China's prospects as the first major economy to recover gives it a crucial role to lead the world economy as a whole and the Central Asian region in particular. Following up on a $25 billion loan to Russia that China dished out in February, it has agreed to lend $10 billion to Kazakhstan. China expects both the recipients to reciprocate by bolstering their energy supplies to China.
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Beijing would have taken into account these emergent circumstances when it signed an unprecedented "oil-for-loans" agreement with Russia on February 17. In terms of the agreement, China Development Bank will lend $25 billion at 6% annual interest to Russia's state-owned oil company Rosneft and oil pipeline monopoly Transneft. In return, China will receive roughly 20 million tons of oil annually from Russia starting from 2011 for a 20-year period. The total volume of the Russian oil supplies within this framework is the equivalent of about 4% of China's current consumption of oil and about 8% of China's present imports. Rosneft receives $15 billion out of the Chinese loan.

On its part, Transneft receives the remaining $10 billion out of the Chinese loan towards the cost of building a spur from the East Siberia-Pacific Ocean (ESPO) pipeline originating from Skovorodino in eastern Siberia to China's Daqing petrochemical hub. China had earlier funded the project's $37-million feasibility study.

The ESPO's first stage is expected to have a capacity of 30 million tons annually and the second stage will have a capacity for transporting 80 million tons. Transneft is expected to complete the first stage (Taishet to Skovorodino) by the end of this year and to commence the construction of the second stage (Skovorodino to Kazimo) in December. The entire project will be completed by end-2010.

Clearly, the Chinese loan comes as a great relief to the two cash-strapped Russian energy companies to realize their refinancing loans in 2009 as well as to continue with their capital expenditures. The loan also goes to some extent to make up for the flight of Western capital from Russia. Without doubt, China has made a smart move.

One, it is always a wise thing to tie up long-term energy supplies. Two, the price of the Russian oil will definitely be cheaper than the prices on the spot market, where China buys the bulk of its imports at present. Three, China has got Russia to deliver oil by a single-destination pipeline to China. Four, China is reducing its reliance on Middle Eastern oil. Five, China is reducing its dependence on the stretched-out transportation route via the Malacca Straits.

Above all, China has persuaded Moscow to commit significant quantities of its oil away from its traditional European market. Moscow often held out the prospect of a diversification to the Asian market, but remained fixated on the Western market. That mindset is changing. Again, China may have at long last galvanized an all-round energy cooperation program with Russia. Sino-Russian energy cooperation had lately shown signs of fatigue after the promising start during the landmark visit by then-Russian president Vladimir Putin to China in March 2006.

Putin, now prime minister, had proposed to export up to 40 bcm of Russian gas to China via the new 6,700-kilometer, $10-billion Altai pipeline. But virtually nothing has happened on this front since then, ostensible amid squabbles over a mutually agreeable gas price formula, while Moscow remained focused on the European gas market. This attitude is changing.

In February, the Kremlin decided to revive the Altai project when President Dmitry Medvedev wrote to Chinese President Hu Jintao offering comprehensive cooperation in bilateral energy projects. Gazprom has since shown interest in forming a gas-trade joint venture with the China National Petroleum Corporation, which would allow the Russian firm to participate in retail gas sales in the Chinese market as a quid pro quo for favorable pricing.

Kazakhstan, Central Asia's number one energy producer, also faces a financial crisis similar to Russia's. Kazakh Prime Minister Karim Masimov underscored this recently by comparing the crisis to wartime conditions, which needed a response on a war footing. He wasn't exaggerating.

With the oil price falling to $50 per barrel as compared to $150 in July last year, there is a severe resource crunch. Besides, Kazakhstan has reason to worry that the crisis may turn out to be drawn out. True, Kazakhstan is spending almost $15 billion or 14% of its GDP on stimulus packages. But the government has nonetheless begun cutting jobs in state enterprises. A ban has been imposed on new hirings. The initial hopes on new infrastructure projects keeping wages stable have faded. Unemployment is rising, which is a matter of major political concern.

In this scenario, China has responded to the Kazakh request for help. Two agreements were signed in Beijing on Thursday during a five-day visit (April 15-19) by Nazarbayev providing for a Chinese loan amounting to $10 billion to Kazakhstan in return for the right, among other things, to take a big stake in the Central Asian country's energy sector. China's Eximbank will lend the state-owned Development Bank of Kazakhstan US$5 billion. China's state-run Chinese National Petroleum Company (CNPC) will in turn extend a $5 billion loan to KazMunaiGas, the Kazakh national oil company.

The two oil companies also signed a separate agreement giving CNPC a 49% stake in MangistauMunaiGas (MMG), a local oil producer. (Kazakhstan and China also signed an initial accord to build a "road transport channel" linking western China and Europe. Other agreements include accords to cooperate in agriculture, education, finance and telecommunications.)

Beijing's intentions are quite transparent: China will tap its $1.95 trillion currency reserves to buy overseas exploration rights wherever available in Central Asia. Nazarbayev told Xinhua news agency on the eve of his departure for China that China's role was of global significance. Its huge market, abundant foreign exchange reserves and "effective crisis response" constitute an "enormous support for the world economic revival", he said.

Kazakhstan is a safe investment destination, too. It holds over 3% of the world's proven oil reserves. It received $21 billion in exploration and production investment in 2007 before the financial crisis erupted. Curiously, China is stepping into the purchase of MMG, outbidding Russia's Gazprom and India's ONGC (Oil and Natural Gas Commission), both state-owned enterprises. CNPC won the race by offering the $10 billion investment package which neither Russia nor India could match. China evidently took a long-term view. The MMG has estimated crude oil reserves of 1.32 billion barrels and also holds a 58% stake in the Pavlodar oil refinery, apart from operating a chain of retail stations.

China is not a new investor in Kazakhstan's energy sector. It already owns Aktobemunaigas, which produces 120,000 barrels of oil per day (b/d) and China holds 67% of PetroKazakhstan, which produces 150000 b/d. It is also an equal partner, along with the Kazakh state oil company KazMunaiGas, in the 200,000 b/d oil pipeline from the Caspian to China's Xinjiang border.

Meanwhile, work on the gas pipeline project from Turkmenistan via Uzbekistan to China is on target. China is financing this. The Turkmen portion of the pipeline runs 188 kilometers and will be completed by end-2009. More than 1,200 km of the pipeline has already been laid in Kazakhstan and Uzbekistan.

Asia Times