Behind the drive of Chinese Heavy Investments

The key aspect of Chinese foreign policy in Central Asia is economic penetration into the region by implementing bilateral and multilateral economic and infrastructural projects through SCO and other Chinese energy corporations. Russia and China are major economic giant neighbours that have physical contiguity with Central Asian States. Of all the five former Soviet Republics of Central Asia, Kazakhstan is vast in area and stable, Tajikistan is economically poor and unstable while, Uzbekistan is most populous, hub of radical Islam. There are various evidences in Kazaks growing economy which made it as a leading investor in the Commonwealth of Independent state and even second after Russia. Moreover, it became an active energy partner of China in 21st century. China and Kazakhstan has achieved such remarkable results in a very short period of time, we have to admit that there are many objective factors that have played an important role in promoting bilateral energy cooperation. First of all, China and Kazakhstan are neighbours. Second, since the establishment of diplomatic ties between China and Kazakhstan, the bilateral relations have been stable and healthy. Third, due to good relationship between the two countries, the bilateral energy cooperation is strengthening perpetually. Fourth, the energy cooperation between the two countries can result in mutual benefits and a win-win situation. Fifth, both states are members of the Shanghai Cooperation Organization, through which they continuously expand and deepen the cooperation in the energy field. Sixth, the energy cooperation between the two countries also has cultural advantages. All these factors played a significant role in Kazak economy.

Kazakhstan, the largest economy in the Central Asia region, already has a stellar record of attracting international investment, receiving more than $120 million in foreign direct investment (FDI) in the past two decades. Within the CIS region, Kazakhstan is second only to Russia in the total volume of FDI attracted, and is the region’s top country in terms of FDI per capita^.[11]

In the Kazakhstan’s hydrocarbons market China is represented by the largest power companies: CNPC, Sinopec, CITIC. The oil volume which is produced in the Republic of Kazakhstan with the participation of Chinese companies constitutes about 45 million tons, more than 50% of the total annual oil production. Currently there continuing construction/reconstruction of Atyrau refinery (with participation Sinopec), Shymkent refinery (with participation of the CNPC), Aktau plastics plant and Moinak hydro-power station. In Aktau bitumen plant is constructing with the share of Chinese capital, the factory will satisfy the growing demand during building the transport corridor «Western China — Western Europe».

China’s accumulated direct foreign investment (FDI) in Russia, Kazakhstan and Belarus increased from US $11.02 billion to US $24.67 billion in 2009-2013. Kazakhstan accounts for 91.5% (US $22.57 billion) of all Chinese investment in these countries. This is stated in the report Monitoring of Direct Investment by Russia, Belarus, Kazakhstan and Ukraine in Eurasia 2014 (MDI Eurasia) prepared by Eurasian Development Bank’s (EDB) Centre for Integration Studies. The report is based on the analysis of a large database on investment transactions, which has been developed by Eurasian Development Bank and the Russian Academy of Sciences’ Institute of World Economy and International Relations (IMEMO) since 2013.[12]

Table 3. Chines Foreign Direct Investments

Sector	Accumulated Chinese FDI
Kazakhstan	Russia	Belorus	Total
Total	10 492
Oil and Gas production
Trunk pipelines
Non-ferrous ore extraction
Glass production
Oil processing
Banking
Filling Stattions
Hotel business

Chinese FDI in Kazakhstan is an important part of China’s economic expansion in Central Asia, including the implementation of its concept of the New Silk Road Economic Belt. At present, however, the main investment projects by Chinese TNC are in the fuel sector, primarily oil and gas production, as confirmed by the report’s data on China’s largest investments in the region.[13]

Investor	Recipient Country	Investee	Sector	Project Start	FDI
CNPC	Kazakhstan	CNPC-Aktobe Munay Gas	Fuel sector; oli and gas production
Trans-Asia gas Pipeline Company ltd.	Kazakhstan	Kazakhstan-China gas pipeline	Transport Sector; Trunk pipelines
CNPC	Kazakhstan	PetroKazakhstan	Fuel sector; oli and gas production
CNPC	Kazakhstan	MangisrauMunayGas	Fuel sector; oli and gas production
SINOPEC	Kazakhstan	Caspian Investment Resources	Fuel sector; oli and gas production
CNPC	Russia	Yamak LNG	Fuel sector; oli and gas production

The researchers state that China has the most impressive FDI dynamics in Eurasian Economic Union’s countries, which reflects the rapid expansion of Chinese TNCs in recent years.

