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Dec 16, 2005 | 21:13 GMT

12 mins read

Circumventing the Bear

Summary
Kazakhstan and China inaugurated their first-ever joint pipeline Dec. 15. The project is only one of a series of infrastructure projects approaching realization that will redirect regional energy flows away from Russia.
Chinese and Kazakh officials inaugurated Dec. 15 the first-ever oil pipeline to connect the two countries, a 620-mile conduit connecting Atasu in central Kazakhstan to Alashankou in western China. The project represents only one part of a massive, decade-old Chinese scheme to lock down as many of Kazakhstan's oil riches as possible — a plan that is about to come to fruition. All told, the Chinese plan aims to connect half a dozen pieces of independent infrastructure — some Soviet-built, some Chinese-built, others built by yet other entities — then reverse the flow of some of them and cobble together a new export corridor stretching from Kazakhstan's oil-rich Caspian basin through a series of western- and central-Kazakh oil zones, and ultimately into China proper. For the first time, China will have a source of imported energy not vulnerable to such pesky things as U.S. aircraft carrier battle groups.
The first phase of this project links central Kazakhstan's Kumkol fields to the Chinese network — but the real fireworks will come five years from now, when the last piece of connecting infrastructure creates a seamless, 1,800-mile link all the way to Kazakhstan's oil capital of Atyrau on the northern shore of the Caspian Sea. For now, the Chinese will be supplying the line with crude from their fields in central Kazakhstan (only recently acquired form Canadian firm PetroKazakhstan) while additional crude will be transported by rail from fields near the Caspian Sea. The new line's throughput has also been opened to third-party suppliers, who have flocked to it for the chance to sell crude directly to China. The project carries massive political implications. Once the line just finished is completely full of crude oil in May 2006, full operations will begin, with oil being shipped east at the rate of 200,000 barrels per day (bpd), ultimately rising to 400,000 bpd. At the beginning of 2005, China only imported 25,000 bpd from Kazakhstan. Once the link between Kenkiyak and Kumkol — which will connect existing infrastructure near the Caspian with the portion of the line that was inaugurated Dec. 15 — is finished and expanded, the project will likely be shipping 1 million bpd. And that likely represents only the first step in what will become an extremely deep Chinese-Kazakh partnership — for even if the line supplied 1 million bpd today, it would provide China with less than 15 percent of its crude oil needs. And this is hardly going to be the end of things. The Chinese plan to fill this patchwork project with a mix of production from dozens of sites added to their asset list during the past several years. Nearly all of this crude is oil that currently ships west or north through Russia. China is thus poised to make an end run around the Russians, and partially to pull Kazakhstan into its orbit. Russia has a number of tools it regularly uses to influence developments in the states it borders, but the Red Army aside, control over energy is its most effective. Specifically, Moscow adjusts the flows of petroleum — its own and those of producing states upstream from it — in order to "adjust" state policies more to its liking. It is a strategy that has served Russia well, keeping Europe "interested" in Russia, preventing the Central European, Baltic and Caucasian states from becoming too adversarial, and keeping the Central Asian states locked into Moscow's orbit. But it is a strategy that has one extremely problematic drawback: it generates resentment, and that resentment spurs states to find alternatives. The Russians have boasted for years that they enjoy a "strategic partnership" with the Chinese, and that Beijing is a core subscriber to Moscow's ideal of a multipolar world counterbalancing U.S. power. While the Chinese appreciate the concept in theory, however, they do not feel it wise to directly challenge the United States. Besides, in the Chinese mind, the Russians may be talking the talk, but they most certainly are not walking the walk. Enthusiastic rhetoric to the contrary, the Russians have blocked every major Chinese attempt to get involved in the Russian mainland energy industry, and have yet to build a pipeline linking Russian Siberia to northeastern China. Instead, Moscow is playing China off against fat-checkbook-toting Japan in a bidding war. Frustrated with the lack of progress, desperate for energy and wanting a partner that is both less flighty and more malleable to Chinese influence, Beijing turned to the Kazakhs, who were also a bit concerned about their northern neighbor. Throughout the 1990s as Kazakhstan attempted to break into the international oil markets, the Kazakhs found themselves constantly thwarted by Russian opposition. All of their export routes were Soviet-built, and thus connected Kazakhstan to the outside world via Russia. Russian state firms — most notably natural gas monopoly Gazprom and oil pipeline monopoly Transneft — jealously guarded access to their pipes, and were particularly hostile to the idea of "alien" petroleum in their networks. To the Russian mind, petroleum output in Kazakhstan was a threat in and of itself because it might give the former Soviet republic the financial wherewithal eventually to get out from under Moscow's thumb. Gazprom even went so far as to secure for itself a share in Kazakhstan's Karachaganak oil and natural gas project in order to ensure the Kazakhs did not go anywhere. It took the rest of the consortium years to eject the Russian monkey wrench. Currently, Transneft is making it difficult for Kazakh governmental entities to ship crude via the Russian network, in order to eliminate any chances of Kazakhstan bidding on the Mazeikiu Nafta refinery in Butinge, Lithuania, expected to go up for sale soon. Other firms and consortia attempted to bring the Russians into the system, with the largest case being the Chevron Corp.