COMMENT: Should Kazakhstan go east?

Late last month, Chinese Prime Minister Li Peng was in Almaty, signing agreements concerning the increase of Chinese-Kazakhstani cooperation. Parts of the agreement included the finalization of the proposed Kazakhstan-Chinese oil pipeline project as well as the formal signing of the exploitation and exportation of oil from the Uzen oil fields in Kazakhstan.

Oct. 6, 1997

5 min read

Richard R. Dion
Director of Economic Research
Center for American-Eurasian Studies and Relations
Washington, D.C.

Late last month, Chinese Prime Minister Li Peng was in Almaty, signing agreements concerning the increase of Chinese-Kazakhstani cooperation.

Parts of the agreement included the finalization of the proposed Kazakhstan-Chinese oil pipeline project as well as the formal signing of the exploitation and exportation of oil from the Uzen oil fields in Kazakhstan.

The Chinese commitment covering the pipeline and the Uzen fields totals about $5.3 billion. This, coupled with the nearly $4.4 billion commitment for development of Kazakhstan's Aktubinsk field reserves signed in June, puts the potential Chinese investment in Kazakhstan at more than $9.5 billion.

New Caspian questions

The export equation in the Caspian Sea has taken on a new twist over the last several months, largely because of this cooperation.

Just a few months ago, most of the export debate concerned whether export routes would go through to Turkey, Georgia, or Russia before moving on to Western markets.

Hardly any discussion involved an eastern route to China, a country which really could use the oil and gas, as most of its economy is fueled by coal.

Past the simple deduction that if Kazakhstan has ample energy supplies and China doesn't, then Kazakhstan should go east, there are other geostrategic factors that Kazakhstan would be wise to keep in mind during the next several decades, not to mention logistical factors that could limit the profitability of such a large project.

Logistically, this is a pretty tall order. Most of Kazakhstan's energy interests are in the far western area of Kazakhstan, adjacent the Caspian Sea, not far from Russia. This means that the energy source, either gas or oil, would have to be transported across Kazakhstan's steppe and then into China. From the border, it would then have to travel on to China's industrial cities, many along its eastern and southern coasts.

Economic questions

This is entirely possible. However, is it profitable?

The most important thing for the Chinese is whether they can fuel their economy enough to sustain their amazing economic growth of the past decade. It is quite certain that the Chinese will want to keep this rate of growth so that they can attract further foreign investment.

As a result, it is quite certain that despite a small profit margin (or perhaps none at all), the deals will be carried out.

Provided that it does not want to transport the oil/gas to its coasts, China could also start building industrial sites closer to the border with Kazakhstan.

It has practically become a policy of the Chinese government to build new cities in order to house its people, a small attempt to prevent the flow of rural society into the big cities on the east and southern coasts.

Apart from that situation, however, China has an energy problem, with most of its economy coal-oriented and prospects for increased domestic oil and gas production limited. With massive pollution affecting much of China, it will have to begin to move away from coal as a source of energy.

Geopolitical concerns

Another factor that must be considered concerning the eastern route through China is the placement of the pipeline.

Any pipeline would probably go through the Chinese Xinjiang Uygyar autonomous region, which is adjacent to Kazakhstan. However, as seen in Colombia, terrorism can make a large dent in the economic viability of any project.

The Xinjiang region is home to the Uighur people, who have been giving Beijing more trouble than the Tibetans. Tourists are routinely turned down for visas for the road crossing between Kazakhstan and China because of the terrorist threat and occasional uprisings. This is where Kazak-Chinese relations could sour, if the Uighurs make a concerted effort to disrupt the energy flow from the Caspian region to the Bohai Sea.

Oil companies in Colombia are starting to see the full extent of damage from terrorism. Of course, a pipeline can be fixed. Such repairs constitute the least of the problems that terrorism brings. However, when company employees are taken hostage and/or murdered, the purpose of the work starts to be questioned.

Kazakhstan also has to be careful about China as not only an economic powerhouse, but also as potentially an expansionist country. The coming months will see the completion of Kazakhstan's transfer of its capital from Almaty to Akmola, which is essentially in the middle of the country. While the official reason for the transfer has been to protect Kazakhstan from potential conflicts that could spill over from civil wars to the south in Afghanistan and Tajikistan, as well as the real threat from earthquakes (Almaty has been leveled several times during the last 110 years because of them), there is also fear conjured up by the giant to the east.

This decision could be akin to that of Pakistan upon its independence. Many of the elite thought that Lahore would become the natural choice of locale for the capital. However, after some deliberation, Islamabad was chosen largely because it was further away from the Indian border. Looking at the population of each country makes the move of the capital that much more important.

For the moment, both sides could not be happier. China has found a potential energy supplier to help fuel its economy. And a sigh of relief could almost be heard from Kazakhstan as it no longer has to rely on Russia for export options. Through the Chinese contracts and its placement in central Asia, Kazakhstan has diversified its export portfolio and ensured that a hungry tiger will be fed. Whether that tiger one day bites the hand that feeds it is another question altogether.