Chinese Energy Diplomacy in Central Asia

China is an unparalleled giant, both in terms of energy and population. It became the world's largest energy consumer in 2010. Similar to the rest of the world, it suffered from the 2008 financial crisis, but the impact was minimal, only slowing down its growth rate.
 
In contrast, most countries in the European Union witnessed a contraction in their economies, with some enduring a double-dip recession. The Chinese economy, buoyed by a huge trade balance, continues to steadily grow. This growth is, however, dependent on finding the energy resources to power more than a billion inhabitants' homes and workplaces.
 
It was 20 years ago that China became a net oil importer. Before that it was able to meet its domestic energy demands through its own natural resources. With its tremendous economic growth spurt, its energy demands have grown year-on-year. Due to this requirement, China has looked to have oil and gas producers satisfy its needs. Quite naturally, neighboring countries have been the first port of call. Given the fact that China shares a border with Russia, which possesses the world's largest natural gas reserves and is the second largest oil producer, energy relations with Moscow have been at a premium.
 
Another western neighbor, namely Kazakhstan, has also featured prominently in Beijing's energy milieu. Kazakhstan's Central Asian neighbors have also attracted the attention of China, especially Turkmenistan, which holds fourth place in terms of the world's largest natural gas reserves. Since the end of the Cold War, discussions, negotiations and finally, agreements were made to import oil and gas from the Russian far east, as well as from the Turkic states of Central Asia. China has been more than willing to fund the infrastructure projects required to physically transport the natural resources from their point of origin to Chinese territory.
 
Due to rising energy needs, China has looked to many other countries as sources from which to import energy, either intentionally or due to necessity. This policy of diversification has dampened concerns related to energy security. The past decade-and-a-half witnessed greater amounts of Middle Eastern oil being transported to China. One of the fears in such an energy relationship has been qualms about the actual transportation of oil to Chinese ports. Whether China likes it or not, it too has been reliant, like all other countries, on the effectiveness of the United States Navy in keeping the sea lanes open for all maritime transport.
 
Galkynysh gas and Kashagan oil
 
The benefit of importing oil and gas from the Turkic states is that there is no requirement to transport them by sea since they can flow through newly constructed land-based pipelines. Chinese President Xi Jinping took a long official tour of four Central Asian states last month to examine possibilities to maintain a steady supply and to increase volume.
 
The visit was intended to promote regional trade and security, but the primary item at the top of the agenda naturally concerned energy. Over the last two decades or so, China has been transforming its economic relationship with the region, consistently exporting more manufactured goods and importing increasing amounts of oil and gas in return.
 
President Xi began his tour in gas-rich Turkmenistan, where more than a dozen agreements concerning bilateral cooperation were signed, a move that has been termed by some observers as reaching a "new strategic level." The Chinese have been encouraged by the Turkmen government and financially supported the development of Galkynysh, the second largest gas field in the world. The Turkmens welcomed the opportunity to export more gas eastward and agreed to increase their gas delivery to China from the Galkynysh field by 25 billion cubic meters annually. This will be made possible through the construction of an upstream complex, the second stage of which should be finalized in five years' time. Financing for this project will come from the China Development Bank, which has a record of generosity in offering low interest loans to build pipelines in particular. Primarily due to the energy relationship, Ashgabat has become China's biggest foreign supplier of natural gas and China has become Turkmenistan's largest trade partner, with trade turnover having crossed the $10 billion threshold last year.
 
The second country to be visited was neighboring Kazakhstan, where almost two dozen agreements estimated to be worth $30 billion were signed in the sectors of agriculture, transport and construction as well as energy. The development that naturally attracted the most attention concerned the official agreement for the Chinese National Petroleum Corporation (CNPC) to acquire an 8.33 percent share in the Kashagan offshore oil project for an estimated $5 billion. Incidentally, Kashagan is the largest oil field discovery the world has witnessed in the last three decades.
 
