A.B. Kosherbaeva – Candidate of Economics and a Specialist at KazMunayGas Consulting
As of today, 493 enterprises that include Chinese capital are operating on the territory of Kazakhstan (this number encompasses 5.7% of all enterprises having foreign investment), and include 147 joint stock companies (please note Figure 5). The charter capital of these companies as of January 1, 2006, comprised KZT 217 bln.
One may judge the scale activity of Chinese investors in Kazakhstan based on the inflow of foreign direct investment (FDI). In 1993, the gross inflow of FDI from China was just US$5 mln, while in 2005, this index jumped to US$195 mln – 39 times greater. At the same time, the share of Chinese FDI as a portion of the total amount was merely 0.4% in 1994, increasing to 3% in 2005 (please note Figure 4).
One of the particularities of the new stage in trade and economic relations between the People’s Republic of China and the Republic of Kazakhstan is the development of cooperation on large projects.
By investing into a Kazakhstani oil pipeline, China plans to mostly transport oil produced by Chinese companies via the route. The import of cheap oil for refining within the borders of that country will bring the highest level of profit to China. This is why Chinese companies are intensively extending their own resource base within Kazakhstan, which is not limited to applying for new licenses, but also includes buying in to existing projects.
The overall volume of oil exports into China was 17.2% of the total export volume in 2005. At the same time, in 2005 the growth rate in volume [of oil exports] decreased by 50.7% as compared with 2004. In regards to the price of oil, the growth rate shrunk by a mere 15%, which is explainable by the increased oil prices on the global market, including that of China. If we observe the price per barrel, oil to China sold at the cost of US$48.8 (73.1% higher in comparison with 2004 – please note Figure 6). Meanwhile, on the global oil market, the price averaged US$54.52 in 2005 (an increase of 42.4% over 2004). And so, oil was exported to China at prices 10.5% below that of global markets. As well, the export price for Kazakhstani oil to the world market averaged US$45.5 (a leap of 54.5% above the level of 2004). Therefore, oil was sent to China at a price 7.3% higher than to other markets.
As of today, China owns a controlling share in several companies (please note Table 5).
Last year, Chinese companies considerably strengthened their positions in Kazakhstan: CNPC’s purchase of the Canadian company PetroKazakhstan played role in this. As of the beginning of 2005, the proven reserves of PetroKazakhstan were estimated at 535 mln barrels. The major assets of the company included the Kumkol oilfields in Kzylorda oblast. Additionally, PetroKazakhstan held 50% of the shares in the joint ventures: Turgai Petroleum (with Lukoil) and Kazgermunay (with a number of German companies). CNPC has high hopes for developing the Darkhan oilfield in the Kazakhstani sector of the Caspian Sea.
Besides, CNPC has 55.4% of the joint venture CNPC-Aktobemunaygas, which is developing oilfields with reserves of more than 100 mln tons. A large asset of the company is a 50% share of Buzachi Operation Ltd, which is working on the development of the North-Buzachi field, with extractable reserves of 75 mln tons of oil. Another CNPC asset is CNPC- Aidan Munay, producing at two oilfields in Kzylorda oblast. China’s Sinopec, which purchased the assets of America’s First International Oil Company in 2004, has become co-owner of a license for six blocks.
Nevertheless, oil reserves in Kazakhstan currently controlled by Chinese companies are insufficient for enabling full utilization of the eastern oil pipeline. Joe Dadi, director of the Scientific and Research Institute on Energy under the State Committee of Development and Reform of the People’s Republic of China, believes, “There will not be any problems with filling the oil pipeline after petroleum companies [operating] in the Kazakhstani sector of the Caspian Sea achieve their projected capacities, as well as the development of oil production by CNPC at the Zhanazhol field.” CNPC’s assets provide for production of about 12 mln tons of oil per year. However, no more than 5 mln tons each year may be directed into the eastern oil pipeline by Chinese companies, as in accordance with earlier signed agreements they are required to supply crude to the Shymkent refinery [for Kazakhstani domestic production] and to the Caspian Pipeline Consortium. This is why China plans further acquisitions in Kazakhstan. Namely the Chinese oil company CNOOC is considering the purchase of Canada’s Nations Energy, which is extracting oil from one of the largest fields in Kazakhstan.