While six years ago Chinese investment was comparable to that made by India in Kazakhstan, Russia and Belarus, now India lags behind China. However the report emphasises that this became possible only because of the extensive presence of Chinese TNCs in Kazakhstan.[13]

Table 4. Rise of Chinese Investments

Energy is the key factor influencing internal and external strategy of development of each sovereign state. Energy independence and securıty of the country are in direct dependence on a level of development of fuel and energy branch.

Economic interests of China in Kazakhstan are closely connected with its energy policy, with aspiration to turn the Kazakhstan oil-bearing zones into a constant and reliable source of fuel for the growing Chinese economy. It is confirmed by that, China within several years holds the fifth position in the list of the largest investors of the Kazakhstan economy, and the larger part goes to oil and gas branch.

Thus, China sees Kazakhstan as the supplier of raw material and fuel foils for the dynamically developing economy which demands more and more resources every year.

Now the energy world is divided into the countries which have enough amount of resources and second ones have lack of resources. States exporting oil and gas products to the world markets, they are about 20, belong to the first group of the countries. Generally it is member -states of the organization of exporters of oil, OPEC, in the territory of which three quarters of world reserves of oil are located. The most part of the states of the world community import and consume the hydrocarbonic resources of these countries for their development of national economies. Especially. states with developing economies in particular, Southeast Asia, China, India, South Korea demand for the big energy resource.

China and India are the main consumers of oil, they share about 79% of growth of consumption of energy in the world. These countries will begin to define the main tendencies ofthe development of the energy world markets and will define supply and demand for oil. According to forecasts of experts, by 2015 China will become the largest consumer of energy on the planet. By this time the requirement it in oil will make 350 million t., and production of the cleared oil – 200 million t. Dependence on import will make about 40%. By 2020 annual consumption of oil will increase to 500 million t here., and deficiency will make about 240 million t. in a year. [14]

Now, in China, the domestic demand for oil for 30% is covered by import. Thus it should be noted that the economy of China depends on oil import, but isn't vulnerable. It is explained by features of its energy sector. First, the country is both large producer and the consumer of energy resources. Secondly, the economy of China is the only large economy in the world which power is based on coal, the country takes the third place in the world (explored reserves – 270 billion t.) Production of coal in the country is more then 2,2 billion t., as a result, it dominates in the sphere of the energy balace of coal. It also defines structure of consumption of energy resources where oil makes about a quarter, and the share of other sources is rather small. In particular, in a total amount of energy sources, the share of coal makes 71%, oil – 22%, natural gas – 3%, hydroenegy – 4%, nuclear power of-2%. [14]

The main supplier of oil to the People's Republic of China are the countries of the Middle East and Africa. Special concern in China is caused by an ambiguous geopolitical situation in these regions of the world, which are capable to influence on uninterrupted delivery of energy carriers. Instability in the Middle East which is the biggest the oil supplier for China increased and remains unresolved. About 12% of oil import of the People's Republic of China are shared by Iran, and in case of futher escalation of conflicts in the Persian Gulf, China can be cut off from this energy source. A certain threat of energy security of China is born by aspiration of the USA to establish control over sea communications on which delivery of oil to East Asia is carried out.[15]

Increase of import needs for oil and gas, also roughly growing economy stimulate an exit of China to the arena of world energy politics in search for new oil and gas resources with necessary infrastructure of their delivery. Search for oil and natural gas, and also opportunities of uninterrupted deliveries of these energy resourses are the main tasks of the states worldwide, in order to increase production volumes. Their ultimate goal - to ensure energy security, to be fixed in the new markets in the long term which will allow to supply hydrocarbonic raw materials for steadily developing national economy. China has three state-supported companies in the energy sector. One of these companies, Sinopec (the China Petrochemical Corporation), was founded by merging the Petroleum Industry Ministry and the Chemical Industry Ministry in 1983. Sinopec is active in the south of China. Another important energy company in China, CNPC (the China National Petroleum Corporation), is China’s largest energy company and it is active in the west and north of the country. The last company, CNOOC (the China National Offshore Oil Corporation), was transformed from a bureau inside the Petroleum Industry Ministry in 1982. This company is responsible for offshore exploration and exploitation activities [16].

