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 Stable URL: http://www.jstor.org/stable/3021138 . Accessed: 25/04/2011 11:01
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IN CHINA'SINVOLVEMENT CENTRAL ASIANPETROLEUM

Convergentor Divergent Interests?
PhilipAndrews-Speed and

Sergei Vinogradov
China's involvement in CentralAsia has grown significantly in the past few years, driven by both the country's political and economic ambitions and its energy requirements. China is becoming a major importerof oil and gas, and the countries of CentralAsia-particularly Kazakhstan,Azerbaijan,Uzbekistan,and Turkmenistan also Kyrgyzstanand but Tajikistan-are attractivepotential targets in Beijing's search for secure petroleum supplies. China already has committed substantial investments in Kazakhstanand also hopes to provide further capital aimed at developing resourcesin CentralAsia and building long-distancepipelines runningto and from the region. If these ambitiousplans materialize,China's political influence in CentralAsia would be greatly enhanced. This article assesses China's goals for expandingits source of energy supplies in the context of its foreign and energy policies. It focuses on the potential for conflicts of interest (1) over achieving the goals of these two policies, (2) between the goals of the state's energy policy and the ambitions of stateowned oil companies, and (3) between China and the Central Asian states. The article's first section will address internationalpolitical issues in the region, 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 internationalinvestment in petroleum, despite the gov-

Philip Andrews-Speedis Lecturerand Director of 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 i 2000 by The Regents of the University of California/Society. All rights reserved. Send Requests for Permission to Reprint to: Rights and Permissions, University of California Press, JournalsDivision, 2000 Center St., Ste. 303, Berkeley, CA 94704-1223.

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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 investments in CentralAsia.

China's Foreign and Energy Policies

Issues and Framework The literatureon China's foreign policy is large'; here, we restrictourselves to identifying those features of it that have a direct bearing on the nation's behavior in the CentralAsian region, namely, general aspirations,conceptual approach,priorities,relevantspecific attitudes,and decision making patterns. At the heartof China's foreign policy lies Beijing's desire to be recognized as a major player in internationalpolitics and establish itself as the leading regional power in East Asia. This aspirationis in part derived from the government's worldview. Despite occasional liberal rhetoric, the Chinese government'sapproachto foreign policy in the 1980s and 1990s has emphasized nationalism,sovereignty, and a zero-sum balance of power politics, and may be described as neorealist. In a world perceived as hostile, it is military security and national sovereignty rather than economic prosperity and social welfare that have been of prime importance, although economic interests have become progressively more importantof late. A recent priorityfor China's foreign policy makers has been to establish peaceful working relationships with as many states as possible, especially neighboringcountries, so that the country can direct its efforts to economic development.2 One theme that continues to underlie many of the relationships China has established has been the perceived need to act as a counterbalance to the U.S. In China's eyes, the U.S. is not only a global hegemon that needs restrainingbut may also pose a threatto the stability and status of China itself. This latterconcern is of crucial significance given that the present governmentin Beijing believes that the continued existence of the Chinese CommunistParty (CCP) is vital to the nation's security and development. Economic interest is a significant motivation behind many of these ties. Beneath this expanding network of diplomaticlinks is a preferencefor bilateral relationshipsbased on practical needs ratherthan strategic partnerships
1. For a recent listing, see the bibliography in 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 Foreign Policy: Theory and 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 in Thinking and the Sino-Russian Strategic Partnership" China Review 1998, ed. Joseph Y. S. Cheung (Hong Kong: Chinese University Press, 1998), pp. 83-123.

