SCO summit in Yekaterinburg And China’s energy offensive towards the Caspian Sea
Ajdar Kurtov
The political and expert quarters will remain for a long time riveted on another summit of the Shanghai Cooperation Organization that was called in Yekaterinburg on the 16th of June.
One could keep looking for quite some time for some fundamental ideas of the main document the summit has adopted, - the Yekaterinburg Declaration of the SCO Heads of State. But comparing some provisions of the Declaration with the practical activities in the central Asian region seems to prove more productive.
Item 5 of the Declaration sounds somewhat pathetically: “The SCO member states, noting the key significance of energy sector for successful economic development and creation of favourable preconditions for improving the living standards of their peoples, express determination to further advance mutually beneficial cooperation in this field on the basis of equality with the aim of ensuring effective, reliable and environmentally safe energy supplies”.
And now let’s take a look at how the SCO unconditional leader China implements its energy plans in the region. Let’s focus on the following two situations by way of an example. The first one has to do with China’s growing involvement in the production of hydrocarbons in Kazakhstan. Back in the 1990s Kazakhstan made easily available its mineral wealth to American, British, French and Italian companies, the companies that foisted disadvantageous or even downright crippling terms on Kazakshtan. The bulk of the profit generated was channelled to Kazakhstan’s new partners, while those were not liable for obligations under the contracts signed, specifically with regard to compliance with ecology-related standards. The situation was largely prompted by corruption that had corroded the Kazakh leaders, including top-echelon officials (a case to illustrate the point is the so-called “Kazakhgate”). A threat loomed large of Kazakhstan turning into a third-world country with a raw exports role to play for the highly-advanced states.
The West was perfectly content with the Kazakh leaders’ policy, since that policy both helped settle the economic problem of securing excess profits to western companies and was in line with the western nations’ political objectives, namely tearing Kazakhstan away from Russia and preventing any new-form revival of the alliance of the former Soviet republics.
However, Kazakhstan growing stronger economically, socially and politically, the internal destabilization risks being largely reduced due to the defeat of the Kazakh opposition and irredentist Slavic organizations and the world hydrocarbons market prices shooting up early this century made Kazakhstan leaders think better of their old stands. The new conditions prompted Kazakhstan to reconsider the earlier signed agreements, and Astana specifically proclaimed the objective of establishing state control over the oil and gas sector.
Astana began to gradually change the national legislation on subsurface resources management and environmental protection to coerce the western companies into greater compliance with Kazakhstan demands, and simultaneously provoked a conflict with the Italian company ENI, the operator of Kazakhstan’s most promising oilfield Kashagan, on the Caspian Sea shelf. Besides Kashagan, ENI’s contractual area in Kazakhstan’s sector of the northern part of the Caspian Sea also comprises the Aktoty, Kairan and Kalamkas oilfields. But Kazakshtan formally laid claims to its foreign partners for the failure to meet the deadlines for making the oilfields operational and producing large amounts of oil.
Kazakhstan made amendments to its Internal Revenue Code, to the law on its mineral wealth and subsurface resources management and to the ecology-related laws concerning foreign investor activities. The legal innovations provided for the consolidation of the State’s right to a 50% share of each new project on secondary markets, too; for a ban on re-selling licences for subsurface resources management for a two-year period following the registration of property rights; toughening control by the Ministry for Environmental Protection; a mandatory demand that foreign economic entities should attract the “Kazakh content” and also the right to use a reference to the need to guarantee national security as explicit justification of a refusal to grant licences for subsurface resources management.
Let us focus for awhile on the term “Kazakh content”, which implies not only an enlargement of Kazakhstan’s share of the authorised capital of consortiums, engaged in drawing up certain projects, but the idea that Kazakhstan’s foreign partners are bound to be geared to the use of Kazakhstan’s mineral wealth. For instance, the foreign partners should purchase no less than 30% to 35% of Kazakh-made materials and equipment, to use no less than 90% of labour and services; and some 90% of personnel. As of May 2009 the Kazakhs have introduced this sort of contractual obligations into 144 contracts.
The national company “KazMunaiGaz” was made responsible for advancing Kazakhstan’s state interests in the oil and gas field institutionally. In autumn last year the company was in control of 18% of oil production in the republic, 80% of oil transportation, half of oil refining and only 6% of oil product retail sale. It was just last year that many things indicated that Kazakh President was trying to shore up the “KazMunaiGaz” Company’s positions. According to the data available, “KazMunaiGaz” is in control of 615 million tonnes of oil reserves, however the greater part of these is believed to be hard to recover; besides, the oil production peak period is over in many oilfields. Given the situation, “KazMunaiGaz” is naturally keenly interested in boosting its oil and gas assets, an objective it tried to attain through the use of state red tape, which helps adjust the earlier signed contracts.
