Caspian oil exports heading east

Posted in China | 10-Feb-05 | Author: Alexander Sukhanov| Source: Asia Times

ASTANA - Construction of the Kazakhstan-China pipeline is set to start in March, ushering in an ambitious project that not only will provide a new source of hydrocarbons to the growing Chinese economy, but also will change the oil balance in the region.

The idea of building a direct pipeline route from Kazakhstan to western China had been under discussion for some time. An agreement, reached at the highest political level between China and Kazakhstan, was finally achieved in 1997. But since that time concrete details of the project have caused many disagreements, and for this reason it did not appear in the Asian oil arena. However, now the Kazakhstan-China pipeline is about to become a reality that other energy players must consider.

The pipeline will extend 988 kilometers from the Kazakhstan oil terminal in Atasu to the Chinese railway station in Alashankou. Its carrying capacity will be 10 million tons a year at the first stage, then will increase up to 20 million tons at the second stage and could even reach up to 50 million tons in the long term. Construction should be completed at the end of this year, and Kazakhstan hopes to begin the first deliveries of oil in 2008.

Kazakhstan has long been interested in the pipeline, which will become its first export route passing through Russian territory. Besides giving it export independence, the pipeline will provide Kazakhstan with about US$700 million in investments. China has activated the project because its fast-growing economy has begun to feel the sharp deficit of energy resources. According to forecasts, by 2020 the country's demand for oil could reach 400 million tons annually. At present, China imports 80 million tons of crude oil a year. Of course, the new supply of oil from Kazakhstan cannot fully satisfy the huge Chinese economy. But the new pipeline can promote the goal of changing the oil balance in the region.

The main question now is where the oil for the pipeline will come from. This responsibility has been assigned to the Chinese National Petroleum Corp (CNPC), which is already conducting negotiations. Supposedly, the basic source of oil will be the deposits of the Kumkol group (which are developed by Hurricane-affiliated PetroKazakhstan company), in the southwest of Kazakhstan. Aside from this, Kazakhstan has already made an offer to Russia to transport through the new pipeline its Siberian oil. Such an offer is possible, technically, as the Kazakh oil terminal at Atasu incorporates the Omsk-Charjou pipeline going from western Siberia through Kazakhstan to Turkmenistan.

However, such a variant looks not absolutely convincing. By calculations, the Kazakhstan-China pipeline will be profitable only if it transports no less than 20 million tons of oil a year. About 10 million tons a year, with the prospect of growth up to 12 million to 15 million tons, are to be extracted on Kumkol group deposits, thus their export potential now does not exceed 7 million tons. As for Russia, it has not yet given its consent to participate in using the pipeline.

Therefore, according to expert opinions, the main stake will actually come from the giant Kashagan deposit on the Caspian shelf. Kashagan is the largest oilfield discovered in the world in the past 20 years. Industrial oil extraction there should begin in 2009 and by 2010 it could reach 22.5 million tons. Realization of the Kashagan project is conducted with an international consortium that includes ExxonMobil, British Gas, ConocoPhillips, Royal Dutch/Shell, Total and Inpex. CNPC already tried to join the project by buying British Gas' share (16.67%). But it has failed to get the consent of the consortium participants. Now the Kazakh government has plans to make a similar deal. It has already reached an agreement with British Gas and the international consortium, now it is necessary to define only the size of British Gas's share to sell. Experts explain the coincidence of interests of China and Kazakhstan to a share in the Kashagan project with another common interest in the Atasu-Alashankou pipeline.

Meanwhile, the transportation of Kashagan oil to China could affect the work of another export route - the Caspian Pipeline Consortium (CPC). This pipeline, from the Caspian Sea to a Russian port on the Black Sea, already has a problem with insufficient loading. Despite this, CPC owners have made the decision to expand the pipeline's capacities from 28 million tons a year up to 67 million tons based on expectations on Kashagan oil.

Another route that could suffer is the Baku-Tbilisi-Ceyhan (BTC) pipeline, with a carrying capacity of about 50 million tons a year. It will connect oil-rich Azerbaijan with the Ceyhan Turkish port on the Mediterranean Sea and will begin operating in the near future. The BTC pipeline will be economically effective for the transportation of not only Azerbaijan, but also Kazakh oil, which is supposed to be delivered to the Azerbaijani capital Baku in tankers moving through the Caspian Sea. BTC shareholders have decided to increase capacity of the pipeline also based on expectations from the same Kashagan oilfield. But instead of this, they can lose a part of the Azerbaijan oil. Instead of using the BTC pipeline to transport oil, the Chinese companies participating in five hydrocarbon-producing projects in Azerbaijan can use the Kazakhstan-China pipeline. And in this case, oil will be carried in the opposite direction, from Baku to Kazakhstan with tankers, or by pipeline through the Caspian Sea (the idea of this pipe is already being discussed).

Thus the Atasu-Alashankou pipeline can change a strategic route of the Caspian oil export, redirecting it from the west to the east. That may seem improbable, but then nobody paid much attention to the Kazakhstan-China pipeline, nor to the strengthening of the Chinese presence in the Caspian Sea in general.