ANDREWS-SPEED VINOGRADOV AND 379

or multilateral mechanisms.3 In cases where geopolitical or securityconcerns are of prime importance,trade and investmentmay be used as instrumentsto establish new relationships.4 One of the key dilemmas facing the Chinese governmentis what approach it should take toward globalization and growing internationalinterdependence. On the one hand, greater economic integrationwith the rest of the world is a prerequisitefor sustainedeconomic growth. On the other, greater integration poses two parallel threats that might weaken the government's hold on power: a reductionof China's political independenceand the country's increasedexposure to Westernpolitical and culturalvalues. As a result, activities that would lead to greaterChinese political integrationwith the rest of the world have not kept pace with those related to increased economic interdependence. Indeed, economic self-interest has been pursued in a very narrowlydefined context, with a case-by-case quest for maximum benefit at minimum cost. But China's global status does depend to some extent on joining such key internationalclubs as the World Trade Organization,and it is likely that the countrywill continue to make progress, albeit slow, toward greaterpolitical as well as economic interdependence.5 This brief account may give the impression that foreign policy making in China is a unifiedprocess. Since the death of Mao, this has been far from the case. Many commentatorshave emphasizedthe importanceof factional politics in China's foreign policy decision-making process that pits realists and againstliberals,nationalistsagainstinternationalists, those supportingthe promotionof national interests overseas against those giving priorityto selfpreservation. In addition,the past two decades of the 20th centuryhave seen a proliferationof nongovernmentaldomestic actors seeking and to some extent able to influence China's foreign policy.6 Taken together with the fact that the CCP's first priority is to remain in power, these factors in part explain why the governmentfinds it difficult to formulateand implement sus3. Naughton, "The Implications of China's Economic Development Strategy";William T. Tow, "Chinaand the International StrategicSystem"in Chinese Foreign Policy, pp. 115-57; and Michael Mandelbaum,"WesternizingRussia and China,"Foreign Affairs 76 (May/June 1997), pp. 81-95. 4. Harry Harding, "China's Cooperative Behaviour," in Chinese Foreign Policy, pp. 375-400; and Thomas W. Robinson, "ChineseForeign Policy from the 1940s to the 1990s," in ibid., pp. 555-602. 5. Thomas W. Robinson, "In[ter]dependence China's Post-Cold War," in China and the in World,pp. 193-216; and Yong Deng, "The Chinese Conceptionof National Interestsin International Relations," China Quarterly 154 (May 1998), pp. 308-29. 6. Carol Lee Hamrin, "Elite Politics and the Development of China's Foreign Relations" in Chinese Foreign Policy, pp. 70-112; Bin Yu, "The China Syndrome:Rising Nationalism and Conflict with the West,"Analysisfrom the East WestCenter, no. 27 (May 1996); and Samuel S. Kim, "China's Foreign Policy in Theory and Practice,"in China and the World,pp. 3-33.

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tained foreign policy initiatives as well as why China's foreign policy appears so unpredictable. Only small changes in either the external environmentor the internal balance 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 Central Asia. The goals of this policy are to constrain new threats and enable China to take advantageof new opportunities. The two most significant new threatsfacing China are overlapping ones: the stability of the country's borders with the Central Asian states and the potentialfor unrestamong Muslim peoples across the region. In the wake of the Soviet Union's downfall, Russia, China, Tajikistan,Kyrgyzstan,and Kazakhstanmoved rapidlyto agree on where theircommon borderslay and plan for reductionsin the numbersof troops along those frontiers. However, there also has been an upsurge in radical Islamic sentimentin the region that worries the governments of China, Russia, and other regional states.8 Thus, in practicalterms Chinafaces potentialthreatsfrom (1) ethnic groups that straddle 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 regional political stability in the face of these potential problems lies at the heart of China's currentCentralAsia policy. Trade and investment have been the most visible elements of China's growing involvement in Asia. Manufactured goods from China form a large proportionof imports to Kazakhstan,Kyrgyzstan,and Uzbekistan. Much of this trafficcomprises basic consumergoods made in northwesternChina that 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 development in Xinjiang Province renders this commerce with CentralAsia especially important.9 At present, Kazakhstanis the most importantCentralAsian state to 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). 9. Rosemarie Forsythe, The Politics of Oil in the Caucasus and CentralAsia, Adelphi Paper no. 300 (Oxford:Oxford University Press, 1996); and James P. Dorian, Brett. H. Wigdortz, and Dru C. Gladney, "Chinaand CentralAsia's Volatile Mix: Energy, Trade,and Ethnic Relations," Analysis from the East West Center, no. 31 (May 1997).