The Kazakh authorities brought pressure to bear on the foreign companies in a bid to force the latter to accept changes to the earlier signed contracts. This was the case of the Canadian company “PetroKazakhstan”, which was compelled to pay major fines for ecological disruptions and temporarily bring the production process to a halt, until the company’s top managers agreed to sell a certain share of implemented projects to Kazakhstan. The transaction looked perfect, with the Canadians selling their business to the new owner, CNPC International Ltd., which “waived” a 33% share of the “PetroKazakhstan” oil refinery to “KazMunaiGaz” and a 50% share to the affiliated company “Kazgermunai”.
Kazakhstan’s government resorted to similar tactics against the British company “BG Group” to oust it from the North-Caspian project, and against the “Aqip KCO” consortium, which taps the largest oilfield Kashagan. Although, of course, in the case of the consortium Astana chose, in the wake of a protracted struggle amid accusations of “resource nationalism” hurled at Kazakhstan leaders, not to exacerbate the situation and meet the consortium halfway. “Aqip KCO” agreed to boost “KazMunaiGaz’s” share of the Production-Sharing Agreement from 8.3% to 16.8% for 1.78 billion dollars. Formally Kazakhstan’s claims to the consortium boiled down to disagreement with pushing back the date of industrial-scale production in the Kashagan oilfield to 2011, while simultaneously increasing the project target costs from 57 billion dollars to 136 billion dollars.
Initially Kazakhstan leaders applied much the same tactic to pursue the same objective to one of Kazakhstan’s three oil refineries, the Pavlodar refinery, which is located by the Russian border and technologically oriented to Russian oil refining. The facility was privatized in January 1997 and the government’s stake placed in management by the US CCL Oil Ltd. Company on the terms of a public-private partnership agreement. But the Kazakh government prematurely terminated the agreement a few years later and handed over a 51% stake to the OAO “Mangistaumunaigaz”. The company later brought its stock of shares to 58%, with 42% of the Pavlodar oil refinery’s stock capital owned by the state.
After that the national company “KazMunaiGaz” bought 51% of the “Mangistaumunaigaz” stock of shares from Indonesia’s Central Asia Petroleum and consequently gained control over the facility. Meanwhile the Russian gas giant GAZPROM made futile attempts to buy 49% of the “Mangistaumunaigaz” stock of shares. The Kazakh authorities have preferred China to Russia. It was reported on the 16th of April 2009 that amid the world economic crisis Kazakhstan borrowed from China 10 billion dollars during N. Nazarbayev’s visit to Beijing. The Chinese CNPC Company bought a 50% stake of “Mangistaumunaigaz” for 1.4 billion dollars. The details of the transaction remain unknown, but Astana claims that the Pavlodar oil refinery has been dropped from the deal and will now become property of “KazMunaiGaz”. But experts estimate “Mangistaumunaigaz” at 3.6 billion dollars. The company owns 36 fields, with drilling under way in 15 of those. Experts claim that “Mangistaumunaigaz” has oil reserves of 1.32 billion barrels. It is safe to assume that it is the above-mentioned Chinese loan to Kazakhstan that made Astana decide in favour of China, rather than GAZPROM, on the sale of “Mangistaumunaigaz”.
In other words, Kazakhstan leaders are ousting western partners from the hydrocarbons market and refusing to meet Russian companies halfway, while losing ground to China. Chinese companies already own a third of Kazakhstan-produced oil, or more than 20 million tonnes per year. The purchasing of Kazakhstan’s “Mangistaumunaigaz” assets by China’s CNPC further tightens China’s grip on the Kazakh oil market and weakens the positions of Russia and the West in Kazakhstan’s fuel and energy complex. China is coming to possess major resource amounts that enable it to reverse Kazakhstan’s oil strategy in Beijing’s favour. Now, Kazakhstan’s authorities’ assurances that they will seek to regain control over the economy’s fuel sector do sound hollow against that backdrop.
The second situation illustrating China’s energy policy on Central Asia has to do with a country that formally has no SCO membership; however, this does in no way restrain China’s policy of advancing towards the Caspian Sea region resources. The Central Asian country in question is Turkmenistan.
