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China's Involvement in Central Asian Petroleum: Convergent or Divergent Interests? Author(s): Philip Andrews-Speed and

China's Involvement in Central Asian Petroleum: Convergent or Divergent Interests? Author(s): Philip Andrews-Speed and Sergei Vinogradov Source: Asian Survey, Vol. 40, No. 2 (Mar. - Apr., 2000), pp. 377-397 Published by: University of California Press

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CHINA'SINVOLVEMENTIN

CENTRALASIANPETROLEUM

Convergentor Divergent Interests?

PhilipAndrews-Speed and

SergeiVinogradov

China's involvement in CentralAsia has grown signifi- cantly in the past few years, drivenby both the country's political and eco- nomic ambitions and its energy requirements. China is becoming a major importerof oil and gas, and the countriesof CentralAsia-particularly Ka- zakhstan,Azerbaijan,Uzbekistan,andTurkmenistanbut also Kyrgyzstanand Tajikistan-are attractivepotentialtargetsin Beijing's searchfor secure pe- troleum supplies. China already has committed substantialinvestments in Kazakhstanand also hopes to provide furthercapital aimed at developing resourcesin CentralAsia andbuildinglong-distancepipelines runningto and from the region. If these ambitiousplans materialize,China's political influ- ence in CentralAsia would be greatly enhanced. This articleassesses China's goals for expandingits source of energy sup- plies in the contextof its foreign andenergypolicies. It focuses on the poten- tial for conflicts of interest(1) over achievingthe goals of these two policies, (2) between the goals of the state's energy policy and the ambitionsof state- owned oil companies, and (3) between China and the CentralAsian states. The article's first section will addressinternationalpolitical issues in the re- gion, focusing on elements of China's foreign and energy policies and key concerns in CentralAsian politics that Beijing must contend with in setting those policies. The second section shows how China's currentenergy policy has led to extensive internationalinvestmentin petroleum,despite the gov-

Philip Andrews-Speedis Lecturerand Directorof Studies, and Sergei Vinogradov is Senior Research Fellow, Centre for Energy, Petroleum and Mineral Law and Policy, University of Dundee, Dundee, U.K.

Asian Survey,40:2, pp. 377-397. ISSN: 0004-4687

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377

378 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

ernmentand state enterprisesnot always sharingthe same goals. Finally, the third section evaluates from the viewpoint of their respective interests the issues raised by China's investmentsin CentralAsia.

China's Foreignand Energy Policies

Issues and Framework

The literatureon China's foreign policy is large'; here, we restrictourselves to identifying those featuresof it that have a direct bearing on the nation's behaviorin the CentralAsian region, namely, generalaspirations,conceptual approach,priorities,relevantspecific attitudes,and decision makingpatterns.

At the heartof China'sforeignpolicy lies Beijing's desireto be recognized

as a majorplayer in internationalpolitics and establish itself as the leading regionalpower in East Asia. This aspirationis in partderivedfrom the gov-

ernment'sworldview.

ernment'sapproachto foreign policy in the 1980s and 1990s has emphasized

nationalism,sovereignty,and a zero-sumbalance of

be describedas neorealist. In a world perceived as hostile, it is militaryse-

curity and national sovereignty ratherthan economic prosperityand social welfare that have been of prime importance, although economic interests have become progressivelymore importantof late.

makershas been to establish

peaceful working relationshipswith as many states as possible, especially

neighboringcountries, so that the countrycan

development.2 One theme that continues to underlie many of the relation- ships Chinahas establishedhas been the perceived need to act as a counter- balance to the U.S. In China's eyes, the U.S. is not only a global hegemon thatneeds restrainingbut may also pose a threatto the stabilityand statusof Chinaitself. This latterconcernis of crucialsignificancegiven thatthe pres- ent governmentin Beijing believes that the continuedexistence of the Chi- nese CommunistParty (CCP) is vital to the nation's security and develop-

ment. Economic interest is a significant motivation behind many of these ties. Beneaththis expandingnetworkof diplomaticlinks is a preferencefor bilat- eral relationshipsbased on practicalneeds ratherthan strategicpartnerships

Despite occasional liberal rhetoric,the Chinese gov-

power politics, and may

A recent priorityfor China's foreign policy

direct its efforts to economic

1. For a recent listing, see the bibliographyin Samuel. S. Kim, ed., China and the World:

China's Foreign Policy Faces the New Millennium(Boulder, Colo.: Westview Press, 1998).

2. Stephen I. Levine, "Perceptionand Ideology in Chinese Foreign Policy" in Chinese For-

eign Policy: Theoryand Practice, ed. Thomas W. Robinson and David Shambaugh(Oxford:

Clarendon Press, 1994), pp. 30-46; Barry Naughton, "The Foreign Policy Implications of China's Economic Development Strategy"in ibid., pp. 47-69; and Ren Yue, "New Geopolitical Thinking and the Sino-Russian StrategicPartnership"in China Review 1998, ed. Joseph Y. S. Cheung (Hong Kong: Chinese University Press, 1998), pp. 83-123.

ANDREWS-SPEEDANDVINOGRADOV379

or multilateralmechanisms.3 In cases wheregeopoliticalor securityconcerns are of primeimportance,tradeand investmentmay be used as instrumentsto establish new relationships.4 One of the key dilemmasfacing the Chinese governmentis what approach it should take toward globalization and growing internationalinterdepen- dence. On the one hand, greatereconomic integrationwith the rest of the world is a prerequisitefor sustainedeconomic growth. On the other,greater integrationposes two parallel threatsthat might weaken the government's hold on power: a reductionof China's political independenceand the coun- try's increasedexposureto Westernpolitical andculturalvalues. As a result,

activities thatwould lead to greaterChinesepolitical integrationwith the rest of the world have not kept pace with those related to increased economic interdependence. Indeed, economic self-interesthas been pursuedin a very narrowlydefinedcontext, with a case-by-case quest for maximumbenefit at minimum cost. But China's global status does depend to some extent on joining such key internationalclubs as the World TradeOrganization,and it

is likely thatthe countrywill continue to make progress,albeit slow, toward

greaterpolitical as well as economic interdependence.5 This brief accountmay give the impressionthat foreign policy making in Chinais a unifiedprocess. Since the deathof Mao, this has been farfrom the case. Many commentatorshave emphasizedthe importanceof factionalpoli- tics in China's foreign policy decision-making process that pits realists againstliberals,nationalistsagainstinternationalists,andthose supportingthe promotionof nationalinterestsoverseas againstthose giving priorityto self- preservation. In addition,the past two decades of the 20th centuryhave seen

a proliferationof nongovernmentaldomestic actors seeking and to some ex- tent able to influence China's foreign policy.6 Taken togetherwith the fact that the CCP's first priorityis to remain in power, these factors in part ex- plain why the governmentfinds it difficult to formulateand implementsus-

3. Naughton, "The Implications of China's Economic Development Strategy";William T.

Tow, "Chinaandthe InternationalStrategicSystem"in ChineseForeign Policy, pp. 115-57; and

Michael Mandelbaum,"WesternizingRussia and China,"Foreign Affairs 76 (May/June1997), pp. 81-95.