ANDREWS-SPEED VINOGRADOV AND 381

communication across this border, together with the substantialnumber of Uyghurs living in Kazakhstan,combine to provide Chinawith a strongincentive to build an effective working relationship. To these factors may be added the CentralAsian state's considerableoil potential,which will be discussed furtherbelow. China's relationships with Central Asian states should not be analyzed without reference to two other countries that also have a substantialinterest in the region: Russia and Iran. Of China's many new relationships,the one that most resembles a strategic partnershipis with Russia. The 1990s have seen the two nations cooperate on a number of fronts: arms sales, military training,trade,investment,energy, and the resolutionof borderdisputes. The economic componentsof this relationshiphave failed to live up to their early promise,10but the political rhetoriccontinues. Strategic interests lie at the heart of the tentative rapprochement." Russia's currenteconomic and political problemshave 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,China can call on Russia's supportto counterbalancethe U.S. and Japan;looking west, China sees Russia as a vital stabilizingforce in CentralAsia. On the Russian side, in the wake of the bombing of Iraqby the U.S. and the U.K. in December 1998, the prime minister for the first time publicly invoked the idea of a strategic alliance of Russia and China (and India) to counteractU.S. hegemony.12 Despite the apparentmultiplicityof common interests,a numberof factors constrainthe development of this relationship. Beijing prefers to emphasize the practical economic benefits of cooperationrather than the strategic elements, in line with its antipathyto strategic alliances. Further,China still perceives the potential for threatsto come from Russia. Neither the disintegration of the Russian Federationnor the rise of rabid nationalismwould be in China's short-terminterest, while an economically and militarily strong Russia might yet result in an uncomfortableneighborin the long term.13 The Russian view of China likewise is not monolithic, as the enthusiasmemanating from Moscow is counterbalanced caution and hostility toward China by
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. "IraqConflict SparksAlarm in Russia over World Role," Financial Times,December 23, 1998, p. 2. 13. Ronald C. Keith, "The Post-Cold War Political Symmetry of Russo-Chinese Bilateralism,"InternationalJournal 49:4 (1994), pp. 751-87; JenniferAnderson, The Limits of the SinoRussianPartnership,Adelphi Paperno. 316 (Oxford:Oxford University Press, 1996); and Deng, "China'sSearch."

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in the Russian Far East. This is a major confrontationpoint for Russia and China. The sparsepopulation,the region's underdevelopedeconomy, and the weakness of the Russian military in the area make the region vulnerableto Chinese domination. The situation is exacerbatedby the moves of regional governments in the Russian Far East and by the Sakha Republic toward greaterautonomy.14 China's relationship with Iran comprises both economic and political dimensions. In the years after the CCP came to power in 1949, China established relationshipswith a number of newly independentdeveloping countries. After the fall of the Shah in 1971, Iran became one of the most importantof these partnerstates as a result of its perceived regional importance. On the economic front the relationshipis based on three main components. The first is arms sales. The earliest post-1971 tradebetween the two states was China's weapons sales to Iran. This commerce persists today, though it has been reportedthat Chinahas 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 international pressure. Oil forms the third economic strandof the relationship. As China's requirementsfor imported energy have risen, so, too, has the volume of oil importedfrom Iran. Furthermore,Iran has granted the China National Petroleum Corporation (CNPC) exploration and development rights for petroleum. The political motivation for China's relations with Iran has evolved over the years. Initially, China was keen to support Iran, as it was with many other developing countries, in establishing its independencefrom the superpowers. 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 constrainingU.S. interests in CentralAsia. A furtherstrandof Chinese strategy in Iran,and indeed in other neighboringMuslim states, has been the desire to secure supportin constrainingefforts by Muslim activists to aid Uyghur separatists in Xinjiang.16 Thus, at the heart of China's relationshipwith Iranlies a tension between the obvious short-termeconomic and political benefits and
14. VladimirShlapentokh,"Russia,China, and the Far East: Old Geopolitics or a New Peaceful 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, "The Remakingof Eurasia,"Foreign Affairs 77 (March/April1998), pp. 107-26; and Peter Ferdinand,"China and Russia: A Strategic Partnership?" China Review (Autumn/Winter 1997), pp. 16-21. 15. See Far Eastern Economic Review (FEER), May 7, 1998, p. 8. 16. John Calabrese,"Chinaand the PersianGulf: Energy and Security,"Middle East Journal 52:3 (1998), pp. 351-66; and Barry Rubin, "China's Middle East Strategy," China Report 34:3-4 (1998), pp. 345-53.

