China resets terms of engagement in Central Asia
By M K Bhadrakumar
Nursultan Nazarbayev has a way of drawing lines in the sand. The president of Kazakhstan recently told global oil and metal majors that new laws would allow only those foreign investors that cooperate with his industrialization program to tap his nation's mineral resources.
"We will work only with those who propose projects helping diversification of the economy," he said at a December 4 investment conference in Astana, the Kazakh capital, which was attended by ArcelorMittal, Chevron, Total, ENRC and other investors. To any unwilling to collaborate, he said: "We will look for new partners, offer them favorable conditions and resources to fulfill projects."
For good measure, he added that Beijing has asked Kazakhstan - a country the size of Europe but with just 16 million people - to allow Chinese farmers to use one million hectares of Kazakh land to cultivate crops such as soya and rape seed.
Pro-Western elements in Kazakh politics have since taken to the streets. On December 17, addressing a rally in Almaty, Bolat Abilov, co-chairman of the opposition party Azat [United Social Democratic Party] drew an apocalyptic scenario: "If we tomorrow give, or distribute, one million hectares of land, it would mean 15 people working per hectare. That means 15 million people would be brought from China. If one of those 15 people were to give birth each year, that would be the end. In 50 years, there would be 50 million Chinese [in Kazakhstan]."
A rally was held outside the Chinese consulate in Almaty with placards reading, "Mr Hu Jintao, we will not give up Kazakh land!"
A pipeline to the heart of Asia ...
Nazarbayev's message was direct: Western investors could keep their money if interested only in exploiting Kazakhstan's mineral wealth. The president was speaking as a momentous event in the history and politics of Central Asia was resetting the terms of engagement for foreigners in the region: the development of an ambitious 7,000 kilometer pipeline to link the region's gas fields to cities on China's eastern seaboard.
Ten days after Nazarbayev spoke, Hu arrived on a Central Asian tour for the formal commissioning of the 1,833-kilometer pipeline connecting gas fields in Turkmenistan, Uzbekistan and Kazakhstan (and possibly Russia) to China's Xinjiang Autonomous Region.
Turkmenistan says it alone can supply 40 billion cubic meters (bcm) of gas a year through the pipeline for three decades once it reaches full capacity. That is about half China's current annual consumption.
Uzbekistan signed an agreement with China in November last year to export up to 10 bcm gas a year. (A 2006 estimate put Uzbekistan's gas reserves at 1.8 trillion cubic meters.) A branch line of the Turkmen-China trunk pipeline passes through the town of Gazli, in the Bukhara region, where the Uzbek gas can be fed into it. China has invested in the Uzbek gas fields in the region. The Uzbek reserves are primarily concentrated in the Qashqadaryo province and near Bukhara alongside which the Chinese pipeline passes.
Kazakhstan is set to export another 10 bcm gas through another branch pipeline connection. China, which is preparing for a massive increase in consumption, wants natural gas to account for 10% of its energy mix by 2020, from 3% in 2005. China consumed 77.8 bcm of natural gas last year, a little more than its domestic output of 77.5 bcm. However, the nation faces a natural gas shortage of 70-110 bcm by 2020, according to the 2009 Energy Development Report published by the Chinese Academy of Social Science, an official think-tank. All China's gas imports are currently in the form of LNG and it is separately raising its LNG import capacity to 15 million to 18 million tons by the end of next year.
There was widespread skepticism among observers whether the Central Asia pipeline project would see the light of day. Indeed, China pushed ahead against Western views that last year's renewed unrest in Xinjiang put it at risk. "China is putting a lot of eggs in one basket,'' one British expert said. "An awful lot of oil and gas is coming through a small region. Looking now at trends in Xinjiang, you could ask whether a route from Central Asia is actually more secure than routes through Southeast Asia or the South China Sea."
The implication was obvious: that China's Central Asian pipeline could become a sitting duck for terrorists. As Robert Ebel, at the Center for Strategic and International Studies in Washington, put it, security could be impossible if the pipelines become targets as they pass through vast stretches of sparsely populated areas in Central Asia and Xinjiang. "There is no way you can protect a pipeline along its entire length. It just can't be done", Ebel, a security expert, maintained. Unrest in Xinjiang, particularly, threatens the Central Asian pipeline, he added. "I'm sure it's causing grey hairs on the people in Beijing," he said.