Ashgabat has long discussed the construction of a 6,400 kilometre gas pipeline from Turkmenistan to China to Japan. The construction project was due to be carried out in 10 years and was pretty costly (11 billion dollars, of which some 1.7 billion dollars would account for the sea section of the pipeline). It was possibly because of that, and also because of China’s changed energy policy in the 21st century that the easterly direction of Turkmen natural gas deliveries was sort of “updated”, namely the option for laying a pipeline to Japan was dropped, with China having been made the only terminal point of delivery.
The China National Petroleum Corporation, CNPC, and Exxon Turkmenistan (Amu Darya) Limited have for many years studied the hydrocarbon potential of the promising fields along the Amu Darya Turkmen bank. The studies aimed to find out about the economic expediency of what was then hypothetical project of an eastern gas pipeline. The geophysical study was made all over the Amu Darya right bank. A number of new gas fields, specifically in the Garagoi area, have been discovered at the approaches to the Kyzylkum desert in the year 2000.
According to the Exxon Company, the project of laying a long-haul gas pipeline from Turkmenistan to China could only prove realistic if it were used to supply 30 billion cubic metres of gas or more per year. But experts thought that the amount could also include gas from China’s western areas. Turkmenistan was to guarantee the annual delivery of 33 billion cubic metres of gas (including 3 billion cubic metres to ensure the operation of compressor stations) throughout 25 years.
The Chinese factor has been central to Turkmenistan’s foreign policy since approximately 2006. The two countries had by then signed 36 intergovernmental agreements. Turkmenistan had registered 37 investment projects involving Chinese companies, to the tune of 382.6 million dollars and 360 million Yuan.
A more important development for Turkmenistan in 2006 was the republic’s president S. Niyazov’s visit to China in early April. The main agreement in a package he signed in Beijing was the General intergovernmental agreement on the implementation of the Turkmenistan – China gas pipeline project and on selling natural gas from Turkmenistan to the People’s Republic of China in the volume of 30 billion cubic metres annually for 30 years since the time the gas pipeline was commissioned, which was due in 2009. Under the agreement the Amu Darya River right bank should be used as a resource potential area for the supplies in question, with Chinese experts to be engaged in prospecting and development jointly with Turkmen experts. However, the agreement also featured a provision whereby Turkmenistan guaranteed gas deliveries to China, if need be, also from other gas fields of the republic.
The duration of the agreement was set at three years. The People’s Republic of China allocated 200 million Yuan as a cheap loan to Turkmenistan in the framework of another agreement shortly afterwards. Two weeks after his visit to Beijing S. Niyazov ordered the setting up of a special Turkmen-Chinese cooperation Directorate at the Ministry of Oil and Gas Industry and Mineral Resources.
One year later, in summer 2007, the two countries concluded yet another agreement to make the pipeline to China a reality. CNPC was authorized to make relevant efforts in Turkmenistan and granted an operator licence for prospecting for gas and development of gas fields on land, the first ever licence that Turkmenistan has granted to a foreign company. The overall length of the new Turkmenistan-China gas pipeline will make up some 7,000 kilometres, with over 180 kilometres due to be laid in Turkmenistan, 530 kilometres, - in Uzbekistan, 1,300 kilometres, - in Kazakhstan, and over 4,500 kilometres, - in China. The overall cost of the project makes up some 20 billion dollars. 17 billion cubic metres of Turkmen gas were due to be annually exported through the development of new gas fields, while the remaining 13 billion cubic metres of annual gas exports,- through the construction of gas purification and treatment plants at the largest gas condensate field Bagtyyarlyk.
Incidentally, the Stroytransgaz Russian Company has won a 395 million-euro contract for laying the 188-kilometre Turkmen section of the gas pipeline from Malai to Bagtyyarlyk. The company will also build a plant to purify and dehydrate gas and a gas-measuring station. The construction of the pipeline got under way in 2008.
During the Beijing Olympics in 2008 Turkmenistan’s new President Gurbanguly Berdymuhamedov said the flow efficiency of the pipeline to China would be increased. The deal was made part of a special framework agreement that was signed during an official visit to Ashgabat by China’s leader Hu Jintao. The flow efficiency of the pipeline to be commissioned in 2009 is due to be boosted from an annual 30 billion cubic metres of gas to 40 billion cubic metres of gas. Unlike Kazakhstan, Turkmenistan continues to insist that all 40 billion cubic metres of gas will be pumped into the pipeline from the gas fields on Turkmenistan’s right bank of the Amu Darya River. However, it has still been unclear what Turkmenistan will charge China for its gas. Ashgabat obviously reserves the right to having the final say, in the hope that in future it will be able to play on contradictions between its trade partners who will seek to get Turkmen gas.