AND ANDREWS-SPEED VINOGRADOV 383

the potential dangers involved in overt supportof such an unpredictableregime. Key Political Issues in CentralAsia Four key issues form the core of the domestic and foreign policies of the new Central Asian governments:nationhood,political stability, economic development, and reducing their dependence on Russia.17 These priorities are often in conflict with each other. For example, their economies and military security are still heavily dependent on Russia, while moves toward greater economic integrationamong the region's countriesare seen to underminethe search for distinct nationhood. Naturalresources are perceived to be the key to economic growth in CentralAsia. In the cases of Kazakhstan,Turkmenistan, Uzbekistan, and Azerbaijan, the main natural resource is petroleum. The rapidexploration,development,and export of crude oil as well as natural gas is an economic priority for these countries. Their landlocked position means that building the infrastructure needed to export petroleum is an exis pensive proposition;the lack of such infrastructure a major constrainton the realization of this potential boon, an issue highlighted by the low oil prices in 1997 and 1998. Russia has the greatest stake in CentralAsia of any of the major powers; this region had been an integral part of the country for more than a century. Achieving the reintegrationof these states within the Commonwealthof IndependentStates (CIS) is a key componentof the Russian government'spolicy, and Moscow seeks to enhance its political, military and economic influence in the region while simultaneously minimizing the influence of other nations. In the days of the Soviet Union, little effort was expended on developing Central Asia's petroleum resources. On gaining independence, these states sought investment from the West and explored a wide range of possible export routes in all directions. Such activities did 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 export routes, prevent Caspian exports from underminingRussian sales of oil and gas to Europe, and counter the interests of other actors in the region such as the U.S., Europe, Turkey, and Iran.18 In this context, the Central
17. John Anderson, The International Politics of Central Asia (Manchester, England: ManchesterUniversity Press, 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. 18. John Roberts, Caspian Pipelines (London:Royal Instituteof International Affairs, 1996); John V. Mitchell, The New Geopolitics of Energy (London:Royal Instituteof International Affairs, 1997); Dorian, Wigdortz, and Gladney, "China and Central Asia's Volatile Mix"; and

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Asian states may see China as an importantoutside partner. From an economic perspective, China is a source of manufacturedproducts and investment and may be considered a model of successful transitionfrom a planned economy to a marketone. Politically, China may be used as a counterweight to Russia. There is the added advantagefor CentralAsian states that closer relations with China are unlikely to irritateRussia as much as their contacts with the U.S.19 Though neithera large economy nor a world-class militarypower, Iranis a major player in Central Asia. It has sought to establish itself as a regional leader through a range of economic, cultural, and political activities, most in notably throughits participation peace-makingprocesses.20 With unstable countriesto the west (Iraq)and east (Afghanistan),good relationsto the north are vital to Iran. Iran has established a working relationship with Russia driven both by the practicalneed for arms and technology and the search for diplomatic support against the U.S.21 With respect to Central Asian petroleum, Iran has three objectives: (1) to gain access to resources Teheranbelieves belong to it, (2) to import gas and oil for use in northernIran, and (3) to serve as a route for exports from the Caspianregion to the PersianGulf.22 China's InternationalEnergy Policy A stable energy supply is a crucial requirement for sustained economic growth in an industrialnation such as China. The country's economy has long been heavily dependenton coal. China is the world's largest producer of the fuel, which consistently accounts for about 75% of the country's primary energy production and consumption.23 Annual production reached a peak of nearly 1.4 billion tonnes in 1996, though it dropped to about 1.2
Douglas W. Blum, "Domestic Politics and Russia's Caspian Policy," Post-Soviet Affairs 14:2 (1998), pp. 137-64. 19. Paul Goble, "Looking West from Beijing," Radio Free Europe/RadioLiberty Newsline 2:241, December 16, 1998. 20. Forsythe, The Politics of Oil; and Adam Tarock,"Iranand Russia in 'StrategicAlliance'," Third World Quarterly 18:2 (1997), pp. 207-23. 21. Tarock, "Iranand Russia." Energy Prospectsand Politics: Need for a Longer-TermWest22. Mehmet Ogutcu, "Eurasian ern Strategy,"Futures 27:1 (1995), pp. 37-65; Forsythe, ThePolitics of Oil; JulianLee, "Geopolitical Aspects of Transit for Caspian Oil and Gas" in Caspian Oil and Gas Summit(London: Centre for Global Energy Studies, 1998), pp. 111-34; and Thomas R. Stauffer, "The Iranian Connection": The Geo-Economics of Exporting Central Asian Energy via Iran, International ResearchCenterfor Energy and Economic Development (IRCEED)Occasional Paper29 (Boulder, Colorado:IRCEED, 1997). 23. State Economic and TradeCommission (SETC), ChinaEnergyAnnualReview 1997 (Beijing: SETC, 1997), pp. 198-201; and British Petroleum(BP), BP Review of WorldEnergy 1999 (London:BP, 1999).