4. Harry Harding, "China's Cooperative Behaviour," in Chinese Foreign Policy, pp.

375-400; and ThomasW. Robinson, "ChineseForeign Policy from the 1940s to the 1990s," in ibid., pp. 555-602.

5. Thomas W. Robinson, "In[ter]dependencein China's Post-Cold War," in China and the

World,pp. 193-216; andYong Deng, "TheChinese Conceptionof NationalInterestsin Interna-

tional Relations,"China Quarterly154 (May 1998), pp. 308-29.

6. Carol Lee Hamrin,"ElitePolitics and the Development of China's Foreign Relations"in

Yu, "The China Syndrome:Rising Nationalism and

Chinese Foreign Policy, pp. 70-112; Bin

Conflictwith the West,"Analysisfrom the East WestCenter,no. 27 (May 1996); and Samuel S.

380 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

tainedforeignpolicy initiativesas well as why China'sforeignpolicy appears so unpredictable. Only small changes in either the external environmentor the internalbalance of power need occur for a substantialshift in foreign policy to result, and this volatility will persist for at least the short term.7

China's Foreign Policy in CentralAsia The collapse of the Soviet Union requiredChina to develop an entirely new policy toward CentralAsia. The goals of this policy are to constrainnew threatsand enable China to take advantageof new opportunities. The two most significantnew threatsfacing China are overlappingones:

the stability of the country's borderswith the CentralAsian states and the potentialfor unrestamongMuslim peoples acrossthe region. In the wake of the Soviet Union's downfall, Russia, China,Tajikistan,Kyrgyzstan,and Ka- zakhstanmoved rapidlyto agreeon wheretheircommonborderslay andplan for reductionsin the numbersof troopsalong those frontiers. However, there also has been an upsurgein radicalIslamic sentimentin the region thatwor- ries the governmentsof China, Russia, and other regional states.8 Thus, in practicaltermsChinafaces potentialthreatsfrom (1) ethnic groupsthatstrad- dle nationalborders(for example, the Kazakhsand Uyghurs in northwestern China)who might seek supportfrom one state to realize separatistambitions in another, and (2) militant Islamic groups that might seek to replace the current secular governments in the neighboring states. The desire for re- gional political stability in the face of these potential problems lies at the heartof China's currentCentralAsia policy. Trade and investment have been the most visible elements of China's growing involvementin Asia. Manufacturedgoods from Chinaform a large proportionof importsto Kazakhstan,Kyrgyzstan,and Uzbekistan. Much of this trafficcomprisesbasic consumergoods made in northwesternChinathat are sold in neighboringCentralAsian states. Though it accounts for barely one-quarterof 1%of China's total internationaltrade,the political need for China to promote economic developmentin Xinjiang Province rendersthis commerce with CentralAsia especially important.9 At present,Kazakhstanis the most importantCentralAsian stateto China. Kazakhstan'ssheer size, the length of its borderwith China, and the ease of

7. Allen S. Whiting, "Forecasting Chinese Foreign Policy: IR Theory vs. The Fortune

Cookie," in Chinese Foreign Policy, pp. 506-23.

8. ShermanGarnett,"Russia's Illusory Ambitions,"Foreign Affairs 76 (March/April1997),

pp. 61-76; and Denny Roy, China's Foreign Relations (London:Macmillan, 1998).

Adelphi Paper

no. 300 (Oxford:OxfordUniversity Press, 1996); andJames P. Dorian,Brett.H. Wigdortz,and Dru C. Gladney,"Chinaand CentralAsia's Volatile Mix: Energy,Trade,and EthnicRelations," Analysisfrom the East West Center,no. 31 (May 1997).

9. RosemarieForsythe,The Politics of Oil in the Caucasusand CentralAsia,

ANDREWS-SPEEDANDVINOGRADOV381

communicationacross this border, together with the substantialnumberof Uyghursliving in Kazakhstan,combineto provideChinawith a strongincen- tive to build an effective workingrelationship. To these factors may be ad-

ded the CentralAsian state's considerableoil potential,which will be discus- sed furtherbelow.

states should not be analyzed

withoutreferenceto two other countriesthat also have a substantialinterest in the region: Russia and Iran. Of China's many new relationships,the one that most resembles a strategicpartnershipis with Russia. The 1990s have seen the two nations cooperate on a numberof fronts: arms sales, military training,trade,investment,energy, andthe resolutionof borderdisputes. The economic componentsof this relationshiphave failed to live up to theirearly promise,10but the political rhetoriccontinues. Strategicinterestslie at the heart of the tentativerapprochement." Rus- sia's currenteconomic andpoliticalproblemshave temporarilydiminishedits ability to pose a credible military threat to China and it appears on first glance to be well-suited as a strategicpartner. Looking eastward,Chinacan call on Russia's supportto counterbalancethe U.S. and Japan;looking west, Chinasees Russia as a vital stabilizingforce in CentralAsia. On the Russian side, in the wake of the bombingof Iraqby the U.S. and the U.K. in Decem- ber 1998, the prime ministerfor the firsttime publicly invoked the idea of a strategicalliance of Russia and China (and India) to counteractU.S. hegem-

ony.12

Despite the apparentmultiplicityof common interests,a numberof factors constrainthe developmentof this relationship. Beijing prefersto emphasize the practicaleconomic benefits of cooperationratherthan the strategicele- ments, in line with its antipathyto strategic alliances. Further,China still perceives the potentialfor threatsto come from Russia. Neither the disinte- grationof the Russian Federationnor the rise of rabidnationalismwould be in China's short-terminterest, while an economically and militarily strong Russiamightyet resultin an uncomfortableneighborin the long term.13 The Russianview of Chinalikewise is not monolithic, as the enthusiasmemanat- ing from Moscow is counterbalancedby caution and hostility towardChina

China's relationships with Central Asian

10. Gilbert Rozman, "Sino-RussianRelations in the 1990s: A Balance Sheet," Post-Soviet

Affairs 14:2 (1998), pp. 93-113.

11. Lowell Dittmer, "China and Russia: New Beginnings" in China and the World, pp.

94-112.

12. "IraqConflictSparksAlarmin Russia over WorldRole," Financial Times,December23,

1998, p. 2.

13. Ronald C. Keith, "The Post-Cold War Political Symmetry of Russo-Chinese Bilateral-

ism,"InternationalJournal 49:4 (1994), pp. 751-87; JenniferAnderson,TheLimitsof the Sino- RussianPartnership,Adelphi Paperno. 316 (Oxford:OxfordUniversityPress, 1996); andDeng, "China'sSearch."

