Not so long ago Kazakhstan was entertaining aspirations of becoming one of the world's 50 largest economies. Now, Astana finds itself in a position where it must reluctantly part with energy assets in order to prop up its shaky financial sector.
President Nursultan Nazarbayev's April 15-19 state visit to China may have gotten Kazakhstan over a big financial hump, but at a substantial cost. In a deal that emerged as the centerpiece of Nazarbayev's visit, the China National Petroleum Corporation (CNPC), the state energy giant, gained a major stake in the MangystauMunayGaz (MMG) energy concern, according to a press release issued April 20 by the Kazakhstani state-controlled energy company KazMunayGaz (KMG) on April 20.
"On April 16, 2009, KMG and the CNPC Exploration and Development Company Ltd (CNPC E&D) signed an agreement in Beijing on acquiring 100 percent of common shares in the MangystauMunayGaz (MMG) joint stock company from the Central Asia Petroleum Ltd. (CAP) Co.," the press release said. "The deal to acquire MMG shares is being carried out through the Mangistau Investments B.V. Co., a joint venture belonging equally to KMG and CNPC E&D." The transaction is to be completed by the end of July, KMG added.
As CNPC secured its grip on MMG, China also agreed during Nazarbayev's visit to extend a $10-billion assistance package to Kazakhstan that will help prop up the Central Asian state's ailing economy. Half of the Chinese loan will be devoted to bolstering Kazakhstan's energy sector, while the other half will be used by the Development Bank of Kazakhstan to stimulate the diversification of the Central Asian nation's economy. The aim is to reduce the country's current dependence on energy revenues. Part of the $5 billion credit line that China is extending to the energy sector is to be used to finance the MMG deal.
KMG took control over MangystauMunayGaz at the beginning of this year after protracted efforts to put the company into the hands of the state. In January, it signed a deal with the previous owner, the British Virgin Islands-registered Central Asia Petroleum Ltd, obtaining 50 percent plus two shares in the company. However, Interfax-Kazakhstan reported on April 20, citing unnamed industry sources, that this deal had been overridden when talks on CNPC acquiring a stake began. "The sources said that some details of this agreement had become no longer topical when CNPC began to actively enter the negotiation process," the news agency report stated.
In addition to financing the MMG deal, part of the Chinese $5-billion line of credit will be used to finance a strategic infrastructure project, the Beyneu-Akbulak gas pipeline, which will take gas from fields in western Kazakhstan to the south of the country. The region is currently dependent on supplies from Uzbekistan and is thus vulnerable to disruptions. Crucially for China, the pipeline could eventually be part of a gas supply route linking the country with Turkmenistan. [For background see the Eurasia Insight archive].
Analysts say it is China's deep pockets that enabled Beijing to win a heated competition for the MMG stake. India's Oil and Natural Gas Corporation (ONGC) and Russia's Gazprom Neft were also reported to be suitors for the Kazakhstani energy concern. This is not the first time China has outstripped India in the race for a stake in Kazakhstan's energy reserves: In 2005, CNPC acquired 67 percent stake in PetroKazakhstan after a hotly fought contest.
Despite the global economic crisis, Beijing is still able to tap into vast reserves -- its coffers currently hold $1.9 trillion in foreign exchange reserves. China is also expected to post 5 percent growth this year. This figure stands in sharp contrast to Kazakhstan's official growth forecast of 1 percent.
With proven reserves of some 500 million barrels of oil and output of 113,000 barrels per day last year, MMG is a juicy prize. It owns 36 oil fields, of which 15 are currently being developed. It is also the operator of a nationwide chain of gas stations, Helios. In addition, the company owns the Pavlodar oil refinery, but Interfax-Kazakhstan reported that the refinery was not part of the deal with CNPC.
China is gearing up to build an oil refinery on its border with Kazakhstan, its ambassador to Astana, Cheng Guoping, announced on April 16. He said discussions had previously focused on building the facility on the Chinese side of the border, but Beijing is now ready to build it inside Kazakhstan. "We are prepared to build the new refinery on the Kazakhstani side, and finance that construction -- China has both money and technologies," the ambassador said in remarks quoted by Interfax-Kazakhstan.
The oil refinery is to be built at the end of the jointly-owned Kazakhstani-Chinese pipeline, which is currently being extended. The new 761-kilometer stretch from the Kenkiyak oilfield to the Kumkol oilfield is due to open in October.
The stake in MMG consolidates China's already significant grip on Kazakhstan's energy market. As well as PetroKazakhstan, which has proven reserves of 340 million barrels of oil and owns the Shymkent oil refinery, CNPC owns a controlling stake in the AktobeMunayGaz company, while the Sinopec Group is developing blocks in the Caspian and the CITIC state-owned investment company is operating the Karazhanbas oil and gas field.
China's purchasing power has allowed it to expand its reach over global energy resources in recent months as it clinched deals with Russia, Brazil, Angola and Venezuela that saw Beijing extend generous loans in exchange for promises of energy supplies.
In Kazakhstan not everyone sees that expanding reach as benevolent. The day before the deal was signed in Beijing, the opposition Azat party issued a statement raising the alarm over China's expansion into Kazakhstan's energy market, which it said "could do irreparable damage to our country's economic security, and even more so to its national security."
Joanna Lillis is a freelance writer who specializes in Central Asia.