Gas diplomacy

With oil hovering around the US$70 a barrel mark, Russia's position as the world's second largest oil – and largest gas – exporter, has given the former superpower a significant geo-strategic boost. On a regional level, its importance is even greater, aided by the control it exerts over its former Soviet outposts in Central Asia, which are sitting on some of the world's most important new discoveries of oil and gas.

Moscow has shown it is not afraid to leverage this dominance to achieve its strategic goals, most famously when it turned off Ukraine's gas supply earlier this year in a pricing dispute that disrupted gas flow to Europe. For this and other similar efforts, Moscow earned a sharp rebuke last month from US Vice President Dick Cheney, who urged it to stop using energy to "blackmail" its neighbors.

Cheney's concern was clearly for Brussels and not Beijing, but China also has a lot to lose from Moscow's increasingly belligerent approach to the energy resources it controls, not least because of its rapidly increasing dependence on foreign energy supplies. Once a net exporter of oil, China now imports 40% of its crude. If US Energy Department predictions are correct, this figure will rise to 75% by 2025.

Independent channels

With energy imports from the Middle East traveling at the will of US aircraft carrier battle groups, the Russia and Central Asia channels are key to China's energy security. "China is not getting what it wants from Russia on energy or getting only part of what it wants," said Dr Stephen Blank, a professor at the Strategic Studies Institute of the US Army War College. "The Chinese do not want to be excessively dependent on anybody and they see the Russians as playing games with them."

As a result Beijing is increasingly looking to a multilateral approach to meeting its regional energy needs, effectively undermining Russian interests. "This is a new departure, multilateralizing discussions on pipelines and energy," Blank said. "But it also shows that they cannot rely on Russia bilaterally so they want to be able to rely on Central Asia more, but without Russia being obstructive."

Central to China's efforts is the six-member Shanghai Cooperation Organization (SCO), which was formed in 2001 and now includes Russia, Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan. Beijing wants to set up an energy working group to study proposals for pipelines between member-states.

"There is an incentive for China to try and create a structure in which Russia's interest in obstruction and ability to obstruct are reduced in return for guarantees of energy sales to China and to the other members," said Blank. "The only way to do that is through the SCO so everybody is committed. Russia would then be part of the solution, rather than part of the problem."

This multi-lateral approach requires Russia's co-operation and China has been increasing the pressure on Moscow by engaging in cash diplomacy with Central Asian leaders. Taking advantage of Islamist riots in Uzbekistan, in which security forces killed hundreds of civilians in May 2005, China rushed to provide diplomatic backing to President Islam Karimov's government, and secured rights to explore energy deposits in exchange for a US$600 million loan.

In December, the state-owned China National Petroleum Corp (CNPC) inaugurated a US$9 billion oil pipeline running from western Kazakhstan to China's Xinjiang Uyghur Autonomous Region. The agreement was no doubt lubricated by the US$2.6 billion plus CNPC has invested in Kazakhstan since 1997.

Russia may benefit from the arrangement in the short-term, supplying half the oil pumped through the new 200,000 barrel-a-day pipeline until Kazakh production comes on-stream sufficiently. Ultimately, though, it will lose out from the arrangement and could eventually find itself shut out of this route to China.

As CNPC pressed ahead with construction of the pipeline, it also acquired PetroKazakhstan, a firm headquartered in Canada that owns several Kazakh oil fields in the path of the pipeline, despite a strong legal challenge from Russian oil giant Lukoil. "For CNPC's interests, acquiring more oil resources from Kazakhstan tied in nicely with the pipeline project," said Ian Thom, regional analyst for global energy consultants Wood Mackenzie. "It was a well-timed move."

The new China pipeline will also take China a third of the way to Kashagan in the Caspian Sea, one of the world's largest accessible oil reserves and the largest new oil discovery in decades. The Chinese plan involves connecting several pieces of infrastructure, some new and some dating from Soviet times. The westward flow in these existing pipes would then be reversed, forging a new export corridor stretching all the way from the Caspian Sea to China.

Rich reserves

Wood Mackenzie estimates that Kazakhstan has 31 billion barrels of discovered oil reserves, twice the amount in the North Sea, although a recent Kazakh government report puts the reserves at triple that estimate. Regardless, Kazakhstan plans to almost triple oil output over the next ten years, with 3.6 million barrels of oil coming daily from its on and offshore fields by 2015. For 2005, they expect to average about 1.3 million barrels a day, easily outstripping Azerbaijian's production levels and making Kazakhstan second only to Russia in terms of former Soviet states' oil output.

