Cash-rich China courts the Caspian
By M K Bhadrakumar
The global downturn is spreading to Central Asia. It may lead to a marked shift
of fortune in the Great Game for control of Caspian energy reserves. On the
surface, the intensity of the rivalries may appear to have subsided, as the
principal protagonists - Russia and the West - brood over the precarious state
of their own finances and prioritize fixing their domestic economies.
But the slowing down of the Great Game bears a deceptive appearance. China
gains out of any changing equations. Of all the major economies of the world,
it is in China that the government's 4 trillion yuan (US$585 billion) stimulus
package may have begun
showing results, which puts the economy in a "better-than-expected" shape, as
Premier Wen Jiabao said on Thursday.
China's prospects as the first major economy to recover gives it a crucial role
to lead the world economy as a whole and the Central Asian region in
particular. Following up on a $25 billion loan to Russia that China dished out
in February, it has agreed to lend $10 billion to Kazakhstan. China expects
both the recipients to reciprocate by bolstering their energy supplies to
We may be witnessing the signs of a seismic shift in the geopolitics of Central
Asia. The region faces a grim economic outlook and it instinctively looks up to
China to help it figure a way out. That provides a big opportunity for China to
take the region under its wings. The implications are deep for the Caspian
In its latest regional report, the International Monetary Fund (IMF) has
projected a stark economic forecast for Central Asia. The IMF predicts that the
economic growth which stood at 12% in 2007 and 6% in 2008 will slow down to
less than 2% in 2009 as a "great recession" takes hold. A senior IMF official
said, "Until recently, the region had been awash with commodity-export
receipts, capital inflows and remittances. This had led to significant economic
gains in recent years with real per capita GDP [gross domestic product] growing
However, the conditions are deteriorating. The point is, oil and gas exporters
are heavily affected by the decline in global demand and the sharp fall in
their prices. At the same time, Central Asian countries are hit hard by the
financing constraints of the international financial markets, which translate
as difficulty in obtaining foreign capital.
At a summit meeting of the Eurasian Economic Community in Moscow in February,
Russia initiated the creation of a bailout fund of $10 billion financed by
Russia and Kazakhstan to help the economies of the member countries - Belarus,
Kazakhstan, Kyrgyzstan, Russia and Tajikistan. But the capacity of Russia and
Kazakhstan to play such lead role is in serious doubt. February seems a long
time ago already as the crisis deepens in Russia and Kazakhstan.
Russia's statistical agency, Rosstat, reported in late March figures that all
but suggest the economy is in trouble. The output of essential goods and
services declined in February by 11.6% while export earnings - of which oil and
gas exports account for the bulk - registered a 40% drop. The World Bank has
forecast a 4.5% contraction of the economy in 2009 and that it may take time to
recover. Russia has already committed $85 billion into stabilization efforts.
Russia's crisis is directly related to the sharp decline in revenue from oil
and gas exports. Energy giant Gazprom recently revised its price forecast for
the export of its gas to Europe to $257.9 per thousand cubic meters (tcm) of
gas. The price stood at $409 tcm in 2008. The Russian newspaper Vedomosti
estimates that at an average price of $260 tcm, Russia's revenues from gas
exports in the current year will work out to $44 billion, as against $73
billion last year.
The business newspaper Kommersant reported that with demand for Russian gas
declining, Gazprom faces a liquidity problem, which in turn could seriously
affect Russia's urgently needed investment program to explore new gas fields.
Russia's biggest Soviet-era gas fields are past their prime. Moscow expects
that through development of giant new fields, the decline in production can be
made up. The fields at Bovanenkovskoye on Yamal were expected to produce their
first gas by 2011, and Shtokman by 2015. But the financial crisis in the West
affects fresh investments.
Meanwhile, Gazprom's gas production is expected to decline to 510 billion cubic
meters (bcm) in 2009 from a level of 550 bcm in 2008. Thus, Gazprom may be
constrained to limit its exports to 170 bcm in 2009, as compared to 179 bcm
last year. Russia's gas shortfall seems to have set in earlier than expected.
Therefore, Central Asia's importance as a source of cheap energy has increased
for Russia. Gazprom is currently buying roughly 50 bcm of gas from
Turkmenistan, 15 bcm from Kazakhstan and 7 bcm from Uzbekistan. Central Asian
producers accounted for about 14% of Gazprom's total production last year.
However, Central Asian producers would now assess that Russia lacks the
financial resources to follow through on its commitments in the field of energy
In late March, when Turkmen President Gurbanguly Berdymukhamedov visited
Moscow, it was widely expected that the talks would result in a decision to
kick-start the so-called Prikaspiiski pipeline network expansion which was
agreed to over two years ago. The project is of immense importance for Russia
to make increased gas purchases from Turkmenistan. It involves the expansion of
the Soviet-era gas pipeline along the east coast of the Caspian Sea via
Kazakhstan to Russia. But Berdymukhamedov balked.
Beijing would have taken into account these emergent circumstances when it
signed an unprecedented "oil-for-loans" agreement with Russia on February 17.
In terms of the agreement, China Development Bank will lend $25 billion at 6%
annual interest to Russia's state-owned oil company Rosneft and oil pipeline
monopoly Transneft. In return, China will receive roughly 20 million tons of
oil annually from Russia starting from 2011 for a 20-year period. The total
volume of the Russian oil supplies within this framework is the equivalent of
about 4% of China's current consumption of oil and about 8% of China's present
imports. Rosneft receives $15 billion out of the Chinese loan.