According to Pan Guang, China is adopting the following four policy principles for its energy development in Central Asia:

- First, ensuring regional security and stability is a precondition for energy development and energy security. China would like to join multilateral cooperation to guarantee security and stability in the region so that good conditions are created for energy cooperation. Efforts in this regard include: resolving various disputes and conflicts in the region by peaceful means; supporting the initiative to establish a nuclear-free zone in Central Asia; fighting extremism and terrorism; and cracking down on weapons smuggling, drug-trafficking, and other cross border crimes.

- Second, Chinese firms are being rendered assistance in order to encourage their participation in energy development in Central Asia, especially in energy development cooperation with the member states of Shanghai Cooperation Organization. The government will play a facilitating and coordinating role in investments in Central Asia by granting preferential tax policies, providing consular services, and protecting the legitimate interests of Chinese citizens as well as corporate entities.

- Third, fair competition and international cooperation are both to be facilitated. China would like to conduct competition on an equal basis with all the countries and groups involved in energy development in Central Asia and is also ready to undertake any form of cooperation with them in the spirit of reciprocity. On the other hand, China is opposed to excluding any country from this sort of international cooperation and is also opposed to any attempt by any country or group of countries to dominate or monopolize the energy development market in Central Asia.

- Fourth, regarding the alignment of the oil and gas pipelines, China holds that it should be sorted out by adhering to the principles of mutual understanding, mutual concession, and mutual benefit. The interests of all the parties concerned should be taken into consideration. China opposes the addition of any political or ideological factor to the ultimate solution, as evidenced by the choice of a certain pipeline alignment, with the aim of rejecting or punishing a particular country [17].

The greatest interest in this plan is presented by Central Asia, which has rich natural resources. According to the developing geopolitical and economic situation, China made active the Eurasian direction in which Kazakhstan is represented as one of the most significant partners. Mostly, it is connected with that the western regions of China having the border with Kazakhstan. are geographically, located close to the Kazakhstan's gas and oil fields. It is attractive that Kazakhstan possesses the eighth place on volume reserves of oil in the world, and, according to the experts, will be enough at least for 50 years. Within CIS Kazakhstan is the second state after the Russian Federation on the level of oil stocks. Oil production on the land is carried out more than on 100 fields located in five areas of the country. Production of oil is provided on fields Tengiz, Karachaganak, Uzen. The main production of explored reserves and production of hydrocarbonic raw materials are expected in the water area of the Caspian Sea which fields are in a stage of development and investigation.

China is one of the Principal investor in Kazakhstan. Shortly stating the strategic aims of China in Kazakhstan is the stable and long-standing access to country’s rich natural resources. The Republic of Kazakhstan is one of the richest oil and gas countries of the region. Kazakhstan’s natural gas reserves reach 2.35 trillion cubic meters (tcm), 1.9 tcm of which are found in areas where oil is also produced. In terms of oil reserves, the republic occupies first place in Central Asia. Kazakhstan President Nursultan Nazarbaev promised to produce 400 million tons of oil a year by 2015, which is the amount currently produced by Saudi Arabia [18, p.57].

From the very first days of their diplomatic relations, China has regarded Kazakhstan as the key target of its economic and energy interests in Central Asia. In the first half of the 1990s, however, its economic presence in Kazakhstan was limited mainly to trade. In the latter half of the same decade, however, China demonstrated much more interest in the energy sphere, mainly because Chinese economy developed into a major energy consumer (oil in particular). Chinese companies came to Kazakhstan with their projects and their money; the leading energy corporations of China became interested in the assets of Kazakhstan’s oil and gas branch and involved in the development of hydrocarbon fields in the country’s west.