ANDREWS-SPEED VINOGRADOV AND 385

billion tonnes in 1998 as demand fell and stockpiles grew.24 The country's proven reserves rank thirdin the world after the U.S. and Russia and stand at about 115 billion tonnes, which gives a reserves/production ratio of about 90
years.25

In contrast,China's oil and gas reserves are modest by comparisonto the potential future domestic demand for these sources of energy. Oil reserves estimates fall in the range of 20-30 billion barrels,giving a reserves/production ratio of just 20 years.26 Consumptionhas been rising at rates in excess of 5% per year, while the growth of domestic crude oil productionhas remained stubbornlybelow 5%.27 The increased demand for oil in the 1990s has been driven mainly by the transportation petrochemicalsectors.28 In and the late 1980s and early 1990s, the share of oil in the nation's total primary energy consumptionfell slightly, probablyas a result of factories and power stations switching 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 consumption was falling, oil's share grew sharply to 23%. This is evidence that the efficiency gains and plant closures in the industrialsector that caused a fall in overall energy consumptionwere not accompaniedby an equivalent decline in demand for 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 barrels per day. The level of oil imports rose tenfold in just eight years, from about 100,000 barrels daily in 1990 to more than one million in 1997. At the same time, exports have shown an overall decline, from about 600,000 barrelsper day to below 500,000 (see Figure 2). Any attempt to predict the level of China's future oil imports is fraught with uncertainties,such as the following: its ability to discover and bring into production new reserves, fluctuations in internationaloil prices, potential changes to government policy on domestic oil pricing and oil imports, the state of the nationaleconomy, and the extent to which petroleumproductsare
24. SETC, China Energy Annual Review 1997; and "ChinaProduces 1.236 Billion Tons of Coal," China Economic Information,March 3, 1999. 25. International Energy Agency (IEA), "China" WorldEnergy Outlook(Paris:IEA, 1998), in pp. 273-97. Today's proven reserves would last 90 years at present rates of production. Reserves/production ratios 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 Statistical Bureau, China Energy Statistical Yearbook,1991-1996 (Beijing: China StatisticalPublishing House, 1998).

FIGURE

China's Primary Energy Consumption (million tones of oil equivalent) and Oil Consumptionas a Percentage of Primary Energy Consumption,1986-1998
1,000 Energy mrntoe .......... 9 0 0 X0.. ....... 800

25

20 ......... ....... ......... ........ ........ ..... .. ........ ...... .... .. ........ ....... ........ ........ ....... ... .... . ...... ....... ........ ........ ........ ...... ...... . .... ...... ....... ....... ...... ...... ........ ...... ....

O il % ......
.............. ......... ....... ..... .......... ......... ....... ........ ........ ......... .. .......... ..... .. ........ ................ ........ ... . ......... ...... ...... .

...... . .....
....... . ...... ...... . .............. ..... ... ...... .......

15

....... ...... ... .... ........

CL

10

........ .... .... ... ...... ...... ... ............ ...... ..... .......... ........ ........ ...... ..... ..... .. ....... ....... ...... ...... . ........ .......... ...... ............ ..... .... ... ....... ...... . .... ..... ......... ..... .. ........ ...... ....... ....... ..... .. ...ss. ... ...... ....

