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How Shah-Deniz Is Changing the Equation (3/9)

China has declared ownership of its planned pipeline from Xinjiang to Shanghai open to foreign entities. This follows President Jiang Zemin's visit to Turkmenistan, where he discussed the possibility of a pipeline to carry natural gas from that country across Uzbekistan and Kazakhstan to Xinjiang. The announcement comes three weeks after Hong Kong tycoon Li Ka-shing, whose companies recently bought a stake in PetroChina, reportedly made the suggestion to Chinese officials at a June 23 meeting.

1. China's "Go West" Initiative

The Chinese decision for the pipeline from Turkmenistan must be seen in the context of its "Go West" program announced last June. Under this plan, China would spend no less than several decades to build up nine provinces (Gansu, Guizhou, Ningxia, Qinghai. Shaanxi, Sichuan, Tibet, Xinjiang, and Yunnan) and the city of Chongqing into the next motors of the country's economic development. This initiative has engendered competition among the political prefects in the regions. The degree of central financial participation is uncertain although expected to be significant.

In the general context of "Go West," the Chinese leadership is creating the conditions for impressive short-term performance in narrowly selected areas against a backdrop of pervasive general stagnation that comes to dominate the scene. Thus while regional officials enthuse over such possibilities as decreased central interference in local economic affairs or free land for those with fresh ideas about agricultural development, President Jiang Zemin has unambiguously declared that all development must take place under "conditions of a socialist market economy." Notwithstanding the liberalization of investment in the single instance of the Xinjiang-Shanghai project, the parallel to increased Soviet productivity due to importation of Western technology in the early 1970s is striking.

Chinese media have been filled with unrealistic plans launched as publicity tactics by individual government departments and especially by regional elites and subelites intent on grabbing the carrot offered them by the political center. The "Go West" program is less an actual program than an initiative launched by the center in order to provide incentives for the regional elites to compete for a combination of economic demonstration and loyalty to Beijing. Thus the proposed regional specializations (petroleum for Xinjiang, hi-tech and financial centers for Chongqing and Xian, even herbal medicine for Yunnan) have come from the bottom up and are unintegrated with each other or on a national scale. One of the only things that the political center in Beijing has done is to declare large sums of money as having been set aside for transport and communications links such as improvements to regional airports and new highway construction. The western areas are indeed plagued by poor infrastructure, but ecological degradation and the lack of qualified personnel are problems at least as grave.

2. Starting with Chongqing?

Chongqing is intended to be the leading region in the near term, and a litmus test for the long-term initiative as a whole. For it is planned that the Jingbian-Shanghai section of the Xinjiang-Shanghai pipeline will be built first, to bring gas from Chongqing to Shanghai. This will occur in tandem with the gas development in North Shaanxi, a project requiring a three-to-five year time horizon. It is possible that China is here following a lesson of the Caspian region, that long major pipelines should be built only piecemeal, with each successive segment independently justifying itself on a commercial basis.

That is how the Caspian Pipeline Consortium (CPC) began its construction several years ago in the Caucasus, which it is now completing through Southern Russia. (There has been some artful ambiguity lately on the part of Russian officials, however, whether the CPC pipeline will stretch all the way to the Tengiz in Kazakhstan, as originally planned. One official as even stated that CPC volumes are now "fully subscribed" by the recent large Russian offshore strike in the North Kashagan section of the Caspian Sea.) It is also how the Baku-Ceyhan Main Export Pipeline (MEP) is arriving at its implementation, using the first-established Baku-Supsa pipeline as a basis for extension to the whole project.

The problem for China and the West-East Gas Pipeline Project is that it is not clear that resources to be developed along the length of the pipeline from Xinjiang eastward do in fact independently justify the construction of the successive segments. And the Xinjiang-Shanghai natural pipeline is only one of six that China has announced the intention to build in the next decade. (The others are Sebei-Xining-Lanzhou, Chongqing-Wuhan, a second Shaanxi-Beijing line, a line from Russia into Northeast China and thence to North and East China, and a pipeline for imported LNG and offshore gas resources.) Some skepticism concerning the realization of all these projects is certainly justified.

3. Xinjiang

Moreover, the Xinjiang-Shanghai pipeline is really at present more of a pipedream of the leadership's "Go West" initiative. The chairman of the pipeline project announced that China had dropped a ban on foreign ownership of energy assets in this instance, because it lacks the skills to build the project on its own. He did not mention that it also lacks the capital, and only hinted that it lacked the technology. This 2,600-mile-long pipeline is projected to carry gas from Xinjiang to Shanghai at a construction cost of $5 billion, to open in 2003. Foreign investors would be allowed into all upstream and downstream phases of the project, with no limit on foreign ownership through joint ventures or share-holding.

The Chinese National Petroleum Corporation (CNPC) asserts that Xinjiang has 17.4 trillion cubic feet of proven gas reserves. It is more likely that these are potential or estimated reserves, because it is not clear that they are all recoverable. The geology is frequently difficult and the depths seem often extreme. Moreover, the pipeline construction itself is also problematic. The route crosses the Gobi Desert and areas of central China that are highly populated. Despite Chinese touting of Xinjiang's natural energy resources, several years ago western energy companies paid high fees to test-drill for oil, and they came up dry. They are unlikely to be more enthusiastic this time around, and the capital hunger within China makes domestic prospecting less likely.