As early at the summer 1997, in a competitive struggle with American and Russian companies, the Chinese National Petroleum Corporation (CNPC) acquired 60% of the shares of the AktobeMunaiGaz Production Association, which controls three major oil fields in the north of Kazakhstan. The fact that the Chinese company was able to outmaneuver such oil giants as Texaco and Amoco in this bargaining was largely due to the extremely appealing conditions the Chinese offered. The CNPC pledged to invest 4.3 billion dollars over 20 years. It also promised to pay the pensions and utility services of approximately 5,000 workers, service AktobeMunaiGaz’s $71 million debt, invest $80 million in an environmental protection program, and also pay for the right to develop the subsurface. The CNPC agreed to pay the Kazakhstan government dividends totaling $320 million in advance, as well as carry out research on the possible construction of an oil pipeline costing $3.5 billion from the field in Aktobe to China [18].

In September of the same 1997, the CNPC acquired the right, after fierce bargaining with such well-known oil giants as Petronas, Unocal, and Amoco, to ownership and use of Uzen, one of the largest oil fields in Western Kazakhstan, for twenty years. Just as before, the CNPC offered the Kazakh side conditions which, figuratively speaking, Astana could not refuse. In addition to indirect investments amounting to 400 million dollars, the Chinese side pledged to pay the Kazakhstan government dividends amounting to $52 million in advance. According to different estimates, the CNPC’s total investments amount to between $1.3 billion and $4.38 billion. The CNPC also agreed to pay 8% of its net profit to the Kazakhstan government for the right to develop the subsurface, service the enterprise’s $6-million debt, invest $10 million in specialist training programs, and pay $27 million to the social services fund. The Chinese also told the Kazakh side that they were willing to build an oil pipeline from the fields in Uzen to Aktobe. Moreover, the CNPC agreed to build a pipeline from Kazakhstan to Turkmenistan. This pipeline could go on to Iran [18].

The same year China and Kazakhstan countries entered an agreement for building a Chinese pipeline. This pipeline begins in Kazakhstan’s Caspian port of Atyrau, passes through Kenkiyak and Atasu, and enters the Xinjiang-Uighur Region of China from Alashankou. From there the pipeline connects with the East-West Pipeline in Urumqi. China’s CNPC and Kazakhstan’s KazMunayGas are the main partners in this project [19.

As soon as the Chinese began purchasing shares in Aktobe, the owner of the third largest field in Kazakhstan in terms of oil deposits, oil from this field started going to the PRC. But it is not exported to China via the oil pipeline. Aktobe oil is pumped by pipeline to the Orsk oil refinery in the Russian Federation. And from there, the ONAKO Company, which owns the Orsk oil refinery, exports its own oil instead, dispatching it from the ports of Novorossiisk and Tuapse. Many believe that the oil pipeline from Kazakhstan to China could become a potential source of oil supply for the Republic of Korea, Japan, and other countries of the Asia Pacific Region. This development of the situation not only promises high dividends for the PRC, but will also significantly fortify Beijing’s position in the region. The pipeline from Central Asia through China to the Asia Pacific Region has even been called the Pan-Asian Oil Bridge. The Chinese are also developing rather isolated fields (such as North Buzachi, North Kumkol, and Karazhanbas), which, since they are close to the Kazakh-Chinese pipeline, are acquiring particular importance [18].

The CNPC also bought the Canadian owned PetroKazakhstan Company in 2005 for $ 4.2 billion. PetroKazakhstan is producing 9.5% of Kazakhstan’s oil [19, p. 40].

After several years of construction, the oil pipeline from Kazakhstan to China finally went into operation in May 2006. The pipeline’s projected capacity is 20 million tons per year, which will be a big jump over the annual amount of 500 thousand tons handled on railways. By completion of the second phase of the pipeline, the final capacity will reach 50 million tons per year. The whole region will become dynamic and the economy will undergo development as a result.” This is the first pipeline in the history of Central Asia that goes to China and may reach the Pacific Ocean via China. For China, this is also a breakthrough in its overseas energy development strategy, since it is its first pipeline to the west and the first cross-border pipeline involving China. It is worth noting that this pipeline passes right along the ancient Silk Road that once promoted the interchange between the West and the East. Today, this Silk Road has assumed a new look in acting as a Eurasian “energy bridge” closely connecting China and Central Asian states.

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