China’s Pipeline Diplomacy

In securing approval to build a natural gas pipeline from northern Turkmenistan to China, PetroChina, the country’s largest oil company, has pulled off a move with striking geopolitical implications, providing an extra bloodline for the world’s fastest growing economy.

For its part, Turkmenistan regards the China deal, signed in July, as an opportunity to free itself from Russia’s stranglehold over its gas export markets. The country’s entire gas pipeline infrastructure to date was built during the Soviet era by Gazprom, the world’s largest gas exporter.

Turkmenistan is currently obliged to export all its gas through Russia and Ukraine and thus has no leverage with European customers. An agreement between Turkmenistan and Russia gives the latter confirmed access to Turkmenistan’s gas supplies until 2028, with Russia given ultimate priority for exports.

The pipeline is good for Turkmenistan, a country that is largely a mess, despite the gas reserves. With a neo-Stalinist government in power, Turkmenistan is mostly desert, segments of it polluted by agricultural pesticides, salinized soil, and waterlogging due to poor irrigation methods. Caspian Sea pollution is another problem, and the country has diverted much of the Amu Darya River to irrigate cotton, which contributes half of the country’s agricultural base.

Poverty is widespread, the educational system is backward, privatization is off in the far distant future and the government has tended to misuse what gas and oil revenues it has. President Gurbanguly Berdimuhamedow, who came to power when president-for-life Saparmurat Niyazov’s term ended with his death in 2007, is regarded as more investment-friendly than his predecessor. The pipeline is at least a chance for the regime to fill up its own tank. Turkmenistan has natural gas reserves of nearly 3 trillion cubic meters, the second biggest among all Soviet ex-republics other than Russia itself

Certainly, the Turkmens know they can charge China higher prices for gas than Russia, partly due to Russia's political leverage stemming from its domination of gas exports, and partly due to China's soaring energy demand. China is hungry not just for energy but for cleaner energy like gas, the government having recently announced its commitment to reduce coal-burning as a proportion of total energy consumption.

The proposed pipeline would enter China’s western Xinjiang province, passing through Uzbekistan and Kazakhstan, according to PetroChina’s chairman, Jiang Jiemin. Nearly 2000 km long, it will have a transport capacity of roughly 30 billion cubic metres a year. The Turkmenistan-Xinjiang connection is supposedly due for completion by 2009.

Once in China, the Turkmen pipeline is expected to be connected to a proposed second Chinese west-east pipeline, yet to be constructed, which will start at Huoerguosi in Xinjiang and stretch across Central China, eventually branching out to Shanghai in the east and Guangzhou in the south, crossing 13 provinces. Its length will exceed 7000 km, while the main trunk line will stretch nearly 5000 km. Combined, the pipelines would be the longest in the world, with the largest transport capacity

Construction is due to begin next year. The Shanghai Daily reported that gas supply is due to begin running by the end of 2008, while others estimate that the pipeline should be in full operation by 2010. While exact timing or plans for coordinating the opening of both new pipelines simultaneously have yet to be announced, it is believed that in the meantime CNPC will link existing gas pipelines in Xinjiang to form an integrated gas grid, which can then act as a back-up for the second West-East pipeline.

The country's first west-east pipeline, linking the Tarim Basin in far-west Xinjiang with Shanghai, came on stream in late 2004. It is 4000 km in length, and cost roughly US$5 billion.

CNPC had previously signed two joint ventures with Turkmenistan’s Amu Darya River Natural Gas Corporation and Sino-Turkmenistan Gas Pipeline Corporation in July, in order to secure the 30 billion cubic metres/year gas quota for a period of over 30 years.

Coming on the back of the Turkmenistan deal, in late August Hu Jintao and Kazakhstan’s president Nursultan Nazarbayev agreed to expand an existing 960 km oil pipeline between the two countries by another 700 km westwards, to the shores of the Caspian Sea, giving China access to Kazakhstan’s coveted western oilfields, as well as foothold in the Caspian.

The existing pipeline, completed in November 2005, runs from Atasu in Kazakhstan to Alashankou in Xinjiang, costing a total of $700 million.

According to analysts, currently the pipeline can pump between 5-10 million tonnes of Kazakh oil to China each year and has the potential to be expanded to supply four times as much.

Turkmenistan’s desire to diversify in order to boost its landlocked economy is evident in its interest in other schemes, including a possible Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, as well as the Nabucco European venture to pipe gas across the Caspian to Europe, bypassing Russia.

Russia, meanwhile, relies on large Turkmen reserves to add to its total level of supplies, and in doing so beefing up its political leverage against Europe in the face of underlying tensions, while fattening its own pockets with its monopoly.