Russia is understandably reluctant to let subsidized Central Asian energy supplies escape from its control as this would result in increased domestic energy prices and possibly a political and economic crisis. "Russia's main objective is to be independent as far as possible on all issues of foreign policy," said the Strategic Studies Institute's Blank. "The problem is that they can't let Central Asian producers be independent or have an independent choice of whom they are going to sell gas and oil to."

But Moscow has not helped its own cause. Recent maneuvering over energy comes at a time of rapidly improving ties between the two regional powers, which share a 4,300-kilometer border. China is now Russia's second largest trading partner after the EU, with trade rising from only US$5.7 billion in 1999, to nearly US$30 billion in 2005. It is hoped bilateral trade will reach US$60 billion by 2010. China also remains Russia's largest military equipment customer, spending up to US$5 billion a year on arms.

Premier Wen Jiabao went to Russia in September 2004 and in October, Russian President Vladimir Putin returned the visit, at which point both parties declared Sino-Russian relations had reached "unparalleled heights". However, the value of trade is heavily influenced by energy costs, with soaring prices accounting for most of the 33% increase in trade between 2004 and 2005. According to some estimates, China will source up to 20% of its energy imports from Russia by 2011, but this could soak up around 50% of Russia's total exports.

The goodwill generated from these ever closer ties has given way to distrust over Moscow's tardiness in backing up words with deeds when it comes to energy guarantees. At the heart of the problem is a long-promised US$16 billion, 4,100km crude oil pipeline from eastern Siberia to the Pacific Ocean (ESPO) which is planned to carry up to 1.6 million barrels of crude per day to one or both of China and Japan.

The ESPO pipeline has been mired in uncertainty, with Russian officials playing Tokyo and Beijing off against each other as they try to decide between two potential routes. Going to Nakhodko on the Sea of Japan could force China to buy its oil via Japan, while the alternative involves stopping at Skovorodino, far from the coast but close to China, with a link supplying crude to Daqing in northeast China.

Positive steps

Perhaps in light of China's regional efforts, Putin's visit in March 2006 seemed to carry with it more urgency. The Russian president inked a number of energy deals with Chinese counterpart Hu Jintao, including one for twin natural gas pipelines to China. The proposed Altai system, which includes a pipeline from new fields in eastern Siberia and a pipeline from fields in western Siberia that currently supply Europe, is expected to be completed by 2011 and will be capable of supplying around 80 billion cubic meters per year.

Putin also ordered officials to speed up plans for the ESPO pipeline and stage one of the project – from Siberia to Skovorodino, near China – has commenced. Plans for the second stage have been left open, leaving Japan, seen by Moscow as a Pacific proxy of Washington, uneasy.

China will take heart from both the progress, and Japan's unease, but it is very possible the horse has bolted on Russia's plans for energy control, unraveling years of work forging closer ties with its largest neighbor. From a position of power, Russia may have given up the momentum in the battle for control of regional oil resources, and gas supplies are next on Beijing's shopping list. A proposed gas pipeline running through Turkmenistan, Uzbekistan and Kazakhstan into China would again undercut Russian interests.

"Russia would prefer that pipeline never went ahead purely because it would make it more difficult to dictate a cheap price to Central Asian states," said Wood Mackenzie's Thom. But he added that the commercial viability of such a project is far from certain. China's own coal reserves and the ESPO oil pipeline from Russia provide more economically viable alternatives.

"I think there is a limit to how much they are prepared to spend on this," he said. "They are not just going to write a blank check – it needs to make commercial sense as well."

However, given China's global ambitions, Moscow would do well not to discount China's appetite for energy and its willingness to defy commercial reality in the short-term to realize its long-term ambitions. In this, it has natural allies in Central Asia. With support from Beijing, the newly independent former Soviet states are beginning to flex their muscles, posing the greatest threat yet to Moscow's new style energy politics.

"The demand for gas and oil is so great that China is prepared to look into helping these states build pipelines directly to China," Blank said. "In Central Asia there is a good old-fashioned rivalry going on."