382 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

in the Russian Far East. This is a major confrontationpoint for Russia and China. The sparsepopulation,the region's underdevelopedeconomy, andthe weakness of the Russian military in the area make the region vulnerableto Chinese domination. The situationis exacerbatedby the moves of regional

Sakha Republic toward

greaterautonomy.14

governments in the Russian Far East and by the

China's relationship with Iran comprises both economic and political dimensions. In the years afterthe CCP came to power in 1949, Chinaestab- lished relationshipswith a numberof newly independentdeveloping coun- tries. After the fall of the Shah in 1971, Iran became one of the most

importantof these partnerstates as a result of its perceived regional impor-

tance.

On the economic frontthe relationshipis based on threemain compo-

nents.

The first is arms sales. The earliestpost-1971 tradebetween the two

states was China's weapons sales to Iran. This commerce persists today,

thoughit has been reportedthatChinahas threatenedto stop the flow because

it believes that Iran was behind some recent Uyghur unrest.15 The second

componenthas been China's provision of nucleartechnology to Iran,though this officially has ceased in response to internationalpressure. Oil forms the

third economic strandof the relationship. As China's requirementsfor im- portedenergy have risen, so, too, has the volume of oil importedfrom Iran. Furthermore,Iran has granted the China National Petroleum Corporation (CNPC) explorationand developmentrights for petroleum. The political motivationfor China's relations with Iranhas evolved over the years. Initially, China was keen to supportIran, as it was with many other developing countries,in establishingits independencefrom the super- powers. This rationale then became assimilated with a general policy of seeking to contain the U.S. in the Middle East. With the Soviet Union's collapse, China's relationship with Iran also became a vehicle for con- strainingU.S. interestsin CentralAsia. A furtherstrandof Chinese strategy in Iran,andindeed in otherneighboringMuslim states,has been the desire to

securesupportin constrainingeffortsby Muslim activiststo aid Uyghursepa- ratistsin Xinjiang.16 Thus, at the heartof China's relationshipwith Iranlies

a tension between the obvious short-termeconomic andpolitical benefitsand

14. VladimirShlapentokh,"Russia,China,andthe FarEast:Old Geopoliticsor a New Peace-

ful Cooperation?"Communistand Post-CommunistStudies 28:3 (1995), pp. 307-18; Kent E. Calder, Asia's Deadly Triangle (London: Nicholas Brealey, 1997), pp. 37-40; Valery V.

Tsepalko,"TheRemakingof Eurasia,"Foreign Affairs 77 (March/April1998), pp. 107-26; and Peter Ferdinand,"Chinaand Russia: A StrategicPartnership?"China Review (Autumn/Winter 1997), pp. 16-21.

15. See

Far Eastern Economic Review (FEER), May 7, 1998, p. 8.

16. JohnCalabrese,"Chinaand the PersianGulf: Energyand Security,"MiddleEast Journal

52:3 (1998), pp. 351-66; and Barry Rubin, "China's Middle East Strategy," China Report 34:3-4 (1998), pp. 345-53.

ANDREWS-SPEEDANDVINOGRADOV383

the potentialdangersinvolved in overt supportof such an unpredictablere- gime.

Key Political Issues in CentralAsia

Fourkey issues form the core of the domestic andforeignpolicies of the new CentralAsian governments:nationhood,political stability, economic devel- opment, and reducing their dependence on Russia.17 These priorities are often in conflict with each other. For example, theireconomies and military security are still heavily dependenton Russia, while moves toward greater economic integrationamongthe region's countriesare seen to underminethe searchfor distinctnationhood. Naturalresourcesareperceived to be the key to economic growth in CentralAsia. In the cases of Kazakhstan,Turkmeni- stan, Uzbekistan, and Azerbaijan,the main naturalresource is petroleum. The rapidexploration,development,andexportof crudeoil as well as natural gas is an economic priorityfor these countries. Their landlocked position means that building the infrastructureneeded to export petroleumis an ex- pensive proposition;the lack of such infrastructureis a majorconstrainton the realization of this potential boon, an issue highlighted by the low oil prices in 1997 and 1998. Russia has the greateststake in CentralAsia of any of the majorpowers; this region had been an integralpartof the countryfor more than a century. Achieving the reintegrationof these states within the Commonwealthof In- dependentStates (CIS) is a key componentof the Russiangovernment'spol- icy, and Moscow seeks to enhance its political, military and economic

influence in the

other nations. In the days of the Soviet Union, little effort was expended on developing CentralAsia's petroleumresources. On gaining independence,these states sought investmentfrom the West and explored a wide range of possible ex- portroutesin all directions. Such activitiesdid not always favor the interests of the Russian government or Russian oil companies. Russia's priorities have been to gain access to resourcesin the CaspianSea, influencethe choice of exportroutes,preventCaspianexportsfrom underminingRussiansales of oil and gas to Europe,and counterthe interestsof other actorsin the region such as the U.S., Europe, Turkey, and Iran.18 In this context, the Central

region while simultaneously minimizing the influence of

Central Asia (Manchester, England:

ManchesterUniversityPress, 1997); Dorian,Wigdortz,and Gladney,"Chinaand CentralAsia's Volatile Mix"; and Paul Kubicheck, "Regionalism, Nationalism, and Realpolitik in Central Asia," Europe-AsiaStudies 49:4 (1997), pp. 637-55.

17. John Anderson, The International Politics of

18. JohnRoberts,CaspianPipelines (London:Royal Instituteof InternationalAffairs, 1996);

JohnV. Mitchell, TheNew Geopolitics of Energy (London:Royal Instituteof InternationalAf- fairs, 1997); Dorian, Wigdortz, and Gladney, "China and Central Asia's Volatile Mix"; and

384 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

Asian states may see China as an importantoutside partner. From an eco-

nomic perspective, China is a

ment andmay be considereda model of successful transitionfrom a planned economy to a marketone. Politically, Chinamay be used as a counterweight to Russia. There is the added advantagefor CentralAsian states that closer relationswith China are unlikely to irritateRussia as much as their contacts with the U.S.19 Thoughneithera largeeconomy nor a world-classmilitarypower, Iranis a majorplayer in CentralAsia. It has sought to establish itself as a regional leader through a range of economic, cultural, and political activities, most notablythroughits participationin peace-makingprocesses.20 With unstable countriesto the west (Iraq)andeast (Afghanistan),good relationsto the north are vital to Iran. Iran has established a working relationshipwith Russia drivenboth by the practicalneed for armsand technology and the searchfor diplomatic supportagainst the U.S.21 With respect to CentralAsian petro- leum, Iranhas three objectives: (1) to gain access to resourcesTeheranbe-

lieves belong to it, (2) to importgas and oil for use in northernIran,and (3)

to serve as a routefor exportsfrom the Caspianregion to the PersianGulf.22

source of manufacturedproductsand invest-

China's InternationalEnergy Policy

A stable energy supply is a crucial requirementfor sustained economic

growth in an industrialnation such as China. long been heavily dependenton coal. China is

of the fuel, which consistently accountsfor about 75% of the country's pri-

mary energy productionand consumption.23 Annual productionreached a peak of nearly 1.4 billion tonnes in 1996, though it droppedto about 1.2

The country's economy has the world's largestproducer

Douglas W. Blum, "Domestic Politics and Russia's Caspian Policy," Post-Soviet Affairs 14:2 (1998), pp. 137-64.