Therefore the very feasibility of the Xinjiang-Shanghai natural gas pipeline depends upon gas from Turkmenistan. Yet again, there are not, along the projected route of the Turkmenistan-Xinjiang pipeline, local resources that could justify the piecemeal construction of successive segments that meld into the greater project as originally conceived. Readers may recall the details I gave here last week, of China's inability to redevelop oil and gas complexes in western Kazakhstan, and its failure to be able even to begin construction of a projected oil pipeline from Aqtobe across Kazakhstan into Xinjiang. That being the case, skepticism is justified about the feasibility of the Turkmenistan-Xinjiang natural gas pipeline, across both Kazakhstan and Uzbekistan, and about the capacity of the parties to implement it.

Perhaps it is also indicative, that according to the Vice-Director of the State Administration of Petroleum and Chemical Industry, CNPC has decided that gas from Changqing's should be delivered first. However, if we note that according to studies commissioned by Shanghai officials, gas from as close as Chongqing is only marginally more economical than imported LNG, then even this first link of the West-East Gas Pipeline Project becomes problematic. That margin will only decrease if China enters the World Trading Organization (WTO) and lowers, as it would be obliged to do, its LNG import duties.

4. Parallels with the "Hit Hard" Campaign

There is an interesting parallel between the leadership's attitude towards the "Go West" program and its January indication that the internal-security oriented "Hit Hard" campaign would continue in force. "Hit Hard" was a year-long heightened security alert introduced for the tenth anniversary of the Tiananmen massacre and the fiftieth anniversary of the foundation of the People's Republic of China. This campaign was prosecuted mainly against the Falun Gong mediation movement and other "elements hostile to the Party," mainly spiritual and religious groups.

In January it was indicated in Beijing, in contradiction to an announced decentralization of administrative machinery, that "Hit Hard" was set to become a permanent institution. Internal party reviews of ideological loyalty as well as the party's "oversight" of non-Party institutions were to be enhanced. New party chiefs quickly appointed in the provinces of Jiangsu, Anhui, Sichuan and Heilongjiang moved to increase central authority, to the detriment of local governors and assemblies. However, the rights assumed by the political center seem unmet by the recognition of definite obligations towards the regions.

On the question of internal security, the Beijing leadership appears split and incapable of taking a definitive lead, with hard-liners insisting on tougher measures and moderates fearing these would further alienate the population, threatening the outbreak of overt rebellions. On the "Go West" program, the political indecision is similar but syndrome behind this behavior differs slightly: the leadership's hesitation is based on recognition of pervasive loss- making in infrastructure in the east, together with a head-in-the- sand syndrome when it comes to designing specific measure to promote the western regions' economic development.

In both instances, however, Jiang Zemin is zigzagging and unlikely, if not unable, to take definite decisions. In this respect he rather resembles former Soviet President Mikhail Gorbachev, who was also faced with simultaneous problems of popular discontent and great economic and political problems that he sought to resolve via grandiose schemes.

5. Once More on "Go West"

There is no central policy for the implementation of the "Go West" initiative, nor is there like to be one, in view of the massive capital requirements for any thoroughgoing attempt at its realization. At least in Shaanxi, private capital seems likely to come from public listings of high-tech companies, identified by Beijing, in high-risk equities markets. Caveat emptor.

The head of the Shaanxi regional planning commission has stated that projects considered to be undesirable for environmental reasons in the coastal provinces may nevertheless be undertaken instead in the west, even though the provincial Shaanxi leadership recognizes problems desertification and soil erosion in the region. Besides boding ill for the environment (Shaanxi is estimated to deposit one billion tons of sand annually into the Yellow and Yangtze Rivers), this statement would appear to confirm definite difficulties in attracting investment.

The coastal zones remain driving "poles of attraction" for investment with already-sunk costs having already established a bedrock of infrastructure. Beijing's incentives for investment in the west have been unexceptional. What is remarkable is the unanimity of the apathy with which these incentives have been greeted by all corporations, whether foreign or domestic, whether state-owned or private. Investments that corporations from in eastern China have made, have concentrated in already-developed cities and regions of the nine-province area.

6. Conclusion

"Go West" has been reduced, from the standpoint of the political center in Beijing, to standard variable in the armory of mass (and specialized) propaganda campaigns, although it is also targeted by regional and functional and subelites at different audiences for different purposes. This is perhaps on balance not such a bad result. Operationally, the "Go West" initiative could turn out to be a Great Leap Westward, which, like the Great Leap Forward of the 1950s, encouraged local initiatives in ill-conceived and misplanned projects that were from the outset overlapping, unintegrated, technically impossible of success, and so wasteful that decades were required to recover from the effects.

The unrestricted invitation to foreign capital to participate in the West-East Gas Pipeline Project is an attempt to avoid such a worst- case scenario in the realization of one industrial project in one economic sector. However, the Soviet experience of the 1970s demonstrates that such narrowly limited projects, even if successful, do not have spill-over effects into the economy as a whole. Yet it would seem to be the case that such spill-over is what both regional elites and the central leadership are counting on, in order to use the West-East Gas Pipeline Project, should it ever be realized, as a motor of the "Go West" initiative.

Any hope that this project may be actually realized is due only to the prospect of Turkmenistan's natural gas one day crossing Central Asia into an already-existing pipeline from Xinjiang to Shanghai. And that prospect was reborn only out of Turkmenistani President Niyazov's dissatisfaction with Azerbaijan's insistence that natural gas from Shah-Deniz should be carried to Turkey through the Trans-Caspian Gas Pipeline, which was originally reserved for Ashgabat's natural gas alone.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2000/07/how_shahdeniz_is_changing_the_2.html
First published in FSU Oil & Gas, No. 92 (25 July 2000): 2 4.

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