Refining margins and profitability of E&P activities are in decline across Europe and post-Soviet Russian energy infrastructure remains in need of significant investment to be able to service all contracted clients.
These include the still relatively little known and far-off “stans” of Central Asia – particularly Kazakhstan and Turkmenistan – which are set to play an increasingly important role in international energy security.
Despite predictions of an imminent re-enactment of the Cold War as the EU and US join forces to compete with Russia for influence in Central Asia to secure supply contracts for their rival energy projects, it is often forgotten that a much larger threat to all these plans actually lies some 3,750 miles east of Moscow, in Beijing.
While debate rages on as to which states will back the EU-US Nabucco pipeline over Gazprom’s Nord and South Stream projects, China has stealthily continued to acquire key up and downstream assets in the region’s producer and transit states.
Rather than directly challenging the primacy of Russia in the energy supply stakes, Beijing has attempted to establish good relations and improve bilateral ties with the Kremlin, signing a number of lucrative long-term oil contracts and offering preferential loans to Russian parastatals at the height of the credit crunch.
Nonetheless, Russia has long viewed its neighbour with a degree of distrust and, more recently, fear. The eventual annexation of resource-rich Siberia by China is a real concern for the government as mass illegal migration and settlement of Chinese workers in this region is regarded as nothing less than a demographic invasion.
On December 14, 2009, the grand opening ceremony of the Kazakhstan-China gas pipeline took place. Starting from the Caspian shore in Atyrau, Kazakhstan, the 800-plus-mile trunkline will deliver oil directly to Alashankou in Xinjiang province, China, and will eventually be able to transport 30billion cu m of gas a year – although, in 2010, deliveries are expected to total a more modest 13billion cu m.
While the idea had been on the drawing board since 1997, construction had not begun until the mid-2000s, with the Kazakh section estimated to have cost $6.7billion, taking more than 4,000 workers just less than two years to complete. Most significantly, it is Kazakhstan’s first export route to completely bypass its traditional ally and sponsor, Russia.
Astana and Moscow maintain close political and cultural links, but evidently even these are not immune to the lure of Chinese investment.
China’s Sinochem is said to be interested in a $320million deal to buy an independent oil firm in Kazakhstan, building on earlier JV acquisitions, and an investment of $939million by China’s sovereign wealth fund for an 11% stake in Kazakhstan’s second-biggest oil producer, KazMunaiGas E&P.
Using energy projects to gain a key foothold in the Kazakh economy, Beijing has since moved into other politically and financially strategic sectors, including nuclear power, petrochemicals and agriculture.
A similar situation has arisen in Turkmenistan, where it seems an emboldened Ashgabat is now enjoying dabbling in geopolitics following decades of self-imposed isolation.
Under eccentric president and self-declared “leader for life” Saparmurat Niyazov, Turkmenistan essentially withdrew from international affairs, maintaining only skeleton relations with its immediate neighbours for purely financial reasons.
As a result, it has traditionally provided about 80% of the 60billion cu m of gas Russia imports each year from Central Asia, giving the Kremlin a virtual monopoly on exports.
However, since Niyazov’s death in 2006, Turkmenistan has made a notable return to the world stage, and is no longer oblivious to its own political and economic value. Relations between Moscow and Ashgabat remain strained at present as no Turkmen gas has been supplied to Russia since a pipeline explosion and ensuing diplomatic dispute in April 2009. Russia appears willing to play the long game on this issue and is refusing to take responsibility for the incident, even actively reducing its annual gas purchases to about 11billion cu m in 2010 – four times less than previous years.
Meanwhile, the spat has given Turkmenistan considerable breathing space to explore alternative markets, and it has already lined up a number of potential clients to make up for Russia’s declining order book, including Iran, the EU and, of course, China.
In Soviet times, Moscow thought of Beijing as its “little brother”, with Chinese communism expected to defer to the Russian line. Today, however, as Chinese domestic growth and demand for raw materials continue to be vital drivers of the global economic recovery, the Kremlin could be right to fear that the student might usurp the master as Beijing finds itself in an increasingly powerful and influential position.
Samantha Wolreich is AKE financial and political risk consultant for Aspen Insurance UK