19. Paul Goble, "LookingWest from Beijing," Radio Free Europe/RadioLibertyNewsline

2:241, December 16, 1998.

20.

Forsythe,ThePolitics of Oil; andAdam Tarock,"IranandRussia in 'StrategicAlliance',"

ThirdWorldQuarterly18:2 (1997), pp. 207-23.

21. Tarock,"Iranand Russia."

22. MehmetOgutcu,"EurasianEnergyProspectsandPolitics:Need for a Longer-TermWest-

ern Strategy,"Futures27:1 (1995), pp. 37-65; Forsythe,ThePolitics of Oil;JulianLee, "Geopo-

litical Aspects of Transitfor CaspianOil and Gas" in Caspian Oil and Gas Summit(London:

Centre for Global Energy Studies, 1998), pp. 111-34; and Thomas R. Stauffer, "TheIranian Connection": The Geo-Economics of Exporting Central Asian Energy via Iran, International ResearchCenterfor Energyand Economic Development(IRCEED)OccasionalPaper29 (Boul- der, Colorado:IRCEED, 1997).

23. StateEconomic andTradeCommission(SETC), ChinaEnergyAnnualReview1997 (Bei-

jing: SETC, 1997), pp. 198-201; and BritishPetroleum(BP), BP Review of WorldEnergy 1999

(London:BP, 1999).

ANDREWS-SPEEDANDVINOGRADOV385

billion tonnes in 1998 as demandfell and stockpiles grew.24 The country's provenreservesrankthirdin the world afterthe U.S. andRussia and standat about 115 billion tonnes, which gives a reserves/productionratioof about90

years.25

In contrast,China's oil and gas reserves are modest by comparisonto the potentialfuture domestic demandfor these sources of energy. Oil reserves

estimatesfall in the range of 20-30 billion barrels,giving a reserves/produc-

tion ratio of just 20

of 5% per year, while the growth of domestic crude oil productionhas re- mained stubbornlybelow 5%.27 The increaseddemandfor oil in the 1990s

has been drivenmainly by the transportationandpetrochemicalsectors.28 In the late 1980s and early 1990s, the shareof oil in the nation's total primary

energy consumptionfell

stationsswitching away from oil as a fuel source (see Figure 1). Throughout

the mid-1990s, the proportionremained steady at about 18%-19% of total primaryenergy consumption. Then in 1997 and 1998, when total consump-

tion was falling, oil's sharegrew sharplyto

efficiency gains andplantclosures in the industrialsectorthatcaused a fall in

overall energy consumptionwere not accompaniedby an equivalentdecline in demandfor fuel in the transportand petrochemicalsectors. China's currentlevel of oil productionstands at about 3.3 million barrels per day, which leaves a deficit of some 300,000-500,000 barrelsper day.

The level of oil importsrose tenfold in just eight years, from about 100,000 barrelsdaily in 1990 to more than one million in 1997. At the same time, exportshave shown an overall decline, from about600,000 barrelsper day to below 500,000 (see Figure 2). Any attemptto predict the level of China's future oil imports is fraught with uncertainties,such as the following: its abilityto discover andbringinto production new reserves, fluctuationsin internationaloil prices, potential

changes to

stateof the nationaleconomy, andthe extentto which petroleumproductsare

years.26 Consumptionhas been rising at rates in excess

slightly, probablyas a result of factories and power

23%. This is evidence that the

governmentpolicy on domestic oil pricing and oil imports, the

24. SETC, China Energy Annual Review 1997; and "ChinaProduces 1.236 Billion Tons of

Coal," China Economic Information,March 3, 1999.

25. InternationalEnergyAgency (IEA), "China"in WorldEnergyOutlook(Paris:IEA, 1998),

pp. 273-97.

Today's proven reserves would last 90 years at present rates of production.

Reserves/productionratios should never be used as an indicationof when a countrywill run out

of a resource,because changes in price and technology can radically alter this ratio in a short period of time.

26. IEA, "China"in WorldEnergy Outlook;BP Review of WorldEnergy 1999 (London:BP,

1999).

27. BP, BP Review of WorldEnergy 1999.

28. State StatisticalBureau, China Energy Statistical Yearbook,1991-1996 (Beijing: China

StatisticalPublishingHouse, 1998).

FIGURE

25

I

China's Primary Energy Consumption(million tones

equivalent) and Oil Consumption as a Percentage of Primary Energy Consumption, 1986-1998

of oil

1,000

Energy mrntoe

900

20 Oil %

X0

800

.

.

.:

.::

700

CL

15

10

.

::::::

:.

X

600

500

400

0

5

0

1986

ss.

1990

-

:.::::

1995

300

200

00

0

SOURCE:

British

Petroleum

(BP),

BP

Review

of

World

Energy

(London:

BP,

1987-99).

FIGURE2

1 ,400

1,200--

1,000--

800

600

2MI E 400

200

0-

1990

-200 --

-400 -

-600

SOURCE:

China's Oil Imports and Exports, 1990-1998 (thousandsof bar- rels per day)

Exports

Ibid.,

1991

1991-99.

19

1993

Net imports

1994

1995

Imports

1996

1997

1998

ANDREWS-SPEEDANDVINOGRADOV387

substitutedby new or renewable forms of energy. The first of these items will have the greatestimpact in the medium term. Since the emergence of China's modem petroleum industry in the 1960s, oil productionhas been concentratedin the country's northeasterncorner. Even in 1996, some 63%

of

in the northeast:Daqing, Shengli, and Liaohe.29 Productionfrom these stra- tegic fields has reacheda plateauand is set to decline. The drive to discover new reserves in Xinjiang in northwesternChina has met with only modest success-though substantialresourceshave been found, theirremotelocation rendersmuch of it commerciallyunattractive.Nevertheless,plans to exploit this resourcecontinue to be pushed forwardat great cost.30 The other great frontierlies in the remote partsof the South China Sea. Large reserves are

expected,or ratheranticipated,but unresolvedterritorialdisputesarelikely to prevent an assessment of the area's true potential for several years. These realities lie at the heartof medium-termforecastsof China's futuredomestic productionand net importsof oil. In recent years, one key short-termdeterminantof China's policy on oil trade has been internationaloil prices and their level relative to domestic prices. Low internationalprices have tended to lead to a substantialrise in crude oil importsalong the coast as buyers shunnedthe more highly priced domestic supplies. Much of this tradehas been illegal. Meanwhile,domestic companies continued producingoil, and stockpiles accumulated. The gov- ernmenteventually was obliged to clamp down on not just illegal but also legal imports in order to protect domestic oil companies. This chain of events occurredin 1994, when the domestic price was far in excess of inter- nationallevels, and repeatedin 1998. On this second occasion, the govern-

the domestic oil pricing mechanism,

ment implementeda radicalreform of

bringing domestic prices more in line with internationalones.31 Thus, the generaltrendtowarda growing level of net oil importshas been punctuated by discontinuitiesresultingfrom changes in governmentpolicy.

