EurasiaNet Business & Economics - Rebuffed by Washington, China Goes Prospecting in Kazakhstan

BUSINESS & ECONOMICS

REBUFFED BY WASHINGTON, CHINA GOES PROSPECTING IN KAZAKHSTAN
Alec Appelbaum 8/15/05

With access to energy investment opportunities in the United States blocked for political reasons, China is turning its attention to Kazakhstan.

Kazakhstan’s energy players have long courted Chinese investment. Now -- following the failed attempt by the Chinese government-controlled oil giant, China National Offshore Oil Co. (CNOOC) Ltd, to acquire the American-based Unocal � Beijing is looking for a more politically friendly environment in which it can secure a steady supply of energy for the country’s fast-growing economy.

CNOOC offered $18.5 billion for Unocal in late June, over $1 billion more than a proposal from Chevron Corp. The attempted Chinese purchase generated fierce political opposition in Washington, and CNOOC eventually abandoned its acquisition effort in early August. In withdrawing its offer, CNOOC said in a statement that strong US political opposition created "an unacceptable risk to our ability to secure this transaction."

With the demise of the Unocal deal, Kazakhstan looks increasingly attractive as a Chinese energy investment destination. In addition to CNOOC, other large state-owned energy entities, such as PetroChina, are cash-rich and on the lookout for takeover targets.

"The Chinese are already active in Kazakhstan and have had more upstream opportunities here in their sights for a long time," echoes Julia Nanay, a senior director with Washington’s PFC Energy consultancy. China’s various stakes in Kazakhstan fields amount to "more than enough" as a production base, according to another analyst, who spoke on condition of anonymity because his employer makes intricate investments in various Central Asian companies.

Helping to spur Chinese-Kazakhstani energy cooperation, the 988-kilometer-long Atasu-Xinjiang pipeline is scheduled to become operational in late 2005. Chinese and Kazakhstani officials have also mulled the construction of a cross-border natural-gas connection that would link to China’s West-East pipeline, which stretches from Western Xinjiang Province to Shanghai.

The pending sale of PetroKazakhstan, a Canadian company with a stock market worth of roughly $3.2 billion, will offer analysts a quick way to gauge China’s determination to raise its profile as a Central Asian energy player. Throughout the summer, PetroKazakhstan, which has had an occasionally contentious relationship with the Kazakhstani government, has mulled takeover offers from a variety of suitors. [For background see the Eurasia Insight archive]. The heftiest, according to published reports, have come from Russian-owned Lukoil and PetroChina, the parent of Beijing’s biggest oil company. On August 14, Indian officials confirmed that the state-run Oil and Natural Gas Corp. had also submitted a bid, reportedly in the $3.5-billion range.

Tanya Malcom, a regional analyst for the New York-based Eurasia Group, suggested PetroChina is best positioned to win a takeover scrum. After a string of small acquisitions, Malcolm argued, Chinese officials may enjoy a critical level of bureaucratic trust among Kazakhstani authorities. "PetroChina is a very [important] player and has respect from the Kazakhstani government," she said.

While technically a private sale, geopolitics stands to play an important role in the deal. PetroKazakhstan is the "largest supplier of refined products in Kazakhstan," according to the company’s website. "If PetroChina were to tell Kazakhstan that [PetroKazakhstan] is an element in our bilateral relationship," added Malcolm, the Chinese company would emerge as the winner with "almost 100 percent likelihood."

Chinese executives seem prepared to accept some conditions that Kazakhstani officials reportedly would like to attach to the PetroKazakhstan deal, including a commitment to adhere to a production schedule outlined by Astana. In addition, Kazakhstan would like to retain control of refining assets. China, given its focus on production and exports, might be comfortable with the Kazakhstani position, some analysts say.

While the ultimate success of PetroChina’s takeover bid isn’t guaranteed, there would appear to be compelling geopolitical interests that would encourage Kazakhstani officials to steer the sale of PetroKazakhstan, should it go forward, to the Chinese firm. In recent years, Kazakhstan has sought to develop a so-called multi-vectored foreign policy, in which the country defends its sovereignty by playing regional powers � China, Russia and the United States � against each other. [For background see the Eurasia Insight archive]. Of the three regional powers, Kazakhstan’s economic and political relationship with China is perhaps the least developed.

Given Kazakhstan’s energy abundance, Astana may take action to ease the disappointment of those companies that lose out in the potential PetroKazakhstan sale, some analysts indicated. "You can imagine the Kazakhstani government trying to make it up to [India] by giving them favorable terms for new offshore projects," Malcom said.

Editor�s Note: Alec Appelbaum is freelance writer based in New York.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

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