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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

THE BIG OIL SHOCK

How China beat the West in Central Asia and helped secure its future

By Anthony Davis / Almaty


WHEN Kazakstan's President Nursultan Nazarbayev greeted Chinese premier Li Peng in Almaty's gleaming new presidential palace, the occasion amounted to more than just another in a string of top-level visits between two increasingly cooperative neighbors. For once, official hyperbole may have been understated. For Li and Nazarbayev's handshake last week sealed what promises to be China's most important economic and strategic demarche into Central Asia for decades -- if not ever.

China has won negotiating rights to exploit two of the largest oilfields in the Caspian Basin, a region some analysts believe conceals as many as 178 billion barrels of oil, making it second only to the Gulf. Moreover, Beijing has undertaken to build a 3,000-km pipeline that will play a key role in fueling China's industrial growth into the next century. Says Galymzhan Zhakiyanov, chief of Kazakstan's Agency for Strategic Resources Control: "We are talking here about a vitally important strategic super-project."

Since the fall of the Soviet Union six years ago, China has worked hard to shore up its diplomatic and military relations with Central Asian neighbors who have long harbored suspicions about Beijing's designs. In recent years China has opened borders to a trade with Kazakstan that in 1996 amounted to $460 million. It has delineated once tense borders and pushed forward with military confidence-building measures and border troop reductions.

Now it has signed off on an energy mega-project, the geo-strategic implications of which far outweigh any immediate commercial logic. The sheer scope and speed of China's Central Asian coup caught many off guard, not least its Western rivals. In June, China National Petroleum Corp. (CNPC) won a 60% stake in the privatization of Aktyubinsk (see map next page) in Kazakstan's northwest, a deal that got it two major fields -- Zhanazhol with reserves of 1 billion barrels and Kenkayak with 300 million.

Then in a surprise move in August CNPC snatched from under the noses of the favored U.S. giants the rights to negotiate with the Kazak government the rehabilitation and exploitation of Uzen field near the Caspian coast. "What surprised people was that they got both rather than either one," says Ray Leonard, vice president of Amoco Kazakstan, which lost out despite aggressive lobbying. "We knew they were strong contenders, but they played their cards very well."

China's winning flush hinged on three cards the multinational giants -- Amoco, Texaco and a Unocal-Petronas venture -- just could not match. First, the Chinese put down big up-front bonuses that the cash-strapped Kazak government desperately needs. In the case of Aktyubinsk, that meant $320 million, in addition to perhaps $4 billion to develop the field. Then they laid on the table an oil-swap deal with Iran that will allow them to ship Kazak oil across the Caspian to Iran and a refinery near Tehran. The Chinese would be credited with a corresponding number of barrels of Iranian crude that they can then export from Iran's Gulf coast. But the ace was unquestionably CNPC's last-minute offer to build a pipeline from Kazakstan to Xinjiang in western China, a 3,000-km project worth an estimated $3.5 billion that will link up with Chinese refineries either at Karamay or Urumqi -- and probably with a future pipeline from Xinjiang to the economic powerhouses of central and coastal China.

"One year ago it was ludicrous to suggest the possibility of a pipeline headed east," says an industry analyst in Almaty. Indeed, according to diplomatic sources, senior Kazaks had quietly assured the Americans that U.S. companies would win the day. Amoco's Leonard can only shrug: "The deal was made for geo-political reasons. We couldn't match either the pipeline or the agreement with Iran."

China's motives for facing down its Western opposition in Kazakstan are not hard to fathom. Once self-sufficient in oil, it has been a net importer since 1993 and today faces a widening oil deficit as demand outstrips supply. At present, China's dependency on imports amounts to only 10% of domestic production, but that figure is projected to rise to 20% by 2000 and possibly to 40% by 2010. Moreover, new fields in Xinjiang have failed to meet expectations.

Despite wariness of its potent neighbor, Kazakstan has equally compelling reasons for the deal. In a single stroke, the pipeline could ease its greatest strategic dilemma: Russia's stranglehold over its oil and natural gas deposits. A pipeline north through Russia is currently the only outlet for Kazak oil, and Moscow has not hesitated to play hard and rough with its former vassal. "Russia," says a senior Western diplomat, "has had a hard time accepting that it's no longer in control of the riches of Kazakstan." Moscow imposes a strict quota on Kazak oil of 140,000 barrels a day. Anything above that is sold to Russia at prices far below the global benchmark. When it suits them, moreover, the Russians simply turn off the tap. "There are all kinds of oil reserves out there," adds the diplomat. "But it's meaningless if you can't get it out."

Other efforts to open up oil routes have proved arduous. In 1993, Chevron signed a 40-year pact with Kazakstan to exploit the Tengiz fields. But the U.S. oil giant has been forced to move oil by barge and tanker across the Caspian to Azerbaijan. The Caspian Pipeline Consortium (CPC), a venture involving Western corporations along with Kazakstan, Russia and Oman, will carry oil west, north of the Caspian Sea. But construction has not begun.

Zhakiyanov reckons the Chinese connection could become his nation's primary oil conduit. He allows the CPC could nearly quadruple current annual oil exports to 27 million tons. "We can't afford to be oriented only toward the West," he says. "And we face competition from Russia and Azerbaijan. Possible routes to the south are politically unstable. Hence the importance to us of having a pipeline to China."

There are other benefits. Building a pipeline across the vast breadth of Kazakstan will provide tens of thousands of jobs in a country battered by severe unemployment. Then, there is a real possibility that the trans-Kazak line will link up with a Russian pipeline and so also could carry Siberian oil to China. As well, Chinese involvement in the Kazak oil industry effectvely ties Beijing into a cooperative rather than overbearing relationship with its sparsely-populated, resource-rich neighbor.

Negotiations over oil extraction and the pipeline are far from complete. And the Chinese must still put together an international consortium to build the line. But the lengthy delays that have characterized negotiations over other Kazak oil and gas deals (usually due to Russian foot-dragging) are unlikely in this case. "Both the Chinese and the Kazaks want this to go through," says a diplomat in Almaty. That probably means that within five years Kazak oil will be flowing east, binding China and Central Asia into a far closer relationship than ever before and perceptibly tilting the strategic balance in Central Asia.

-- With reporting by David Hsieh / Beijing


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