The most optimisticpredictionsforecastthat China's domestic production of oil will reach4.0 million barrelsper day in 2010 before startingto decline. In 1995, Chinese sources estimatedthatthe productionshortfallwould be in the rangeof 2.8-3.4 million barrelsper day by 2010, but by 1999 this projec- tion had fallen to some 2.4-2.8 million. The InternationalEnergy Agency

total onshore and offshore domestic oil productioncame from threefields

(IEA) projects a higher level of

net importsamountingto some 4.0 million

29. SETC, China EnergyAnnual Review 1997.

30. MehmetOgutcu,"China'sEnergyFutureand Global Implications,"in China's Economic

Security,eds. WernerDraguhnand RobertAsh (Richmond:CurzonPress, 1999), pp. 84-141.

31. FereidunFesharakiand Kang Wu, "RevitalisingChina's PetroleumIndustrythroughRe-

organisation:Will It Work?"Oil and Gas Journal, August 10, 1998, pp. 33-45.

388 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

barrelsper day by 2010, which could rise to 8.0 million by 2020.32 This is some 40%greaterthanthe currentamountof oil thatJapanimportsandabout 85% of the currentlevel of imports to either the U.S. or Western Europe. Projectionsbeyond the year 2010 face the uncertainimpact of fuel substitu- tion. The technology alreadyexists to power motorvehicles with a range of fuels such as alcohol, methane,compressednaturalgas, liquefiednaturalgas, and electricity,and pilot projectsalreadyhave been set up in China.33 Until coherentlong-termenergy and environmentalpolicies are drawnup and put in place, it is impossibleto assess the extentto which demandfor oil products will be constrainedby fuel substitutionin China's transportsector. Naturalgas, unlike oil, has played an insignificantrole in China's energy mix, accountingfor just 2% of primaryenergy consumption. This is set to change as China tries to make betteruse of its own gas resourcesas well as examine the opportunitiesfor tapping into the vast reserves in Russia and CentralAsia. Not only does Chinarequireadditionalsuppliesof easily trans- portableenergy, but the governmentis keen to substitutegas for coal where possible to reduce the level of atmosphericpollution. Domestic reserves of naturalgas are estimatedat 1.4 trillion cubic meters. Currentproductionof 22 billion cubic meters per year gives a reserves/productionratio of 60 years.34 However, any substantialincrease in demand will requireboth an ongoing effort to discover and develop new gas reserves within China (both onshore and offshore) and the constructionof new infrastructurefor gas im- portation. The volume of annualnaturalgas importscould be as high as 60 billion cubic meters by the year 2020,35 which is equivalent to the current level of gas importsto Japan,the world's thirdlargestgas importerafterthe U.S. and Germany.

The State, Energy Imports,and State EnterpriseAmbitions

China is set to become one of the world's major importersof both oil and naturalgas. The role to be played by China's governmentand state oil com- panies in facilitatingthese importsis a key issue to be evaluatedin this arti- cle. Before 1990, China's involvement in the petroleum industrybeyond its shorelargelywas limited to importinga low volume of the resource,predom-

32. Xiaojie Xu, "China's Looming Oil Crisis and Ways of Avoiding It," OPEC Bulletin,

January1997, pp. 11-16; "MoreOil Imports,"ChinaEconomicInformation,May 23, 1999; and IEA, "China."

33. Alcohol Fuels in Cars Could Clean Up Fumes," China Daily,

34. BP, BP Review of WorldEnergy 1999.

35. Keun-Woon Paik, "China Moves on Gas for Supplies and Environment,"Petroleum

September24, 1998, p. 3.

Economist,February1999, pp. 23-24.

ANDREWS-SPEEDANDVINOGRADOV389

inately from SoutheastAsia. In the

sions. First, it became clear that the volume of crude oil importswas set to rise dramatically. China startedto importever largerquantitiesof oil from the Middle East and furtherdiversify its sources of supply.36 Second, the governmentcommittedits state-ownedenterprises(SOEs) in the oil business to undertakesubstantialinternationalinvestmentsrelatedto the extractionof oil and gas resourcesin the groundas well as in transportnetworks.37 The earliestprojectswere directedat such low-risk projectsas oil field rehabilita- tion, field development,andthe provisionof services. Morerecently,the two majorupstreamoil companies,CNPC and ChinaNational OffshoreOil Cor- poration(CNOOC,the main Chinese explorerandproducerof oil and gas in

China's offshore waters),have signed majorexplorationandproductioncon- tracts,while the ChinaPetroleumCorporation(Sinopec) has enteredrefinery projects.38These activities spanmost of the globe, takingplace in Southeast Asia (Indonesia,PapuaNew Guinea, Thailand,Bangladesh,Myanmar,Ma- laysia), northern and western Africa (Nigeria, Sudan, Ethiopia, Algeria), South America (Venezuela and Peru), the Middle East (Iran,Iraq, and Ku- wait), and the CIS (Russia, Kazakhstan, Turkmenistan,Azerbaijan). Of these, the largest commitmentshave been those made in CentralAsia.

1990s, China made two strategicdeci-

In the late 1990s, CNPC committed about US$800 million on two

field

developmentprojectsin Kazakhstanat Aktyubinskand Uzen that have total oil reserves of about2.5 billion barrels.39The total investmentrequiredfor the Aktyubinskprojectmay exceed US$4 billion. At the same time, CNPC has been seeking oil and gas development projects in both Azerbaijanand Turkmenistan,and at least three pipeline projects with CNPC involvement have been proposed.40The shortestpipeline routewould take oil southfrom Kazakhstanthrough Turkmenistanto Iran and possibly on to the Persian Gulf. Two export lines to the east are under discussion: one for oil that would cross Kazakhstan,linking its fields in the west with refineriesin the east, before continuingin to Chinaandthe otherto carrygas from Turkmeni-

36. FrankC. Tang and FereidunFesharaki,"China:Evolving Oil TradePatternsand Pros-

pects to 2000," Natural Resources Forum 19:1 (1995), pp. 47-58.

37. Mehmet Ogutcu, "China's Outward-LookingEnergy Linkages," Geopolitics of Energy

20:9 (September1998), pp. 2-8.

38. Until 1998, CNPC was responsible for nearly all onshore oil and gas exploration and

development in China. The restructuringof state companies in 1998 divided these

assets between CNPC and Sinopec, which until this time had been involved mainly in down- streamactivities. CNPC retainedits overseas investments.

upstream

39. "China'sSearch for Oil," China EconomicReview, July 1998, p. 36.

