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Wednesday, 20 May 2009

CHINA’S RECENT CENTRAL ASIAN ENERGY MOVES

Published in Analytical Articles

By Stephen Blank (5/20/2009 issue of the CACI Analyst)

China has exploited the current global economic crisis to intensify and accelerate its previous strategy for obtaining energy security and political influence abroad. Exploiting other countries’ and firms’ distress, using its enormous cash reserves, and benefitting from the fact that its economy appears to be less adversely affected than others have been, China, through its oil companies CNOOC, CNPC, Petro China, SINOPEC, or through governmental agencies, is either lending afflicted firms and countries money to obtain long-term contracts, access to energy, and other comodities at below market prices if possible, and at the current low market prices where necessary.

BACKGROUND: China’s tactics are not new.

China has exploited the current global economic crisis to intensify and accelerate its previous strategy for obtaining energy security and political influence abroad. Exploiting other countries’ and firms’ distress, using its enormous cash reserves, and benefitting from the fact that its economy appears to be less adversely affected than others have been, China, through its oil companies CNOOC, CNPC, Petro China, SINOPEC, or through governmental agencies, is either lending afflicted firms and countries money to obtain long-term contracts, access to energy, and other comodities at below market prices if possible, and at the current low market prices where necessary.

BACKGROUND: China’s tactics are not new. Rather, they are the same tactics that China has successfully employed earlier. But presently, they have much greater effect given the current crisis and the availability of so many properties from countries and firms afflicted by the crisis.

China’s economic activities abroad during this crisis are not tied exlcusively to Central Asia or to energy alone. But its most striking recent moves have occurred in the energy sector. China’s Export-Import Bank is lending the state-owned Development Bank of Kazakhstan $5 billion, and CNPC is lending Kazmunaigaz National Co., Kazakhstan’s state-run gas giant, another $5 billion. Moreover, CNPC is buying a 49 percent minority holidng in Kazakhstan’s AO MangistauMunaigaz company from KazMunaiGaz. This deal enables Kazakhstan to continue its robust pace of exploration for oil, which finances its overall development plan whose long-range aim is its comprehensive economic diversification and modernization. Having received an estimated $21.1 Billion in 2008 in investment for exploration and production, it needs to keep that up during this crisis to prevent an even more severe economic contraction. Kazakhstan's state news agency Kazinform said the $5 billion loan would help pay for the MangistauMunaiGaz deal and the construction of the Beineu-Bozoi-Akbulak gas pipeline, which will serve southern Kazakhstan. Thus Kazakhstan’s need for capital and reliable export markets plays into China’s strategy, and China’s victory was clearly facilitated by its deep pockets and cash reserves. But China’s actions do not break with past Sino-Kazakh relations. Indeed, according to Kazakhstan’s President Nursultan Nazarbayev, at least since 2006, “economic cooperation has become the major motivation pushing the overall development of the Kazakhstan-China relationship.”

Nevertheless, this deal exemplifies the way in which China can now exploit the stricken condition of countries like Kazakhstan whose banking system is all but insolvent, and where foreign investment has fallen by half since 2008. Indeed, this deal gives China control over about 15 percent of Kazakhsan’s total oil output, while other Chinese firms have already been there for some time. Furthermore, Kazakhstan’s national nuclear power company, Kazatomprom, has begun mining uranium fields in southern Kazakhstan in a joint venture with Chinese nuclear power companies. Terms of the deal also call for Kazakhstan to provide China with more than 24,000 tons of uranium by 2020. More recently, the China Guangdong Nuclear Power Group (CGNPG) and Kazakhstan’s state nuclear agency, Kazatomprom, have agreed to form a joint enterprise that would build atomic energy stations in China. Thus, Chinese Prime Minister Wen Jiabao recently outlined a four point proposal for enhancing bilateral partnership that emphaiszed first of all maintaining the growth of bilateral trade, and second, fulfilling previous agreements and giving priority to cooperation in the energy and resource sectors. Then comes cooperation in investment and finances to ensure the smooth implementation of construction projects. Finally, both sides are to promote cooperation in infrastructure.

Apart from lending Kazakhstan money, China is also building power plants in Tajikistan and Kyrgyzstan and pipelines in Turkmenistan that will then go on to Uzbekistan so that it can buy gas from these countries at affordable prices. It also is mining iron ore in Kyrgyzstan from what is apparently Asia’s largest source of iron. Not surprisingly, the Kyrgyz government is encouraging further Chinese investment in its coal mining, non-ferrous metals, precious metals, and infrastructure sectors. Kyrgyz officials also want China to import electricity from the Kambarata power station that Russia is building in order to prevent surplus capacity and under-production. Buying hydropower makes sense for China, which has increasingly been pledging infrastructure assistance and cash to Central Asian states through the SCO, e.g. helping Tajikistan build dams and roads. Moreover, China can become a handler or middleman, e.g. wiring Central Asia into Pakistan and Afghanistan and picking up huge transit and construction fees. Likewise, in the past few years China has invested heavily in Afghanistan’s energy and mineral resources, which it has found to be abundant, with a view to building pipelines either directly to China or possibly through the port of Gwadar and Pakistan to China.

IMPLICATIONS: China thus secures the long-term access to energy and commodities it wants at low prices, gains equity access to those energy fields or pipelines, and also obtains considerable influence and political leverage over the host government. In return, it allows these distressed firms to gain capital and access to China’s consumer market, whose energy demand remains robust. Indeed, China’s total oil imports hit a one year high in March 2009, indicating continuing strong demand. China thereby engenders a mutually profitable but dependency-inducing long-term relationship with these energy providers and their governments. The instruments of China’s energy strategy are its major energy firms, banks, and state lending agencies and they clearly work together given the size and scope of recent acquisitions across the globe.

China’s actions also bear all the earmarks of a global strategic plan of action for China to use its economic power to secure unchallengeable positions in Eurasia and elsewhere. Even though China’s national oil and energy companies do not always see eye to eye with the government, and even though much of the oil fields they buy produce oil that does not go to China, the confluence of energy buyouts of foreign assets and state lending to those governments as well as the breadth and duration of China’s actions over time clearly indicates a considered policy and strategy. China’s global shopping spree also reflects its persisting belief that it cannot ultimately rely upon the market to deliver energy, its determination to strike now while the iron is hot in terms of acquiring distressed properties, and its efforts to implement its concept of energy span>

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