........ ..... . ........ ........ ... .. ..... ..... ....... ........ ..... .. ......... ........ ..... .... ........ .... ..... ....... ..... . ........ ....... ..... ........ ........ ........ ........ ...... . ........ ..... .... ........ ........ ........ .... .. .... ....... .......... ........ ........

....... ... ... ....... ...... .... ...... ....... . ..... ... ....... ..... ........ ........

........ ........ ....... ........ ........ ........ ...... ..... ..... ... .. ...... .... .... ....... ..... ........ ......... ........ :: :::: ....... .......

. .... .... . ...... ...... ........ . ...... .... . .... . ...... ...... ....... .... ...... .... .. ........ ..... ... ........ 1990

0 1986 SOURCE: British Petroleum

....... ....... ..... ....... ..... ....... . ...... ............... .... ...... ........ ...... .. ... ...... ...... .......... ........ ..... ... .. ..... ...... ...... ..... .... ... ...... ...... ... ........ ..... .. .... : . ... . ..... .. .... ...... ...... ...... .... ....... ....... ...... . ..... ........ ....... ...... ....... ....... ....... ....... ........ ...... ..... ...... ....... ........ ....... ...... .... ..... ...... ...... ........ ........ ....... . ..... . ...... .... ....... . ....... ...... ........ ........ ....... ........ ...... ........ ...... ........ ....... ..... ........ ...... .... ... .......... ........ ........ . ...... .... ..... .. ....... ......

...... ...... ...... .. ....

.: .. ...... ..... ..... . ........ ...... . ..... ....... ........

...... . ... ...... ..... ....... ... ... . .....

.:: ...... ..... ...... ..... ..... . ...... X .... .. .... ........ ... ....... ..... ..... .... ....... ..... ..... ..... .... ... ....... ...... ..... . ....... ...... ........ ......... ......

..... . ....... ........ ........ .... . ..... ....... ....... ...... .... ........ ......

...... ... .. :.:::: .-..... .... ....... ..... ..... .... ... ...... 1995

...... 7 0 0 ........ ........ .... .......... ....... ........ ...... 6 0 0 . ...... ..... ....... ...... . 500 ....... ........ .. ...... ........ ....... ..... . .......... .......... 4 0 0 ........ .......... ....... ...... ...... ....... 3 0 0 .... ..... ....... ...... . ..... . ..... ....... ...... ........ ....... ...... ...... 200 .... ...... ...... . ...... 0 00

(BP),

BP Review

of World Energy

(London:

BP,

1987-99).

FIGURE2

..... ................ ....... ..... ....... ...... .... ............ ..... ..... ...... ...... . .... . ................. ........................ . .................. .................. .................... .................................. 1,400 . . ................................. . ..... ................... .......... 1,200-1,000-800 600 2MI400 E 200 01990 -200 --400 -600 SOURCE: Ibid., 1991-99. Net imports Imports

China's Oil Importsand Exports, 1990-1998 (thousands of barrels per day)