40. JamesP. Dorian et al., "Energyin CentralAsia and NorthwestChina:MajorTrendsand

Opportunitiesfor Regional Cooperation,"Energy Policy 27 (1999), pp. 281-97; and "China's Pipeline Plan for KazakhstanPoses Threatto Policies of Russia, U.S.," PetroleumIntelligence Weekly,September29, 1997, pp. 1-2.

390 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

Stanto China. These two easternpipelines (to runpossibly as far as the coast of China) would be substantial undertakings, with total lengths in the 4,000-7,000 km range and price tags of US$5-10 billion. To date, the only eastwardtransportof petroleumfrom CentralAsia has been the carriageof crude oil from Kazakhstanby trainto northwesternChina. The fall of oil prices in 1998 broughta dose of realismto these ambitions. The oil and gas resourcesof the Caspianregion startedto look less attractive to all internationalinvestors. Cost reductionand elimination of all but the most attractiveexportoptions became centralto the strategiesof the interna- tional investors. Even CNPC has had to rethinkits extravagantplans in Ka-

zakhstan, calling into question its

Aktyubinskfield and the pipeline to Xinjiang.41 Though the rise of interna-

tional oil prices during1999 and early 2000 provideda more favorablecom- mercial environmentfor investors in the Caspianregion, the futurelevel of prices remainsvery uncertainand only the most favorableprojectsare mov- ing ahead.

promised investments in

both the

Energy Policy and SOEs It is not easy to identify clearly the objectives and prioritiesfor this program of overseas investment. The difficulty is enhanced by the probabilitythat, though the Chinese government and the SOEs appear to speak with one voice, their aims are not identical. The key drivingforce from the government'spoint of view is the desire to enhancethe securityof the country'spetroleumsupply throughowning both the resource in the ground and, where relevant,the transportnetwork. The most senior governmentofficials have publicly exhortedChina's oil industry to invest in overseasoil andgas resourcesin orderto make up for the domes- tic shortfall.42 Specific productiontargets have been set for this overseas productionof 1.0 million barrelsper day of oil and 50 billion cubic meters

per year of gas by the year 2010.43 25%-40% of net oil imports.

In the case of oil, this would amountto

41. "China'sCNPCto Renege on KazakInvestment,"PetroleumArgus, October30, 1999, p.

9; andJ. Whalen,"Relationswith China:Not Yet the Best of Friends,"Financial TimesSurvey:

Kazakhstan,July 1, 1999, p. 4.

42. For example, a speech by PremierLi Peng in May 1997, reportedin GuangmingDaily,

May 29, 1997. See also Ye Qing, "China'sEnergyPolicy and EnergyDevelopmentProspects" (paperpresentedat the World Energy Council Meeting on New Energy Technology for Asia Pacific, April 1997, Beijing). Ye Qing was at the time vice-chairmanof the State Planning Commission.

43. "ChinaTargets300 Million Tonnes of OnshoreOil and Gas by 2010," China Economic

Information,June 1, 1999.

ANDREWS-SPEEDANDVINOGRADOV391

The term "securityof supply"is sometimes used in a very emotive way, andit is essentialto clarify whatit means andwhatmay be done to achieve it. In the case of oil, short-termcrises may resultin eitherthe physical interrup- tion of supply or a massive increase in price or both. The former may be specific to a country, while the latteris likely to be global in impact. Two complementaryapproachesto mitigate the effects of such crises are to build up a strategicreserve of oil and to hold sufficientforeign exchange reserves thatwould allow the affectedcountryto buy its way out of a short-termcrisis. The focus of most governmentsis on long-term security of supply. The lowest cost and most effective way of achieving this is throughthe physical and regulatoryintegrationof the national marketfor oil and gas with the widermarketsfor those resources-at the regionallevel for gas andthe inter- nationallevel for oil. It is importantto note thatoil and gas marketsoperate in quite differentways. The marketfor crude oil and oil productsis essen- tially international,and a large proportionis sold on spot marketsor short- term contracts. Thoughpipelines have to be constructed,they generally de- liver to the marketratherthanto a specific contractedcustomer. In contrast, internationallytradednaturalgas tends to be sold on long-term contracts. This relatesto peculiaritiesin both the transportand the consumptionof gas. First, all gas transportsystems require very large investment, whether for pipelines or for liquefiednaturalgas (LNG) carriedby sea. Second, the infra-

poorly developed in most countries and therefore

structurefor using gas is

the supplierof gas needs assurancethat an operatingmarketexists. Integratingnational marketswith broaderones abroadshould be supple- mented by enhancing the physical security of sea-lanes and pipelines, the effective use of domestic resourcesof oil and gas, the appropriatemanage- ment of energy mix in domestic consumption, and the measures pursued, preferablythroughthe market,to raise energy efficiency. Such an approach does not requirethe ownershipof overseas resourcesin the groundby either the governmentor a state company. However, many in the Chinese govern- ment, as well as Chinese academics and commentators,take the view that such ownership should be an essential component of the country's energy policy, whetherthe petroleumis transportedto Chinaor sold for dollars. In- deed, some authorsportrayit as a matterof urgency and nationalpride that Chinamust access acreagenow, because otherwise there will be none avail- able. China is seen to be in a competition with other countries that is per- ceived as being one of capitalinvestment.44Such a formulationof the issue ignores the facts thatmost internationaloil companies are financedprivately

44. Chang-leYan, ed., China'sEnergyDevelopmentReport(Beijing:EconomicandManage-

ment Press, 1997), p. 70.

392 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

andnot obliged to supplytheirhome states,andthatproductioncost as much as capitalavailabilitylies at the heartof internationalcompetition. The view of China's oil companiesmay be somewhatdifferent. Across the world, many state oil companies wish to use their privileged positions at home to become major players in the internationalpetroleum industry, an ambition supportedby governmentsoften for nationalisticratherthan eco-

nomic reasons. China is no exception, and CNPC is

expansion as documentedabove. Indeed, one of the objectives of the 1998 reformsof the country's oil sector was to produce two vertically integrated companies,CNPC andSinopec, thatwould be of internationalstature,at least in size andrangeof activities. Before this reform,CNPC was predominantly active in explorationandproductionand Sinopec in refiningand distribution. Both arenow involved in both upstreamanddownstreamactivities, CNPC in northernand western China and Sinopec in the south and east. To date, no frameworkfor competitionbetween the two has been drawnup. Such ques-

tions aside, althoughinternalstrategydocumentsarenot availablefor exami- nation,it is clear thatthe objective of the internationalinvestmentprogramis to projectCNPC into the top 10 oil companies in the world.45 Overseasinvestmentis particularlyappropriatefor CNPC, given the likely limited scope for furtherlarge discoveries within China. In additionto, and possibly more importantthan,the profitmotive, thereis the need to maintain or expand the company's revenue and find work for the large proportionof CNPC's 1.5 million workforcewho might otherwise be unemployed. How-

