Chinese-Central Asian relationship requires delicate balancing act

It would appear to be a match made in heaven. China, in order to fuel its economic ambitions, has moved quickly to snatch up Central Asian resources. Central Asia, looking to upgrade its aging infrastructure, has increasingly opened itself up to Chinese investment.

Chines and Turkmen workers celebrate the inauguration of the natural gas pipeline running from Turkmenistan to China.
But while everything appears to be going swimmingly, the idyllic arrangement is not likely to last for long. This is because Central Asian states work alone in wooing the Chinese, which plays to Beijing's strength in bilateral dealings. But the cross-border networks it aims to build require a diplomatic balancing act that China lacks experience to pull off.

A shortage of energy resources is the main threat to China's economic ambitions, leading Chinese companies to sign contracts for energy imports around the world.

Jennifer DeLay, editor of the Edinburgh-based “FSU Oil and Gas Monitor,” says that while the pace of China's economic growth has slowed amid the global financial crisis, "it certainly hasn't reversed." She says China's economy is set to keep growing, requiring more energy, and that gas imports in particular are expected to increase dramatically in the coming years.

DeLay said China is already consuming 4.1 million barrels of oil daily, and just over half of that (51.8 percent) is imported. Natural gas imports account for only 11 percent of current consumption, but are set to increase greatly as China replaces coal with gas.

China's southern neighbors either don't have much to offer, or, in the case of Vietnam, relations are not at a stage where oil imports are up for discussion. DeLay notes that there are plans to build oil and gas pipelines from Myanmar to China, but those won't be operational until 2012. With the shortage of direct land routes, China is largely dependent on sea routes.

"The statistic I've seen is that as of January this year, foreign tankers account for about 80 percent of all the oil imported into China," DeLay says. As for natural gas, "again it's very much a majority. China is working to build up an LNG [liquefied natural gas] fleet so that it can import its own LNG, but they don't have it yet."

Fortunately for China, its western neighbors -- the Central Asian states of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan -- have vast energy resources, leading Beijing to court them heavily since the collapse of the Soviet Union.

Long Courtship

It started with confidence-building agreements along the Sino-CIS border in April 1996 that involved China, Russia, Kazakhstan, Kyrgyzstan and Tajikistan. The group evolved, adding Uzbekistan and taking on an economic and security dimension.

The grouping now called the Shanghai Cooperation Organization (SCO) has enabled China to penetrate deeply into Central Asia's energy resource market in little more than a decade.

The China National Petroleum Corporation (CNPC) signed its first major Central Asian contract with Kazakhstan in 1997. The two parties agreed to build a 2,238-kilometer oil pipeline from western Kazakhstan to China, which has now started operating. A gas pipeline from Turkmenistan to China started operating in December 2009.

"China is currently connected by pipelines to only two countries," DeLay says. "Turkmenistan for gas -- and that pipeline just began operating last December -- and Kazakhstan for oil. That pipeline has been operating since 2006."

These two pipelines receive much attention and by themselves are sufficient to show China's growing influence in Central Asia, but China's interests in Central Asia go much further and involve every country.

Energy Exploration

The CNPC is helping to explore and develop oil and gas fields in eastern and western Uzbekistan, including in the Aral Sea. China Investment Corp bought a 14.5 percent stake in Kazakhstan’s KazMunaiGaz Exploration and Production last year, paying $939 million.

Besides the Turkmenistan-China gas pipeline that started operations last December, PetroChina is helping build another gas pipeline to ship some 12 billion cubic meters (bcm) annually from western Kazakhstan to the Chinese border. In Turkmenistan, the CNPC is the only foreign company that can boast of having an onshore contract to explore for energy.

Just over the border from where Chinese workers in Turkmenistan are developing gas fields, the possibility of China helping develop gas fields in northwestern Afghanistan is under consideration. During Afghan President Hamid Karzai's recent visit to China, the project not far from where the Turkmenistan-China gas pipeline starts was discussed.

Not wishing to rely solely on pipelines to import Central Asian oil and gas, China has embarked on ambitious railway projects. Chinese company HPGI, created specifically to build rail lines between China and Kazakhstan, has plans for 21 new rail lines, eight solely for transporting oil and liquefied natural gas, or LNG.

There are also plans to build a China-Kyrgyzstan-Uzbekistan rail line that would end in the eastern Uzbek city of Andijan, near where the CNPC is developing Uzbek oil and gas fields.

Central Asia needs to upgrade its electricity systems and China's Tebian Electric Apparatus is building 220-kV and 500-kV power transmission lines and substations in Kyrgyzstan and Tajikistan. China's XD Group is modernizing and reconstructing the electricity system for the Uzbek capital, Tashkent.

Chinese companies are also involved in Central Asia's hydropower projects. China's Sinohydro is helping build the Nurobad and Shurob hydroelectric power plants (HPP) in Tajikistan as well as modernizing the Kayrakkum HPP.