Exports

1991

19

1993

1994

1995

1996

1997

1998

ANDREWS-SPEED VINOGRADOV AND 387

substitutedby new or renewable forms of energy. The first of these items will have the greatest impact in the medium term. Since the emergence of China's modem petroleum industry in the 1960s, oil production has been corner. Even in 1996, some 63% concentratedin the country's northeastern of total onshore and offshore domestic oil productioncame from three fields in the northeast:Daqing, Shengli, and Liaohe.29 Productionfrom these strategic fields has reached a plateau and is set to decline. The drive to discover new reserves in Xinjiang in northwesternChina has met with only modest success-though substantialresourceshave been found, their remote location rendersmuch of it commercially unattractive. Nevertheless, plans to exploit this resource continue to be pushed forwardat great cost.30 The other great frontier lies in the remote parts of the South China Sea. Large reserves are expected, or ratheranticipated,but unresolvedterritorial disputes are likely to prevent an assessment of the area's true potential for several years. These realities lie at the heartof medium-termforecasts of China's futuredomestic productionand net imports of 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 imports along the coast as buyers shunned the more highly priced domestic supplies. Much of this tradehas been illegal. Meanwhile, domestic companies continued producing oil, and stockpiles accumulated. The government eventually 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 international levels, and repeatedin 1998. On this second occasion, the government implemented a radical reform of the domestic oil pricing mechanism, bringing domestic prices more in line with internationalones.31 Thus, the general trend toward a growing level of net oil imports has been punctuated by discontinuitiesresulting from changes in governmentpolicy. The most optimistic predictionsforecast that China's domestic production of oil will reach 4.0 million barrelsper day in 2010 before startingto decline. In 1995, Chinese sources estimated that the productionshortfallwould be in the range of 2.8-3.4 million barrelsper day by 2010, but by 1999 this projection had fallen to some 2.4-2.8 million. The InternationalEnergy Agency (IEA) projects a higher level of net imports amountingto some 4.0 million
29. SETC, China Energy Annual Review 1997. 30. Mehmet Ogutcu, "China'sEnergy Futureand Global Implications,"in China's Economic Security, eds. WernerDraguhn and Robert Ash (Richmond:Curzon Press, 1999), pp. 84-141. 31. FereidunFesharakiand Kang Wu, "RevitalisingChina's PetroleumIndustrythroughReorganisation:Will It Work?"Oil and Gas Journal, August 10, 1998, pp. 33-45.

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barrelsper day by 2010, which could rise to 8.0 million by 2020.32 This is some 40% greaterthanthe currentamountof oil thatJapanimportsand about 85% of the currentlevel of imports to either the U.S. or Western Europe. Projectionsbeyond the year 2010 face the uncertainimpact of fuel substitution. The technology already exists to power motor vehicles with a range of fuels such as alcohol, methane,compressednaturalgas, liquefied naturalgas, and electricity, and pilot projects alreadyhave been set up in China.33 Until coherent long-term energy and environmentalpolicies are drawn up and put in place, it is impossible to assess the extent to which demandfor oil products will be constrainedby fuel substitutionin China's transportsector. Naturalgas, unlike oil, has played an insignificantrole in China's energy mix, accounting for just 2% of primaryenergy consumption. This is set to change as China tries to make better use of its own gas resources as well as examine the opportunitiesfor tapping into the vast reserves in Russia and CentralAsia. Not only does Chinarequireadditionalsupplies of easily transportableenergy, but the governmentis keen to substitutegas for coal where possible to reduce the level of atmosphericpollution. Domestic reserves of naturalgas are estimated at 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 require both an ongoing effort to discover and develop new gas reserves within China (both onshore and offshore) and the constructionof new infrastructure gas imfor portation. The volume of annualnaturalgas imports could be as high as 60 billion cubic meters by the year 2020,35 which is equivalent to the current level of gas imports to Japan,the world's third largest gas importerafter the 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 companies in facilitating these imports is a key issue to be evaluated in this article. Before 1990, China's involvement in the petroleum industry beyond its shore largely was limited to importinga low volume of the resource,predom32. Xiaojie Xu, "China's Looming Oil Crisis and Ways of Avoiding It," OPEC Bulletin, January1997, pp. 11-16; "MoreOil Imports,"China Economic Information,May 23, 1999; and IEA, "China." 33. Alcohol Fuels in Cars Could Clean Up Fumes," China Daily, September24, 1998, p. 3. 34. BP, BP Review of WorldEnergy 1999. 35. Keun-Woon Paik, "China Moves on Gas for Supplies and Environment,"Petroleum Economist, February1999, pp. 23-24.