Discord between Russia and China over Turkmenistan is evident in Russia’s claim that, were large quantities of Turkmen gas to be diverted to China, supply to Russia would not meet the demands laid out in their previous agreements In 2003, Russia and Turkmenistan signed an agreement stipulating that Russia was to receive between 70 to 90 billion cubic metres of gas per year from 2009 until 2028.

According to Russian media, at present Turkmenistan only produces 70 billion cubic metres of gas each year, of which Russia receives 42 billion cu.m. Clearly, there is not enough pie to go round.

However, Turkmenistan's energy statistics should not be immediately taken at face value, since its methods of calculation remain shrouded in secrecy, a legacy of Niyazov. Some Russians complain that an earlier Chinese agreement with the late president promised gas deliveries originating only from the eastern bank of the Amu Darya River. However, the agreements with new president Berdimuhammedov are alleged to give China rights to deliveries from the western bank, thus encroaching on the “Russian” area.

CNPC also has recently signed a contract to develop the Gunorta Eloten gas field in Turkmenistan, in addition to the various gas agreements reached in April 2006 when Niyazov visited Beijing.

China’s blunt rebuttal of Russia’s interests is not without a degree of acrimony. There has long been talk about Russia building an oil pipeline to China from Siberia. However, hesitation and ambiguity on further developments has begun to irk Chinese officials.

However, Russia’s reasons for its hesitance may indeed be more complex. In early August, Moscow pressured Exxon to abort plans to export natural gas production from its Sakhalin I investment project to China, insisting that it redirect all supplies to Gazprom for sale to domestic markets.

Foreign investors quickly balked at a possible repeat of the Shell/Sakhalin II fiasco of last year, when the Russian government decided to take over a majority stake in the project.

However, for all Gazprom’s often brash and hubristic behaviour, domestic gas supply shortages are indeed being reported with increasing frequency.

Logically, if Gazprom took over the Sakhalin I project, it would normally be in its interests to export to China, given Gazprom’s total dominance of foreign gas exports and its over-dependence on Europe. Expanding eastwards to China would also improve Russia’s nationwide pipeline network and infrastructure.

However, if domestic gas is indeed in short supply, and with guaranteed supply boosts from countries such as Turkmenistan now coming under question, Asian markets may have to be sacrificed to protect domestic as well as European consumers.

Although China is now willing to pay heftier prices for its oil and gas, European markets are still much more lucrative and are charged substantially higher. With an elaborate Russia-EU pipeline network already in place, diversification may not currently be Russia’s main priority.

Now, increasing competition with Central Asia in supplying gas to China means that Russia has less leverage on China when it comes to price negotiation, making it further reluctant to bring any pipeline plans to fruition.

However, in another twist, on August 20, the Xinhua news agency announced that CNPC is preparing to build a 950-kilometre oil pipeline from the Sino-Russian border in Heilongjiang province to the Daqing oilfields, presumably to offset Daqing’s declining production, and help rejuvenate north-east China’s aging industrial economy. The pipeline will run between the Daqing oil tanks and Mohe city in northern Heilongjiang.

Upon reaching the Sino-Russia border, the pipeline will eventually run to Angarsk in Eastern Siberia. The pipeline's total length will reach 2400 kilometres, providing China with15 million tons of oil per year and costing roughly US$2 billion to build.

Russian Energy Minister Viktor Khristenko said that construction is due to begin in 2008.

CNPC also recently defeated Rosneft, the Russian national oil corporation, in securing an auction for two oil fields in Eastern Siberia, according to the Chinese NewsTrak Daily. The timing of the move suggests Russia’s desire to appease China in face of competition, as gas links to China provide access not just to the Chinese economy but also potentially to South Korea and other East Asian markets.

China’s announcement of an apparent conclusion to the Turkmenistan deal is well-timed, coming only one week after the Shanghai Cooperation Organization’s gung-ho military parades drew to a close in mid-August. Turkmenistan is the only Central Asian country notably absent from this grouping, designed supposedly as a platform for cooperation on energy agreements and regional security issues between China, Russia, and Central Asia.

By waiting until the meeting’s conclusion, China reassured Russia that the organization’s purpose as a vehicle for multilateral agreements and cooperation was given legitimacy. However, by waiting only a week to announce the Turkmenistan project's conclusion, China sent a clear message to Russia that “business is business.”

Meanwhile, China is attempting to diversify its pipeline options so as not to appear dependent on its northern neighbours. There has been much publicity over Chinese investment in the southern Pakistani port city of Gwadar, from where oil and gas supplies from the Middle East could be shipped and potentially pumped through a pipeline to China.

CNPC is also reported to be in negotiations with Myanmar to develop a gas pipeline to China’s Yunnan province.