-led Tengizchevoil consortium. After years of debate and pain, Tengizchevoil formed the Caspian Pipeline Consortium (CPC), which constructed a pipeline from its fields on the Caspian's northeastern shore to the Russian port of Novorossiysk on the Black Sea. But even here, simply maintaining the operation has been described by those involved as a "constant pain in the ass." Russian authorities — partially at Transneft's behalf — have continually plagued the line with shifting tax and regulatory structures and with lawsuits, particularly from the ironically named "Anti-Monopoly Ministry." As such, most members of the CPC group have decided to not pursue future expansions of the CPC line, and instead to throw their weight behind alternatives explicitly excluding Russian territory and partners. Note that this means exclusion of Russian partners in terms of infrastructure, not in terms of clients. While Transneft, Gazprom and the Kremlin are all hostile to alternate export routes bypassing Russia, Russian oil-producing firms are not. Fully 10 percent of the crude that fills the CPC, for example, originates in Russia. Even more notably, the bulk of the crude contracted to fill the Kazakhstan-China line will come from Russian Siberia, tied into the new China link via a Soviet-era pipeline. In fact, none other than Russian state oil firm Rosneft plans to use the new Kazakhstan-China line to fulfill some of its delivery contracts to China, because existing Russian infrastructure is limited to more expensive rail links. Rosneft's use of China's new connection to Kazakhstan makes a great deal of sense from an economic point of view, even if it is extremely awkward politically.
And there is far more going on than simply the new China link. By far the biggest Russia-bypassing project is the Baku-Tbilisi-Ceyhan (BTC) pipeline, originally designed to ship Azerbaijani crude to the Mediterranean. In its original incarnation, the economics of the deal were a bit sketchy. The route over the Anatolian mountains was longer and more expensive than competing routes north through Russia or south through Iran. As such, many outsiders — we among them — have consistently opined that BTC was part of a broader effort to draw the states of the Caucasus and Central Asia away from Russia and Iran. This chorus increased in volume once initial estimates of Azerbaijani oil reserves proved overoptimistic. But as Russian complications mounted in Kazakhstan, many Kazakh producers decided it would be in their best interests to ship their crude via tanker across the Caspian to Baku, Azerbaijan, for loading into the BTC line. That eagerness to avoid Russian options has increased to the point that there is now talk about expanding BTC far beyond its initial planned maximum capacity of 1 million bpd. The Kazakh government — which plans on supplying the project with 145,000 bpd of crude when the line enters operation in January 2006 — now says that by 2016 it would like to supply it with some 760,000 bpd, three-quarters of its total capacity. Much of that additional output would come from the as-yet-undeveloped Kashagan field in the Kazakh sector of the Caspian Sea, which alone is expected to produce at least 1 million bpd. Within two years, the two projects — the China line and BTC — should be transiting a combined 1.2 million bpd. Currently, combined exports from Azerbaijan and Kazakhstan are only 1.4 million bpd. This hardly means that there will be no crude oil moving through Russia. Far from it — now that Kazakhstan has access to more reliable export corridors, interest in and output from its fields will jump sharply. That output will need an outlet, and as Kazakhstan grows as an energy supplier, Russia-bypassing infrastructure will become a limited commodity. Via CPC, Tengizchevoil has a pipeline that on a good day can pump 550,000 bpd, and the 350,000 bpd line connecting the Kazakh oil capital of Atyrau to the Russian network at Samara will similarly maintain robust flow. Nonetheless, the trend towards minimizing Russian participation is not only entrenched, but so far proving remarkably successful. Russian efforts alternatively to sabotage or to monopolize the region's oil output have directly led to the soon-to-be shunting of most production away from Russia by the Kazakh-China and the BTC lines. For Russia, this is not simply about lost prestige or transit revenues — it is about a multinational effort to peel the entire region away from Russian economic influence. It is a story being retold across the entire former Soviet space. China is unofficially populating the Russian Far East with its people, NATO has wholesale admitted much of the former Warsaw Pact — most of which is now in the European Union as well — and Ukraine, Moldova, the bulk of both the Caucasus and the Balkans are all working to ingratiate themselves into the West and insulate themselves from the Russian Bear. Russia cannot afford to fall much further. And recent changes in Russia indicate a long-absent effort to check Russia's fall using relatively pragmatic means. Luckily for Moscow, it has options for dealing with these new infrastructures. With Kazakhstan, Russia's tool will hit with the force of a sledgehammer. While the Central Asian state has experienced abundant successes in rerouting oil exports, it has no means of rerouting natural gas — currently all its natural gas export roads lead to Russia. While these natural gas exports are not even a shadow as important to Astana as its oil exports, the point is that Russia still has ways of triggering Kazakh migraines — and without even tinkering with private Russian firms' ability to access the new China route. Options are far more surgical in working against the BTC. Specifically, the BTC travels within a few miles of Abkhazia and South Ossetia, two secessionist enclaves of Georgia. Both regions owe their de facto independence to Russian patrimony, and were Russia to get serious about putting the BTC on ice, it would use those enclaves to tighten the screws. And unlike its trepidations about permanently alienating Astana, Moscow could not care less what Tbilisi thinks of it. If Russia is going to do anything, it will need to do so before what was once a BTC pipe dream becomes a reality. For once the world becomes used to the BTC supplying it with copious amounts of oil — which is to say, by the end of 2007, when the pipeline is expected to reach its maximum capacity of 1 million bpd — any interference with the pipeline would bring immediate and wholesale international attention. That means that if Russia is to use underhanded means to counter this new threat without risking international condemnation, it needs to do so within the next 12 months — well before the world has a chance to get used to digesting BTC oil. But Russia's real problem is that all of these actions have consequences. Pressuring Kazakhstan will only prompt it to link to the West and China more enthusiastically as it will quite logically see Moscow-Astana relations collapsing under Russian pressure tactics. Damaging the China route's prospects — even if only by reducing the flow of private Russian firms' oil through it — will also arouse ire in Beijing. And sabotaging the BTC will hurt the interests of BP Amoco PLC, the single Western company to pour money — tens of billions of dollars no less — into the Russian economy.

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