ever, as the

investment commitments grow a number of questions remain

unanswered:who is driving the strategy?who will bear the financial risk? and how much is Chinapreparedto pay to gain its objectives? These ques- tions are especially pertinentin the light of the high level of the bids being submittedby CNPC in internationallicensing roundsandthe recentvolatility of internationaloil prices. On the basis of this analysis, one can speculate that there are indeed two

views on the internationalinvestmentprogram. The first,held by many gov-

ernmentofficials and academics, focuses on securityof supply and is based on a combinationof militaristicthinkinganda poor understandingof how the internationalpetroleumindustryand marketsoperate. The second, held by

in the forefrontof this

the oil companies themselves, is based on a

presentsituationmay be used to promotethe corporateinterest. This appar-

ent convergenceof governmentenergy policy and industrystrategymay not

commercial vision of how the

45. See China Petroleum IndustryYearbook1997 (Beijing: China PetroleumIndustryPub-

lishing Company,1997), p. 239. Here CNPC strategywith respectto internationalinvestmentis stated as being aimed at "two naturalresources"(oil and gas), "two markets"(domestic and international)and "two currencies"(domestic and foreign). This explanationof international corporatestrategycontains no mention of nationalinterests.

ANDREWS-SPEEDANDVINOGRADOV393

be long lived. Despite the returnof oil prices to levels above US$20 per barrelin 1999 and as high as US$30 per barrelin early 2000, theirlow level in 1998 has placed pressureon all oil companies to improve their technical and financial performance. State companies, such as CNPC and Sinopec, generallyhave higherunitcosts for any given oil or gas field thanthe interna- tionalcompanies. If the Chinesegovernmentis determinedto reformits state enterprisesand enhance profitability,the companies will have to cut costs andbe much more selective in theirinvestments. If such a policy is followed through,the scope for Chineseoil companiesto invest overseas is likely to be curtailed,possibly drastically.

Assessment of Interests

The previous sections have reviewed some of the key issues in foreign and energy policy that are raised by China's petroleum investments in Central Asia. This section firstevaluatesthe interestsof the differentpartiesin China and then examines the interests of the CentralAsian states in the light of China's aspirations.

The Viewfrom China

Two key considerationsare driving China's involvement in the exploitation of Central Asia's petroleum resources: energy policy and foreign policy.

Given the contrastingnature of oil and gas

secure long-termsupplies is much less for oil thanfor gas. Chinahas a long coastline. Provided certain reforms are made to the Chinese domestic oil market,integrationwith the internationaloil markets,large-scale import of oil to coastal ports, and transportinlandby pipeline are clearly the least-cost strategy. However, the governmenttakes the view thatits coastline is sensi- tive to blockade, as are the sea-lanes through the Malacca Straits and the SouthChinaSea. In this context, Kazakhstan'soil resourcesare attractiveas an alternativesource of supply in an immediatelyadjacentcountry.

Should the Chinese governmentdecide eventuallyto supportCNPC's am- bition to build an oil pipeline from Kazakhstanto the heart of China, the countrywill incura numberof costs. First,therewould be the immediateand

substantialcost of constructinga pipeline that does not provide the least ex- pensive route for oil imports. Second, China would then be tied to a source of oil that will never be among the cheapest in the world and may even be

rendereduncompetitiveif

existence of this pipeline will act as a disincentive to develop economically

viable and environmentallyfriendly substitutesfor oil productsin the trans- port sector.

markets, the strategic need to

oil pricesfall to US$10 per barrelagain. Third,the

394 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

In the case of naturalgas, Chinahas a wide varietyof optionsfor import.46 These include the proven andproducinggas fields of West Siberiaas well as less developedreserves in East Siberiaand the RussianFarEast. In addition to piped gas from these regions, the importof liquefiednaturalgas to China's coastal provinces is also a realistic proposition. Against these alternatives, the pipeline from Turkmenistanstartsto look expensive andtime-consuming. Chinais not the only Asian countryassessing the gas resourcesof Central and East Asia. Both Japanand South Koreahave a keen interestin securing long-termaccess to new gas reservesfor themselves;cooperationwith China could form the basis of a major gas transportnetwork in Centraland East Asia. However, the cost of such projects will be very high because of the

need for infrastructurefor both transportand distribution. The recent Asian recession will limit the ability of these countriesor theirindustriesor both to fund infrastructureprojectsthat are not commerciallyviable. In the shortand mediumterm,the only commercialgain availableto Chi- nese petroleumcompaniesin CentralAsia is likely to be restrictedto devel-

opment; productionand sale

markets;and the provision of services. All of these activities are subject to

the influence of internationaloil prices. The constructionof substantialex- port lines eastwardinto China will be drivenmore by political and strategic concerns than by the need to secure low-cost supplies of oil or gas. One event thatwould change this assessmentwould be the discovery of large and commerciallyviable reservesof oil or gas in northwesternChina. The cost of the pipeline network from CentralAsia to China's heartlandcould then be partlyborn by these new discoveries. In the context of foreign policy, Chinahas clear political and strategicin- terestsin CentralAsia thatare quite independentof petroleum. As discussed above, they may be categorizedas establishingregional influence, maintain- ing regionalstability,andengaging in economic cooperation. These interests are accentuatedby the presenceof a largeregionalpetroleumresource,which in turnhas enhancedthe attentionpaid to CentralAsia by threeotherparties:

the West, Russia, and Iran. For China,this provides two parallelchallenges:

to prevent the other parties from gaining excessive influence in the region, while continuingto develop bilateralrelationswith these parties,both inside and outside the region. From this perspective,there exists a strongconvergence between China's foreign policy and its currentenergy policy. Both would be supportedby massive Chinese investments in resources as well as transportsystems in

of oil into the local, regional, or international

46. Keun-Woon Paik, Gas and Oil in Northeast Asia: Policies, Projects, and Prospects

(London:Royal Instituteof InternationalAffairs, 1995); "GazpromOpens Some Projectsto For- eigners-Provided They Help Build a Pipeline to China,"RussianPetroleumInvestor(February 1999), pp. 31-35.

ANDREWS-SPEEDANDVINOGRADOV395

CentralAsia. China's political presence and influencewould be enhancedat the same time that it secures new supplies of energy. Petroleumcould be- come a tool of foreignpolicy andestablishChinaas a majorplayerin Central Asia. Seriouspolitical drawbacksmight appearonly later. For example, for- eign policy in the region could become the servant of energy policy once such investmentshad been made.

