom.