Fall-out continues from the Shah-Deniz gas find offshore from Azerbaijan. Several weeks ago, part one of this series examined developments around the Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan, and Iran's problems with Turkmenistani gas imports. The evident withdrawal of PSG from the TCGP has brought to the surface many subterranean possibilities that have been silently percolating. Whereas a few weeks ago, it was generally thought that Turkmenistan would be left only with Gazprom as a gas-buyer and would have to take whatever price it was offered, other suitors have presented themselves.
1. TCGP "Redivivus" and Its Alternatives
Most prominently Royal Dutch Shell, which joined the TCGP consortium in late 1998 about a year after PSG was created by Bechtel and the GE Capital Group, has gone back to President Sapurmurat Niyazov of Turkmenistan with several new proposals of its own for TCGP construction. The contents of these proposals have not been publicly discussed, but it is known that they are multiple and of sufficient interest to retain the leadership's interest. Shell's public declarations in favor of proceeding can only be described as ardent.
At the same time, Niyazov again discussed in Ashgabat, with President Jiang of China, a project first bruited in the mid-1990s, and then reanimated in 1997 when the Chinese National Petroleum Company (CNPC) made its first and most striking forays outside the country in search of properties to feed China's growing, perhaps soon to be insatiable, energy thirst. This gigantic project proposes construction of a pipeline longer than the distance from New York City to Los Angeles, a gas pipeline that stretching 5,730 kilometers from the right bank of the Amu-Darya River in Turkmenistan, across Uzbekistan and Kazakhstan, to China.
This pipeline would cost about $11 billion to construct, for delivery of 11 billion cubic meters of gas annually. In fact, this is clearly a long-term idea that is still only in the stages of preliminary study by an international consortium including U.S., Chinese, and Japanese companies. The Chinese leadership considers it as an alternative to a proposed Russian gas pipeline from East Siberia. Given the increasing cooperation between Russia and China, the East Siberian option must be considered more promising at present. It is also slightly less gigantesque.
I wish spend the remainder of this article examining an issue related to the Chinese cooperation with Turkmenistan but only indirectly concerning Shah-Deniz. This issue is the increasing intrusion of China's energy sector into the growing Central Asian industry. The just-completed diplomatic tour of Chinese President Jiang Zemin in Central Asia offers an opportunity to review aspects of this rapidly evolving development. In particular, I focus on China's role in Kazakhstan's difficult search for oil export routes. It will be clear at the end of the article how this theme links back up to Shah-Deniz.
2. Turkmenistan's Chinese Option
In early July, when President Jiang Zemin of China visited Ashgabat on a Central Asian tour, a gas pipeline from Turkmenistan to China was on the agenda. The length of such a pipeline, passing through Uzbekistan and Kazakhstan would be greater than the width of North America from Los Angeles to New York City. Projected at 5,730 kilometers, it would deliver 30 billion cubic meters of gas annually and cost approximately $11 billion. Such a pipeline was first bruited in late 1997 and early 1998, when the CNPC began to make its first forays into Central Asia to slake China's growing energy thirst. It is well known that China's energy demand will begin to soar in the first decade of the twenty-first century.
If the country's entry into the World Trade Organization (WTO) is successfully accomplished, then energy demand can be expected to accelerate still more rapidly than heretofore expected. That is because WTO membership will probably facilitate the entry of the global automotive industry into China, including both imports into China and the eventual construction of automotive plans on the mainland. The existence of such automotive products risks creating wide demand, particularly since market saturation is quite low. This will only increase pressure on energy supplies in the country, particularly since it is the burgeoning transportation sector that already is anticipated to outstrip other sectors in rate of growth of energy demand. What this will do to global warming, in turn, can only be guessed at.
3. China's Problems in Western Kazakhstan
China continues to experience difficulties in other projects in Kazakhstan. Despite winning privatization contests for the regional oil producers Aktobemunaigaz (AMG) and Uzenmunaigaz (UMG) nearly three years ago, negotiations for finalizing the takeover agreements have proven difficult. Nor would China's experience be unique in this. The U.S. energy company LaTex Resources tried in the mid-1990s to work with UMG to rehabilitate the latter's wells with Western capital, technology, and expertise. However, UMG informed LaTex that it considered the latter to be in breach of contract after receiving that investment, declined to advance the 1.5 million barrels of crude agreed, and informed one of LaTex's partners of its intention to alter further the terms of the service contract.
Moreover, Chinese management policies continue to sow ethnic resentment in Kazakhstan. Two thousand Kazakh workers, laid off en masse in 1999, held social protests at the AMG-UMG complex, demanding their jobs back or financial compensation from CNPC. Despite reassurances from CNPC's vice-chairman in April of this year, it is not clear that the matter has been resolved. Indeed, it is not at all clear where the capital would come from, insofar as CNPC has been told by the Chinese government to operate on a strict profit basis, and that original Chinese investments contracted in the takeover deal, apparently still not realized, were to have covered wage arrears and other debts, ecological rehabilitation and other social costs, as well as personnel training, all on top of investments in production.
Little if any progress seems to have been made on the $3.5 billion pipeline from western Kazakhstan to Karamai (Xinjiang), highly touted three years ago with a projected annual volume of three million barrels, which was an integral part of the contract signed by CNPC in the AMG-UMG acquisition. Last year China accelerated construction of the part of the pipeline in Xinjiang reaching to the border with Kazakhstan, but it appears that not a single kilometer of the pipeline has been laid in Kazakhstan itself.
China experimented with rail shipments from these fields in western Kazakhstan to western Xinjiang in 1997. The shipment costs were excessive, and the only question was how long China would continue to subsidize the loss to keep its hand in the game. China's enthusiasm for the project declined as production problems at AMG became evident in 1998. The projected 1998 level of approximately 700,000 barrels was not attained because of problems finalizing the terms of the takeover contract. Earlier this year CNPC, citing high transportation costs, declined to purchase any oil at all from AMG.
4. Kazakhstan's Alternatives to the China Option
Despite the problems with the AMG-UMG field, Kazakhstan and China have cooperated recently on testing a different rail route, from the Kumkol field being developed by a joint venture mostly owned by Hurricane Hydrocarbons, a Canadian firm that recently came out of bankruptcy protection. It had been shipped by the Shymkent refinery, which is jointly owned by Hurricane and CNPC. Following this test, another Hurricane affiliate, the Canadian-Kazakhstani joint venture Hurricane Dostyk, seeks to open a terminal at the Druzhba railway station on the border with China with a projected annual handling capacity of a little under 200,000 barrels.
Kazakhstan is still exploring the China option only because Russia is hesitating to increase the country's quota access to the Russian pipeline system. This hesitation comes, despite Kazakhstan's readiness to upgrade the Atyrau-Samara line from 1.5 to 2 million barrels per year, and despite ready financing and throughout guarantees already obtained by KazTransOil from major producers in Kazakhstan.
Russia's hesitation to upgrade the Atyrau-Samara pipeline is generally overlooked. Its significance is in the fact that it brings under consideration the eventuality of building a spur from Atyrau to Baku that could take oil from the East Kashagan offshore field in the North Caspian. In a striking statement reported July 10 by the Khabar television station in Kazakhstan, President Nazarbaev asserted that the primary task of his government has now become to securing stable export routes. Not only did Nazarbayev advocate signing a long-term contract with Russia for the Caspian Pipeline Consortium link from Tengiz to Novorossiisk, but also he asserted the need, even in addition to expanding the Atyrau-Samara pipeline, to join the Baku-Ceyhan project. This would mean building a link from Aqtau on Kazakhstan's east Caspian shore across the sea to Kazakhstan.
This hesitation by Russia also means that a line from Atyrau could take North Caspian oil to Baku. The mere idea of such a connection makes both possibilities (from East Kashagan and from Aktau) more feasible. Also, both these possibilities enjoy an advantage not shared by a still unrealized export route through Iran, about which there has for years been continuing talk, but only talk. This is the fact that any route for Kazakhstani oil through Iran would have to transit Turkmenistan. This is significant, because President Niyazov's recent actions have thrown the TCGP into doubt at the next- to-last minute, after a great deal of effort by all concerned parties. While there is no shortage of parties interested in Ashgabat's gas, this pattern (together with his on-again, off-again claims to the oil field that Azerbaijan calls Kyapaz and which he himself calls Serdar) has dissuaded increasing segments of the international energy industry from counting upon him too heavily: not to mention that he has alienated high government officials in both Azerbaijan and Turkey.
5. Once More on Shah-Deniz
So what does all this have to do with Shah-Deniz? Shah-Deniz makes the Turkmenistan-China gas pipeline more likely; but it would be difficult at this stage to make it less likely. But the light that this in turn sheds on China's increasing involvement in energy politics in Central Asia, stretching nearly to the eastern shore of the Caspian, provides perspective on Kazakhstan's export possibilities, highlighting the organizational and logistical problems of routes to China, as well as the political and financial problems of a route through Turkmenistan into Iran. That is how Shah-Deniz, while making the TCGP less likely yet not impossible, also increases the feasibility of the Baku-Ceyhan MEP being extended across the Caspian Sea to Kazakhstan.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 90 (11 July 2000), 4–5.