Tebian is building three more power plants in Tajikistan, which paid the Chinese company by giving it rights to mine gold, silver, copper, tungsten, mica, and gemstones in the Pamir Mountains. Other Chinese mining companies are also working gold deposits and looking for uranium and rare earth elements in Tajikistan.

China is also looking to increase its civilian nuclear power potential, and there too it can find the resources it needs in Central Asia. The China National Nuclear Corporation and China Guangdong Nuclear Power Corporation own shares in Kazakh uranium mines, and have contracts to buy uranium from Kazatomprom. In Uzbekistan, a subsidiary of the China Guangdong Nuclear Power Corporation is jointly prospecting for black-shale uranium in Navoi Province. Sinosteel is prospecting, with Australia's Monaro Mining, for uranium in Kyrgyzstan.

Chinese companies are also constructing or improving roads leading from Kyrgyzstan and Tajikistan to China, Chinese workers are building a tunnel Tajikistan, and Chinese-made goods can be found at every Central Asian bazaar.

Dangerous Liaisons

The arrangement looks fantastic on the surface. China receives a major portion of the energy resources it needs as long as Beijing finances the development of the oil and gas fields, uranium mines, infrastructure, and import-export routes. Central Asia gets a steady customer who not only pays on time, but is actually constructing the means for the five countries to export their raw materials.

But while China may be a rising world power, its experience in international mediation is limited and Central Asian regional politics are full of potential pitfalls. China holds a permanent seat on the UN Security Council, but is rarely involved in talks aimed at resolving conflicts, the situation with its neighbor North Korea being a notable exception.

On the business end, DeLay says, China has long preferred to keep its business deals on a bilateral level with one foreign partner. Many of the agreements China has worked out in Central Asia follow this model, she says, but geography dictates that Beijing engage in multilateral dealings as well.

For example, the gas pipeline linking China to Turkmenistan passes through Uzbekistan and Kazakhstan. A rail project linking Uzbekistan to China will go through Kyrgyzstan, requiring Beijing to find common ground with two feuding neighbors.

John MacLeod, the head of Central Asian programs at the London-based Institute for War and Peace Reporting, says that in recent years, “there's constant talk about various kinds of regional economic structures, but they never work out.”

“Even things like simplified customs rules, and even visas for citizens, are constantly a problem because practical things are often tied up with politics and very often with the kind of very individualistic stances of each set of leaderships, who feel that their country is preeminent and they don't want their interests to be encroached upon by the others,” MacLeod says.

NATO just saw an example of such regional complications. When Uzbekistan recently halted train traffic bound for Tajikistan, supplies headed for Tajikistan and then on to NATO troops in Afghanistan were held up. Tajikistan and Uzbekistan have never had good relations, but ties are particularly strained amid a dispute over Tajikistan's hydropower plans, leaving Uzbekistan worried it will be left with water shortages.

MacLeod said such incidents highlight the likelihood of breakdowns in China's regional balancing act.

"You have this history of rocky relationships and less than perfect cooperation, so simply managing this new conduit through all their territories could throw up all those problems,” MacLeod says. “You could have a situation where a simple dispute about the division of transit fees -- say, between the Uzbeks and the Kazakhs -- could escalate into something worse given this kind of difficult political relationship.... What is effectively a business dispute over money suddenly takes on this political aspect."

MacLeod notes that the Chinese have worked to ensure these multilateral deals in Central Asia benefit all the parties involved, and cites the Turkmenistan-China gas pipeline as an example.

"The Chinese are trying to mitigate that risk by giving each of the players, particularly the Uzbeks, a stake in it by holding out the prospect that they too can export some gas down the pipeline," he says.

The Central Asian states’ reasons for allowing the Chinese so far into the region are clear, MacLeod explains.

"Only China will put in money into things that are not necessarily immediately commercially valuable -- like roads in Tajikistan, like developing oil and gas in Uzbekistan -- where other...commercial players would be more faint-hearted because they know about the kind of terrible legal problems you can have operating in a country like that,” MacLeod says. “So the Chinese are in it for the long game.”

He continues: “The Central Asians appear to be just not thinking about...the big politics and hoping that the Chinese are simply a kind of an investment bank that they can deal with."

This may leave a traditional suitor, Russia, out in the cold. Before the global economic crisis, the Kremlin was spending a lot of the revenues it was receiving from oil and gas sales on projects in Central Asia. But the economic crisis hit Russia hard, leaving financially secure China a free economic hand in Central Asia.

MacLeod said Moscow is putting on a brave face, but cannot be happy with the way things are shaping up in Central Asia.

"I think to an extent the Russians have accepted the Chinese economic expansion in terms of investment and energy exploration in Central Asia as a fact,” MacLeod says. “They may not like it. but they're saying that they're perfectly happy and that it meshes well with their own interests. But of course, to an extent, it doesn't.”

He explains: “Currently Russia -- the Kremlin, through Gazprom, the huge energy company -- has de facto control of the pipeline network coming out of Central Asia. And although Kazakhstan is obviously an independent oil exporter...Russia has a huge say in what happens, especially if there's turbulence at the political level."

Copyright (c) 2010. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.