US energy giant Conoco Phillips announced last November its desire to release itself from the project and to sell its shares, in which India's Oil and National Gas Corporation (ONGC) had expressed interest. The Kazakh energy giant KazMunaiGaz preferred to partner with CNBC; thus it will be the Chinese who will finance half of the second development phase of Kashagan after 2020, estimated to cost approximately $3 billion. Just days after the visit, the oil facilities at Kashagan began production and, despite some minor problems that were quickly resolved, production has continued according to schedule.
 
During his visit to Astana, the Chinese president made a pledge to work toward a "Silk Road economic belt" that will boost multilateral trade, encourage further investments and improve regional infrastructure by providing more interconnections. Both countries were satisfied with the agreement to produce oil from the eastern Caspian oilfields and transport it further east to China, which will naturally boost bilateral trade. In terms of trade, total turnover is reaching the level of $25 billion and is forecast to reach an impressive $40 billion in the next two years.
 
The third stop was to Uzbekistan, where $15 billion worth of contracts in the energy sector were signed, with both countries agreeing to extend the China-Kyrgyzstan-Uzbekistan pipeline all the way to the eastern gas fields of Turkmenistan. Uzbekistan-China bilateral trade is not in the same range as Turkmenistan or Kazakhstan, having barely reached $3 billion in 2012. This year however, it has picked up considerably as it has almost reached last year's figure in the first six months of 2013. Related to this, President Xi expressed his desire to increase bilateral trade to $5 billion in the next four years, which is highly likely, given the fact that China is already the largest foreign investor in Uzbekistan.
 
The fourth country visited was Kyrgyzstan, where the Chinese president attended the Shanghai Cooperation Organization (SCO) summit held in the capital, Bishkek. Investment agreements worth $3 billion were signed between the two countries, focusing primarily on healthcare, transportation and energy. Due to Kyrgyzstan's size, the total trade turnover with China is less than $1.5 billion a year, although it has increased to more than $2.2 billion for the first half of this year, making Beijing Bishkek's second-largest trading partner. On the sidelines of the SCO summit, President Xi met with Tajik President Emomali Rahmon and they agreed to construct a pipeline crossing Tajik territory for almost 400 kilometers to transport Turkmen gas to China.
 
Attractiveness of Turkic states
 
One can see from these bilateral agreements that China considers Central Asia to be a much more preferable region from which to import energy. Given the fact that energy is centered on a land-based supply, it becomes a desirable choice given the alternative of maritime transportation from the Middle East. Due to this important factor, some analysts predict that within the next 15 years or so, Central Asia could provide up to a one-tenth of China's total energy requirements.
 
What the president's trip highlighted was the fact that China has chosen to be involved in the extraction dimension of natural resources as well as the purchasing side. Beijing has been interested in and increasingly involved in participating in exploration and extraction, as well as funding the development of pipelines so that they can be connected to the wider national Chinese network. Therefore, the participation of CNPC in the Kashagan oilfield is a highly significant step, given the fact that it is the largest oil field outside of the Middle East.
 
When evaluating the recent visit and as the previous orientation of China toward Central Asia, it is clear to see that Beijing believes the Turkic states provide an opportunity to increase its energy security through diversifying its energy imports. In this vein, it must also be recalled that Russia, the biggest energy player in Eurasia 10 years ago, signed an agreement with China to initiate the East Siberian Pacific pipeline to be run by the Russian oil pipeline monopoly Transneft, which declared in late July that it had planned to boost annual capacity by 80 percent in five years' time.
 
China's interest in importing oil and gas from Turkmenistan and Kazakhstan has also made these two countries quite content, as they are also able to diversify their export markets. In the immediate aftermath of their independence, most analysts believed that they had no alternative but to export to the West, primarily to the European Union, through the old Soviet pipeline system. In fact, that was what highlighted the first decade of their energy policy.
 
Today, however, given the fact that there is a major energy importer from the East demanding more and more natural resources, as well as the growing interest of the European Union in the West to acquire more Caspian oil and gas, these are naturally very welcome developments for both Ashgabat and Astana. If energy prices remain high -- and there is no evidence to counter this likelihood -- then the near future promises higher rates of economic growth and greater standards of living for Turkmenistan and Kazakhstan.