Kazakhstani specialists believe that there will be insufficient quantities of hydrocarbons in the country to fill the oil pipeline to China within a reasonable period of time. The oil extracted within the framework of existing Kazakhstani projects is to be divided among different export routes. All that Kazakhstan can hope for from the Zhanazhol field is 3-5 mln tons of oil [per year]. According to a representative of the Ministry of Energy and Mineral Resources of the RK, CNPC-Aktobemunaygas must split the oil for export between the eastern and western directions. JV TengizChevrOil intends to export oil by the “northern and southern” routes. Western Kazakhstani oil will be divided between export to Russia, the Kazakhstani-Caspian transport system, and China. As for onshore oil, it is slated to travel in the same directions, as well as to Iran. At present, even the earlier-planned capacity increase of the Atyrau-Samara pipeline from 15 mln tons to 25 mln tons per year has turned out simply to have been under consideration, as companies do not guarantee supplies meeting the necessary volume.
Following construction of the Sino-Kazakhstani oil pipeline, transportation capacity has redefined the growth of oil production within the country. This is why the owners of the pipeline have set their startup hopes on Russian oil. KazTransOil believes that at the initial stage the ratio of Russian to Kazakhstani oil being fed into the Atasu-Alashankou will be 50:50. However, thus far Astana and Beijing have yet to receive confirmation for this plan [from Russia]. As per estimates by Russian sources, CNPC will at best receive 2 mln tons of Russian oil. Presently, Russia guarantees China a supply of oil in big quantities only by rail.
Already this year, Russian Railways has stated that it is prepared to supply China with up to 15 mln tons of oil. Those Russian companies that export oil to China via rail connection have a long time ago demonstrated their interest in the Atasu-Alashankou pipeline, as railway delivery returns a low profit. Nonetheless, transporting oil to China requires modernization of the Omsk-Pavlodar pipeline, which connects with Atasu [railway station at the Sino-Kazakhstani border]. The Russian pipeline’s owner, Transneft, suggests that oil companies pay for any necessary modernization of the pipeline. Contrarily, Russian Railways promises to cover all expenses for updating the transport infrastructure, and creation of all necessary conditions similar to those offered by pipeline transport, in case the [relevant] oil companies agree to ship via rail. The existence of two variants for exporting oil to China should bring Russian oil companies additional benefits already within the next few years.
The planned tariff on oil transportation services has yet to be agreed. Preliminarily, the rate for oil delivery along the entire route will be from US$13 to US$26 per ton, which means that one will pay US$17 per ton on average for the whole length of the pipeline.
Let us now consider what strategic threats to the national interests of the republic were created by the sale of PetroKazakhstan to China. The first is a dependency for the economy on the “mono-export” of subsoil resources to China. CNPC received both oil assets in Kazakhstan and directly participated in the Atasu-Alashankou pipeline project, which connects the oilfields of PetroKazakhstan with China. As a result, the Chinese party has access to Kazakhstani oil not at global prices, but at those convenient to that country. Consequently, China will pay taxes, royalties, and other disbursements to the government of Kazakhstan based on its market interests. A second obvious threat is that the Chinese party controls [a portion of] the domestic market for oil products in Kazakhstan, on which PetroKazakhstan is a near monopolist. Further on, elementary economic logic will prevail: China will be able to dictate its own terms to Kazakhstan, which will not necessarily be in our best interests.
From the economic point of view, Kazakhstan requires investment into projects within the processing industry. However, there are no real investors coming in from China. The logic of the Chinese investors’ presence is quite simple, China needs mineral resources at acceptable prices, transported via profitable routes. This allows development of the border regions of China (the Xinjiang Uighar Autonomous District in particular) rather quickly. At the same time, such social issues as employment for the Chinese population and strengthening of the middleclass are resolved. Being in a beneficial neighborhood with Kazakhstan permits China to solve such matters as effective investment of its capital and growing the competitiveness of Chinese producers and service providers, due to the [nearly] pegged exchange rate of the yuan to the U.S. dollar. At the same time, of the volume of Kazakhstani exports, those to China decreased from 9.7% of the total in 2004 to 8.7% in 2005 (only 0.1% of which were for products from the processing industry), while imports increased from 5.5% to 7.2%1, respectively.
The increasing Chinese presence in Kazakhstan will continue until companies in the processing industry are sold and investment attracted into that sphere, as well as until that point at which the principles of economic security in our country are reconsidered. As soon as Kazakhstan becomes a member of the WTO, the boundaries of not only the market for goods, but for services as well, will be extended, and Chinese businesspeople will invest into the “fertile soil” of Kazakhstan’s economy. The competitiveness of Kazakhstani producers will be below that of Chinese ones. The conclusion is quite obvious: considered diversification of Kazakhstan’s production is necessary, especially within the processing industry. We require a more targeted policy as regards national savings, which would to a certain degree allow solving of the problem related to investment into the processing industry on the part of the middleclass. Therefore, softening the expansion of China’s capital and goods into the economy of Kazakhstani, as well as controlling the activities of Chinese businesspeople needs to occur.