Such a partnershipof energy and foreign policy is viable as long as some- body is preparedto pay the cost. In the early 1990s, the relatively high oil prices, the soft budgetaryconstraintson Chinese state companies, and the ample potentialfor financingfrom Japanand Korea meant that finance was

not a critical issue. Given the prices and the drive to make its

ernmentwill need to reassess to what extent it can affordto use petroleumas a tool of foreign policy in CentralAsia. Furtherconstraintson the partnershipof energy andforeign policy in Cen- tralAsia areprovidedby China's relationshipwith Iranand Russia. Iranhas the ambition to act as the main low-cost export route for Caspian oil, as indeed it could do once U.S. sanctions are lifted. Russia is keen to provide substantialgas supplies to China and these supplies would be cheaperthan any fromTurkmenistan.WereChinato make strategicinvestmentsin oil and gas pipelines eastwardfrom Kazakhstanand Turkmenistan,it would be act- ing againstthe interestsof Iranor Russia, respectively.

present volatile and uncertainnature of oil state companiesprofitable,the Chinese gov-

The Viewfrom CentralAsia Securingexportroutes for theirpetroleumis a key priorityfor most Central Asian states. The two countriesfor which Chinaprovides a potentialexport route for petroleum are Kazakhstan,for oil, and Turkmenistan,for natural gas. However, it is essential to understandthe prioritiesof both these coun- tries andthe foreign companies,which providemost of the investment. Gov- ernments and companies alike wish to develop the fields, construct the transportnetworks, and startproductionas soon as possible. A numberof factors constrainthe speed with which they can move: providersof finance have to be persuadedof the commercial viability of the projects;domestic and external political conflicts of interest have to be resolved; time is re- quiredfor construction,especially for long pipelines; and, in the case of gas, marketshave to be developed. Governmentsand companies will both prefer the export option with the lowest cost and shortestcompletion time, all otherthings being equal. Both will want at least one exportroute from any one countryin orderto prevent themselvesbeing held hostage by a transitstate. However, the recentvolatil- ity of oil prices will constrainthe scope for achieving this. In addition,the

396 ASIANSURVEY,VOL.XL,NO.2, MARCH/APRIL2000

CentralAsian governments,andpossibly some of the companies,would pre- fer to avoid dependenceon transitthroughRussia. The exportroutes throughChina are unlikely to satisfy the need for speed andlow cost. This raises the questionof whetherthe CentralAsian statesare just using the discussions with China as a bargainingchip in negotiations with other states or as an excuse for developing closer ties with China. Pur- suing such a strategymay have been the case two or threeyears ago, but the low oil prices of 1998 have shown the Caspiangovernmentshow uncompeti- tive theirpetroleumresourcesare. As the largestmarketfor petroleumadja- cent to CentralAsia, China's attractivenessas a destinationfor petroleum exportshas been enhanced. A furtherchallenge for CentralAsian oil produ- cers is that a numberof Gulf states, such as Iranand Saudi Arabia,areplan- ning to open their upstreamindustriesto foreign investors. This will place even greaterpressureon CentralAsian producersto develop only the lowest cost fields and use the least expensive export routes. In this respect, both Kazakhstanand Turkmenistanwere bound to respondpositively to Chinese approachesin the mid-1990s to constructexport pipelines to the east for oil and gas, respectively, given that the Chinese parties appearedto have the funds and that normalcommercialcriteriadid not seem to apply. In additionto the need for petroleumexportroutes,the CentralAsian states have a wide rangeof political reasonsto build close relationswith Chinathat relateto regional stability,balancingoutside influences,and economic devel- opment, as discussed above. For these states as well as for China, the in- volvement of Chinese companies in the exploitationof CentralAsian petro- leum resources and the constructionof export networks eastwardto China initially held a strong appeal for both political and economic reasons. The recentvolatility and uncertaintyof oil prices and the potentialavailabilityof new sources of petroleumsupply in the Gulf may togetherforce the Central Asian states to focus on commercial ratherthan political criteria in their choice of export routes. Thatbeing said, if a particularCentralAsian state finds thatit is unableto sell a large proportionof its potentialproductionof oil or gas to the antici- patedmarkets-as a resultof oversupplyor low prices-it may be obliged to develop an alternativestrategy to prevent its economic development being stifled. If Chinapersists in its approachto achieving securityof energy sup, ply and is preparedto pay for it, then the interests of both China and the respectiveCentralAsian statecould be servedby constructingan exportpipe- line that conventionally would be described as being uneconomic. China would enhance both its long-term security of energy supply and regional political influence, albeit at a cost, while the CentralAsian state would in- crease its foreign exchange earningsfrom petroleumand strengthenan im- portantpolitical relationship.

ANDREWS-SPEEDANDVINOGRADOV397

Conclusion

CentralAsia has become a focus of strategic,political, andeconomic interest for many parties,including the U.S., Europe,Russia, Iran,and China. Even without the presence of substantialpetroleumreserves, the newly indepen- dent CentralAsian states would have become a battlegroundfor competing outside interests seeking to establish their influence. Petroleum has only heightenedthe stakes. China has a range of motives for its involvement in CentralAsia. The searchfor securityof petroleumsupply is complementedby a rangeof polit- ical, economic, and securityconcerns. China's abilityto implementits ambi- tious plans for investmentin petroleumresourcesand exportinfrastructurein the CaspianSea region arelikely to be temperedby a numberof factors. The confused and conflicting natureof the motives for investing in overseas pe- troleumprojectswill probablybe broughtto the fore in these times of volatile oil prices and Asian recession. The sheer scale of funds needed for the pipe- line projects runningeastwardto China seems certainto renderthem unat- tractive to commercial lenders and this would place the risk firmly on the shouldersof the Chinese governmentor the state oil company, CNPC. The purchase of petroleum resources in the ground and subsequentex- ploitationby CNPC is not the lowest-cost way to achieve securityof energy supply. Oil price volatility, combined with China's desire for its state com- panies to returna profit,may undermineCNPC's investmentplans for Cen- tralAsia. Likewise, fromthe point of view of the CentralAsian states,export routes to the east throughChina are far from being the lowest cost options. At present,it would appearto be predominantlypolitical and strategiccon- cerns thatkeep China's oil companiesin CentralAsia. The Chinese govern- ment considers the sea-lanes from the Gulf to the Chinese coast to be vul- nerableto attackor blockade. Fromthis perspective,a pipeline networkfrom CentralAsia would providea viable complementarysource of supplyas well as enhance Beijing's political standingin the region. However, the greater the uncertaintyover futureoil prices, the less attractivedo the CentralAsian projects appear. Conversely, the interest of the Central Asian states in China's involvement in their field development and export projects is en- hanced by lower oil prices. If investment in exploration and development dwindles in the Caspianregion and grows in the Gulf, China's promisedin- vestments suddenly become not only attractive but potentially important componentsof nationaldevelopmentfor KazakhstanandTurkmenistan.This asymmetryof interestsbetween China and the CentralAsian states is likely to prove a majorstumblingblock to both constructionof exportroutesto the east and other involvement of China in CentralAsia's petroleumindustry.