... sends shock waves to Washington
The American experts have drawn a doomsday scenario for the Chinese pipeline. Writing in the Central Asia & Caucasus Institute Analyst of Johns Hopkins University in October last year, Stephen Blank of the US War College branded Xinjiang as a "pressure cooker" which Beijing is nowhere near controlling.
Growing nervousness in Washington about the Chinese pipeline was quite palpable. The US Senate Foreign Relations Committee held a rare hearing in July regarding China's geopolitical thrust into the Central Asian region. Testifying at the hearing, Richard Morningstar, the US special envoy for energy, underlined that the US needed to develop strategies to compete with China for energy in Central Asia.
This was perhaps the first time that a senior US official has openly flagged China as the US's rival in the energy politics of Central Asia. US experts usually have focused attention on Russian dominance of the region's energy scene and worked for diminishing the Russian presence in the post-Soviet space by canvassing support for Trans-Caspian projects that bypassed Russian territory. In fact, some American experts on the region even argued that China was a potential US ally for isolating Russia.
Certainly, 2009 was a turning point in American discourses on Chinese policies in Central Asia. As China's Turkmen gas pipeline got closer to completion, US disquiet began to surface.
"China is having increasing and heavy influence in Central Asia,'' Morningstar said. ``It is hard for us [the US] to compete with China in some of these countries. It's easy for Turkmenistan to make a deal with China when China comes in and says, 'Hey, we're going to write a check for X amount of money, we're going to build a pipeline'. That's not a hard deal to accept, and we [US] can't compete in that way."
Morningstar put forward two suggestions. One, "to develop a strategy to deal with that [Chinese policy] and encourage the US companies to negotiate creatively with Turkmenistan". Two, Washington should also think about whether it makes sense for US companies to cooperate with China in such countries.
Scope for US-China cooperation over Central Asian energy resources is very limited. In geopolitical terms, there is a conflict of interest between the two countries. One principal objective of China is to lock in energy sources that are not dependent on supply routes passing through the Malacca Straits, which the US controls and could prove a choke point in the event of a US-China confrontation.
Besides, Morningstar himself put his finger on the crux of the problem. While it was good for China's energy-hungry economy to get "clean energy" such as natural gas, the "gas that goes to China competes with gas that could go westward".
Beijing raises the stakes ...
However, the US realizes that devising a counterstrategy to China's is easier said than done. China's presence in the Central Asian energy scene was not a single day's happening. Painstaking diplomacy spread over years went behind it. It was back in 1997 that Kazakhstan and China agreed to build a 3,000 km crude oil pipeline and would later double capacity to 20 million tonnes a year.
In 2005, CNPC International paid almost $4 billion for a 33% stake in PetroKazakhstan. The following year China bought up Kazakh oil assets worth nearly $2 billion in the Karazhanba oil and gas fields (which has proven reserves of more than 340 million barrels), agreed to purchase 30 bcm gas from Turkmenistan ((later increasing this to 40 bcm), and committed $210 million to look for oil and gas in Uzbekistan over the next five years.
In 2008, Kazakhstan and China agreed on jointly developing oil and gas reserves on the continental shelf of the Caspian Sea, while China's Guangdong Nuclear Power Co and Kazakhstan's state nuclear firm Kazatomprom agreed on boosting uranium output in their joint venture.
In April 2009, China made the mother of all energy deals by agreeing to lend Kazakhstan $10 billion in an unprecedented "loan-for-oil" deal and also agreed with state-owned KazMunaiGas to jointly buy oil producer MangistauMunaiGas for $3.3 billion.
In 2009, China also agreed to issue a $3 billion loan for developing the Central Asian state's largest gas field, South Iolotan, which is estimated to contain anywhere between 4 trillion and 14 trillion cubic meters of gas, according to Britain's Gaffney, Cline and Associates - making it one of the world's five largest gas deposits.
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