Nor is it clear whether Ashgabat will be able to supply the entire China-requested gas volume. The Chinese also claim the right to develop another two major projects in their own interests. The projects in question are as follows:
1. A cluster of gas fields on the right bank of the Amu Darya River, with the maximum projected gas capacity estimated at 25 billion cubic metres to 30 billion cubic metres per year. The projected capacity should be attained some time between 2015 and 2020 approximately. 12 billion cubic metres of gas are expected to be produced in the gas fields in 2010. The largest gas fields of the cluster are Samandepe and Altyn Asyr. The estimated reserves of the Bagtyyarlyk contractual area make up 1.7 trillion cubic metres; however, the figure has failed to be proven. A total of 17 gas and gas condensate fields have been discovered on the right bank of the Amu Darya River, including Samandepe and Farap (under development); Metejan, Kishtivan, Sandykty (mothballed); Akgumalam, Tangiguiy, Iljik, Yanguiy, Eastern Yanguiy, Chashguiy, Girsan, Beshir, Bota, Uzyngyi, Bereketli, Pirgyi (under exploration). The largest of these for the time being is Samandepe with the 80 billion cubic metre gas reserves.
2. The Yashlar-South Yolotan cluster of gas fields, of which the largest are South Yolotan (Gunorta Yoloten) and Osman. Turkmen geologists claim the reserves of the fields make up from 3 trillion cubic metres of gas to 7 trillion cubic metres of gas. A British company, asked to estimate the reserves, shared the opinion and actually came up with a higher figure for the gas saturated thickness. Notably, just three years ago the maximum projected gas output was estimated at 15 billion cubic metres to 20 billion cubic metres per year, but the Turkmen now claim the output in the gas fields will have reached 45 billion cubic metres of gas per year by 2020. The projected capacity is due to be attained between 2015 and 2020 approximately. 10 billion cubic metres of gas are due to be produced in 2010.
13 billion cubic metres of gas should be supplied to the Chinese pipeline from the Samandepe and Altyn Asyr gas fields, which are currently developed by the Turkmengaz Company. The Turkmen see the reserves as proved. The remaining 17 trillion cubic metres of gas are due to be supplied through the development of the gas fields that haven’t yet been opened up in the Bagtyyarlyk contractual area, where the CNPC Chinese experts work on product sharing agreement terms.
Following an explosion of the Central Asia- the Centre pipeline on the 9th of April 2009 Ashgabat decided to spite GAZPROM and include Chinese companies on the project to develop the South Yolotan deposit. It has thus clinched China’s earmarked credit of 3 billion dollars to develop the gas deposit on an industrial scale. This has largely added to the steadiness of the project to supply Turkmen gas to China and complicated the feeding of gas to Russia on reasonable terms. In early June 2009 the Turkmen President said confidently that the republic would start pumping 40 billion cubic metres of gas to China through the new pipeline by later 2009.
The pipeline to China is sharp evidence that Beijing is tightening grip on Turkmenistan. In 2006 and 2007 the Turkmen-Chinese trade turnover grew 18-fold. 30 Turkmen-Chinese joint ventures were operational in Turkmenistan as of August 2008. Chinese companies are involved in 49 investment projects in Turkmenistan to the tune of 1,284 billion dollars.
While taking part in SCO activities, China never forgets about its own interests. It has been steadily gaining access to the energy wealth of Central Asia, while ousting American, European and Russian companies from the area. This is what one should give a thought to now. All the wish-wash about the SCO future supranational currency is suggestive of the Soviet-time discussion of “forming a communist society person”. One should realize that the energy policy interests of Central Asian countries, Russia and China are far from always coincident. The SCO Energy Club has to this day failed to come up with a cooperation model that would suit all member-states. China seeks to keep up its high economic growth rates. China is currently energetically penetrating Central Asia to gain access to the local oil and gas reserves. The Chinese are simultaneously laying pipelines to transport the mineral resources in question to China’s western border.
So far there’s been no rapprochement between the SCO member-states on energy cooperation, although the concept of SCO energy policy has been under discussion for several years now. At least the latest SCO summit-approved Yekaterinburg Declaration offers nothing but “diplomatic fog” to that end. Signs are we are watching some trendy stage production.
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Source:
http://en.fondsk.ru/article.php?id=2238
http://en.fondsk.ru/article.php?id=2240
Photo:
http://gdb.rferl.org/5D9FAB62-D0C5-4C14-9CA1-7E39FCB573C5_mw800_mh600.jpg
