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Analysis: SCO energy ties

By JOHN C.K. DALY, UPI International Correspondent   |   Aug. 22, 2007 at 5:32 PM
WASHINGTON, Aug. 22 (UPI) -- For the past several days, Western analysts have been fixated on the Shanghai Cooperation Organization’s massive Peace Mission 2007 anti-terrorist drill.

The exercise, held Aug. 8-17, was the SCO’s largest joint exercise in its six-year history, with armed forces from China, Kazakhstan, Kyrgyzstan, Russia, Tajikistan and Uzbekistan totaling 6,500 troops, and 80 aircraft taking part. The forces maneuvered at the Russian army's 34th Motorized Rifle Division base near Chelyabinsk in Russia’s Volga-Urals Military District before shifting to Urumqi, capital of China's Xinjiang Uighur Autonomous Region. For the first time, China deployed its military forces in a combined mission abroad.

On Aug. 16, Russian President Vladimir Putin, Chinese President Hu Jintao, Kazakh President Nursultan Nazarbayev, Kyrgyz President Kurmanbek Bakiyev, Tajik President Emomali Rakhmon and Uzbek President Islam Karimov assembled in Bishkek and traveled the following day to Urumchi to observe the exercise’s final deployment.

Kremlin propagandist proclaimed that the exercise represented the birth of an "anti-NATO" alliance and a "Warsaw Pact 2." For his part, Putin was effusive about the organization and implicitly hailed its anti-U.S. stance, stating on Aug. 19, "Year after year, the SCO becomes a more significant factor in strengthening security and stability in the central Asian region. … We are convinced that any attempts to resolve global and regional problems alone are useless."

Overlooked in all the military publicity, however, is the real issue, the growing economic integration of the SCO members, highlighted by a Kazakh-Chinese agreement that for the first time will allow Beijing directly to tap the hydrocarbon resources of the Caspian.

The idea of building a direct pipeline route from Kazakhstan’s Atasu to western China’s Alashankou was first broached in 1997. The initial $700 million, 688-mile project became operational last year with an initial throughput of 10 million tons per annum. On Aug. 19, during a state visit to Astana after the SCO summit in Almaty, members of Chinese President Hu Jintao’s entourage representing the China National Petroleum Corp. signed an agreement with Kazakhstan’s state-run oil company KazMunaiGaz to initiate the second phase of the Atasu-Alashankou oil pipeline, extending it 435 miles westward to link it to the Caspian. The 745-mile pipeline extension will connect China with Kazakhstan’s Kenkiyak and Kumkol oil fields.

The pipeline represents a further Chinese inroad into Kazakhstan for CNPC, which bought PetroKazakhstan in August 2005 for $4.18 billion. Lest anyone be in doubt, Nazarbayev said, “The Caspian will be linked to western China. These are major projects and today we reached agreement on these issues.”

Nor was the pipeline extension the only bad news for hopeful Western investors. Hu and Nazarbayev announced that a 30 billion cubic meters per year natural gas pipeline, scheduled for completion in 2009, carrying Turkmen gas to China under a July agreement reached between Hu and Turkmen President Gurbanguly Berdymukhamedov, will transit Kazakhstan.

As leader of Central Asia’s leading petro-state, Nazarbayev is thinking big. In his quest to diversify Kazakhstan’s export markets, Nazarbayev said in Bishkek, "The draft Asian energy strategy envisions the establishment of an SCO energy agency, which would be a type of ‘brain center’ and database, while transactions on the market for energy resources could be made through an SCO energy bourse."

Putin endorsed Nazarbayev’s calls, stating, "I am sure that the initiated energy dialogue and accompanying national energy strategies as well as the establishment of an energy club will set the priorities for our further cooperation."

Iran’s Mahmoud Ahmadinejad, present as an SCO invited observer, reiterated his proposal to hold a meeting of SCO energy ministers, remarking, "I suggested last year that a meeting should be held between oil and gas ministers of SCO member states to optimize cooperation in transportation, prospecting, development and refining. As before, Iran is ready to organize such a meeting."

The West is not as yet completely locked out of the transportation market for Kazakh hydrocarbons, however. Prior to the SCO exercises Azerbaijan’s President Ilham Aliyev visited Astana on Aug. 7-8 and said, “Kazakhstan and Azerbaijan are working together on strategic issues in energy and transport. … Azerbaijan’s border is always open for the transportation of energy resources to Europe.”

During the visit, representatives of the State Oil Co. of Azerbaijan and their counterparts in Kazakhstan’s national oil and gas company KazMunaiGaz signed an agreement on strategic cooperation in the oil and gas sectors and a memorandum on the joint implementation of a trans-Caspian project to ship Kazak oil through the Baku-Tbilisi-Ceyhan pipeline at an initial rate of 500,000 bpd, with a future capacity of 750,000 bpd.

Kazakhstan’s energy export policy is to make its hydrocarbons available to everyone, finding diversity a guarantor of its independence. During an interview with the BBC, Nazarbayev said, "The United States, Russia and China are all interested in Kazakhstan, and we don't want to allow a conflict of interest here." It is obvious, however, that geography and proximity have given Russia and China advantages that Washington lacks. In addition, both Beijing and Moscow have studiously avoided the pontificating on human rights and electoral transparency that the Bush administration frequently directs toward Central Asian states.

While the initial winner for Kazakh energy was Russia, with its 750,000 bpd Caspian Pipeline Consortium pipeline opening in 2001, China’s recent agreements have made it a rising major player in the race for Kazakhstan’s hydrocarbon assets. While the West can comfort itself with Almaty’s commitment to provide oil for BTC and Western investment in the massive Tengiz oil field, if it is to increase its share of Kazakh reserves, a policy of toning down rhetoric and increasing investment would seem to be most prudent. Almaty has already indicated its unhappiness with a Western consortium developing Kazakhstan’s Kashagan field and its estimated 9 billion to 16 billion barrels of reserves; if the West does not alter its policy, it is now evident that Beijing would be only too happy to take up the slack.

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(e-mail: energy@upi.com)

© 2007 United Press International, Inc. All Rights Reserved. Any reproduction, republication, redistribution and/or modification of any UPI content is expressly prohibited without UPI's prior written consent.
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