At the heart of China’s international oil and gas strategy lies the observation that the country is surrounded by a ‘belt’ of oil and gas resources which runs from the Middle East through Central Asia to the Russian Far East. In addition to enhancing bilateral government relations, China has been gaining access to some of these resources, through its national oil companies, and has been building pipelines to import oil and gas supplies overland from Central Asia and Russia. The major remaining task to complete the vision of connecting these resource-rich areas to China by overland pipelines is to fill the gap between the Middle East and Central Asia.
Two news items in early September 2011 suggest that China may have taken a couple of steps to closing this gap. China’s major national oil company (CNPC) is said to have won a tender to explore for oil in the Amu Darya basin of north-west Afghanistan, beating rivals such as Australia’s Buccaneer Energy, Britain’s Tethys Petroleum and Pakistan’s Shahzad International. This is the first such tender for oil and gas resources to be held in Afghanistan for many years. This new project enhances China’s involvement the country’s extractive industry sector, adding to its successful tender to exploit the large Aynak copper deposit, and putting it in a strong position to win further oil and gas projects. In both cases the Chinese companies offered the Afghan government attractive financial terms and infrastructure investment.
One project which CNPC may be also be considering is the Sheberghan gas field which also lies in the north-west of the country, near the city of Mazar-e-Sharif. This gas field was discovered in1959. It has already produced some 64 billion cubic meters of gas and is estimated to hold a further 34 billion cubic meters of recoverable gas reserves. Since 2006, the US Agency for International Development has been seeking investors to revitalise the gas field and to build a 150 megawatt electrical power plant to use this gas.
The second piece of news is that China is reported to be a likely winner of the engineering, procurement and construction contract for a pipeline which will take natural gas from Iran to Pakistan, though Russia’s Gazprom remains a potential competitor. This pipeline is planned to have an annual capacity of 10 billion cubic meters and is due to be in operation by 2014.
China has long dreamed of building an overland energy supply corridor from the Middle East to western China, following the old Silk Route. China’s oil companies already have significant oil and gas assets in Iran and Iraq. In Central Asia, the companies have fields in Kazakhstan, Turkmenistan and Uzbekistan, as well as pipelines to bring oil and gas from these countries to western China. But a major gap still exists between the Middle East and Central Asia. Any pipeline between the two regions could traverse either Afghanistan or Pakistan.
Whilst the construction of one or more overland pipelines from the Middle East to China is probably still several years away, these recent news items show that China’s government and its national oil companies appear to have been successful in progressing both options for completing such an energy corridor. These steps and the eventual completion of the energy corridor may well bring benefits to China and its companies, but they will also carry costs and risks.
An energy corridor from the Middle East would allow China to further reduce its reliance on sea-lanes for the import of oil and gas. Not only is the USA currently the main guarantor of sea-lane security in both South and East Asia, but tensions have risen in the last year or so in the South and East China Seas. Further, China’s deepening involvement in Afghanistan and Pakistan raises its diplomatic profile and political influence in this strategically important region. For China’s oil companies, these projects provide new opportunities to gain access to oil and gas assets, to make profits and to further their ambition of turning themselves into major international companies.
The eventual construction of new pipelines across this region to China will require large investment, though this can be provided by China’s state-owned banks at low interest rates if necessary. The main challenges will lie with a combination of political, security and commercial risks. China’s government risks being dragged more deeply into a politically unstable region where history shows that outsiders rarely reap much reward. The government is also likely to find that overland pipelines are more prone to disruption than sea-lanes, either by the governments of transit states seeking to extract higher fees or by terrorists.
The Chinese national oil companies not only face political and security risks arising from the host or transit state governments, but also run the risk of failing to receive a commercially acceptable price for the gas once it is delivered to China. Indeed, CNPC is suffering from this last problem right now, with the gas it is importing from Turkmenistan.
Afghanistan and Pakistan are winners in the short-term. Afghanistan will have its resources developed and infrastructure built, whilst Pakistan will get a pipeline to supply much needed natural gas. Meanwhile the governments and companies from the West are reminded that China is becoming an important player in the extractive industries in an increasing number of locations.