On its part, Transneft receives the remaining $10 billion out of the Chinese
loan towards the cost of building a spur from the East Siberia-Pacific Ocean
(ESPO) pipeline originating from Skovorodino in eastern Siberia to China's
Daqing petrochemical hub. China had earlier funded the project's $37-million
The ESPO's first stage is expected to have a capacity of 30 million tons
annually and the second stage will have a capacity for transporting 80 million
tons. Transneft is expected to complete the first stage (Taishet to
Skovorodino) by the end of this year and to commence the construction of the
second stage (Skovorodino to Kazimo) in December. The entire project will be
completed by end-2010.
Clearly, the Chinese loan comes as a great relief to the two cash-strapped
Russian energy companies to realize their refinancing loans in 2009 as well as
to continue with their capital expenditures. The loan also goes to some extent
to make up for the flight of Western capital from Russia. Without doubt, China
has made a smart move.
One, it is always a wise thing to tie up long-term energy supplies. Two, the
price of the Russian oil will definitely be cheaper than the prices on the spot
market, where China buys the bulk of its imports at present. Three, China has
got Russia to deliver oil by a single-destination pipeline to China. Four,
China is reducing its reliance on Middle Eastern oil. Five, China is reducing
its dependence on the stretched-out transportation route via the Malacca
Above all, China has persuaded Moscow to commit significant quantities of its
oil away from its traditional European market. Moscow often held out the
prospect of a diversification to the Asian market, but remained fixated on the
Western market. That mindset is changing. Again, China may have at long last
galvanized an all-round energy cooperation program with Russia. Sino-Russian
energy cooperation had lately shown signs of fatigue after the promising start
during the landmark visit by then-Russian president Vladimir Putin to China in
Putin, now prime minister, had proposed to export up to 40 bcm of Russian gas
to China via the new 6,700-kilometer, $10-billion Altai pipeline. But virtually
nothing has happened on this front since then, ostensible amid squabbles over a
mutually agreeable gas price formula, while Moscow remained focused on the
European gas market. This attitude is changing.
In February, the Kremlin decided to revive the Altai project when President
Dmitry Medvedev wrote to Chinese President Hu Jintao offering comprehensive
cooperation in bilateral energy projects. Gazprom has since shown interest in
forming a gas-trade joint venture with the China National Petroleum
Corporation, which would allow the Russian firm to participate in retail gas
sales in the Chinese market as a quid pro quo for favorable pricing.
Kazakhstan, Central Asia's number one energy producer, also faces a financial
crisis similar to Russia's. Kazakh Prime Minister Karim Masimov underscored
this recently by comparing the crisis to wartime conditions, which needed a
response on a war footing. He wasn't exaggerating.
With the oil price falling to $50 per barrel as compared to $150 in July last
year, there is a severe resource crunch. Besides, Kazakhstan has reason to
worry that the crisis may turn out to be drawn out. True, Kazakhstan is
spending almost $15 billion or 14% of its GDP on stimulus packages. But the
government has nonetheless begun cutting jobs in state enterprises. A ban has
been imposed on new hirings. The initial hopes on new infrastructure projects
keeping wages stable have faded. Unemployment is rising, which is a matter of
major political concern.
In this scenario, China has responded to the Kazakh request for help. Two
agreements were signed in Beijing on Thursday during a five-day visit (April
15-19) by Nazarbayev providing for a Chinese loan amounting to $10 billion to
Kazakhstan in return for the right, among other things, to take a big stake in
the Central Asian country's energy sector. China's Eximbank will lend the
state-owned Development Bank of Kazakhstan US$5 billion. China's state-run
Chinese National Petroleum Company (CNPC) will in turn extend a $5 billion loan
to KazMunaiGas, the Kazakh national oil company.
The two oil companies also signed a separate agreement giving CNPC a 49% stake
in MangistauMunaiGas (MMG), a local oil producer. (Kazakhstan and China also
signed an initial accord to build a "road transport channel" linking western
China and Europe. Other agreements include accords to cooperate in agriculture,
education, finance and telecommunications.)
Beijing's intentions are quite transparent: China will tap its $1.95 trillion
currency reserves to buy overseas exploration rights wherever available in
Central Asia. Nazarbayev told Xinhua news agency on the eve of his departure
for China that China's role was of global significance. Its huge market,
abundant foreign exchange reserves and "effective crisis response" constitute
an "enormous support for the world economic revival", he said.
Kazakhstan is a safe investment destination, too. It holds over 3% of the
world's proven oil reserves. It received $21 billion in exploration and
production investment in 2007 before the financial crisis erupted. Curiously,
China is stepping into the purchase of MMG, outbidding Russia's Gazprom and
India's ONGC (Oil and Natural Gas Commission), both state-owned enterprises.
CNPC won the race by offering the $10 billion investment package which neither
Russia nor India could match. China evidently took a long-term view. The MMG
has estimated crude oil reserves of 1.32 billion barrels and also holds a 58%
stake in the Pavlodar oil refinery, apart from operating a chain of retail
China is not a new investor in Kazakhstan's energy sector. It already owns
Aktobemunaigas, which produces 120,000 barrels of oil per day (b/d) and China
holds 67% of PetroKazakhstan, which produces 150000 b/d. It is also an equal
partner, along with the Kazakh state oil company KazMunaiGas, in the 200,000
b/d oil pipeline from the Caspian to China's Xinjiang border.
Meanwhile, work on the gas pipeline project from Turkmenistan via Uzbekistan to
China is on target. China is financing this. The Turkmen portion of the
pipeline runs 188 kilometers and will be completed by end-2009. More than 1,200
km of the pipeline has already been laid in Kazakhstan and Uzbekistan.
It shouldn't come as surprise if Beijing now begins flexing its financial
muscles to ensure that the pipeline optimally delivers gas on China's western
border. Indeed, gas deliveries to China via the new pipeline will signify a
major diversification of the Central Asian region's gas exports away from
Russia and Europe.
Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign
Service. His assignments included the Soviet Union, South Korea, Sri Lanka,
Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.