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inately from Southeast Asia. In the 1990s, China made two strategic decisions. First, it became clear that the volume of crude oil imports was set to rise dramatically. China startedto import ever larger quantities of oil from the Middle East and further diversify its sources of supply.36 Second, the governmentcommitted its state-ownedenterprises(SOEs) in the oil business to undertakesubstantialinternationalinvestmentsrelated to the extractionof oil and gas resources in the ground as well as in transportnetworks.37 The earliestprojects were directedat such low-risk projects as oil field rehabilitation, field development,and the provision of services. More recently, the two majorupstreamoil companies, CNPC and China National Offshore Oil Corporation(CNOOC, the main Chinese explorer and producerof oil and gas in China's offshore waters), have signed majorexplorationand productioncontracts, while the China PetroleumCorporation(Sinopec) has enteredrefinery projects.38 These activities span most of the globe, taking place in Southeast Asia (Indonesia, Papua New Guinea, Thailand,Bangladesh, Myanmar,Malaysia), northern and western Africa (Nigeria, Sudan, Ethiopia, Algeria), South America (Venezuela and Peru), the Middle East (Iran, Iraq, and Kuwait), and the CIS (Russia, Kazakhstan, Turkmenistan,Azerbaijan). Of these, the largest commitmentshave been those made in CentralAsia. In the late 1990s, CNPC committed about US$800 million on two field development projects in Kazakhstanat Aktyubinskand Uzen that have total oil reserves of about 2.5 billion barrels.39 The total investment requiredfor the Aktyubinskproject may 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.40 The shortestpipeline route would take oil south from 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 refineries in the east, before continuingin to China and the other to carrygas from Turkmeni36. Frank C. Tang and Fereidun Fesharaki,"China:Evolving Oil Trade Patternsand Prospects to 2000," Natural Resources Forum 19:1 (1995), pp. 47-58. 37. Mehmet Ogutcu, "China's Outward-LookingEnergy Linkages," Geopolitics of Energy 20:9 (September 1998), 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 upstream assets between CNPC and Sinopec, which until this time had been involved mainly in downstream activities. CNPC retained its overseas investments. 39. "China's Search for Oil," China Economic Review, July 1998, p. 36. 40. James P. Dorian et al., "Energyin CentralAsia and Northwest China:Major Trends and Opportunitiesfor Regional Cooperation,"Energy Policy 27 (1999), pp. 281-97; and "China's Pipeline Plan for KazakhstanPoses Threatto Policies of Russia, U.S.," Petroleum Intelligence Weekly,September29, 1997, pp. 1-2.

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Stanto China. These two easternpipelines (to run possibly 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 eastward transportof petroleum from Central Asia has been the carriageof crude oil from Kazakhstanby train to northwesternChina. The fall of oil prices in 1998 broughta dose of realism to these ambitions. The oil and gas resources of the Caspianregion startedto look less attractive to all internationalinvestors. Cost reduction and elimination of all but the most attractiveexport options became central to the strategiesof the international investors. Even CNPC has had to rethinkits extravagantplans in Kazakhstan, calling into question its promised investments in both the Aktyubinskfield and the pipeline to Xinjiang.41 Though the rise of international oil prices during 1999 and early 2000 provided a more favorablecommercial environmentfor investors in the Caspian region, the future level of prices remainsvery uncertainand only the most favorable projects are moving ahead. 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 driving force from the government'spoint of view is the desire to enhance the security of the country's petroleumsupply throughowning both the resource in the ground and, where relevant, the transportnetwork. The most senior governmentofficials have publicly exhorted China's oil industry to invest in overseas oil and gas resourcesin orderto make up for the domestic shortfall.42 Specific production targets 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 In the case of oil, this would amount to 25%-40% of net oil imports.

41. "China'sCNPC to Renege on Kazak Investment,"PetroleumArgus, October30, 1999, p. 9; and J. Whalen, "Relationswith China:Not Yet the Best of Friends,"Financial TimesSurvey: Kazakhstan,July 1, 1999, p. 4. 42. For example, a speech by Premier Li Peng in May 1997, reportedin GuangmingDaily, May 29, 1997. See also Ye Qing, "China'sEnergy Policy and Energy Development Prospects" (paper presented at 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. "ChinaTargets 300 Million Tonnes of Onshore Oil and Gas by 2010," China Economic Information,June 1, 1999.

391 ANDREWS-SPEED VINOGRADOV AND The term "securityof supply" is sometimes used in a very emotive way, and it is essential to clarify what it means and what may be done to achieve it. In the case of oil, short-termcrises may result in either the physical interruption of supply or a massive increase in price or both. The former may be specific to a country, while the latter is 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 sufficient foreign exchange reserves crisis. thatwould allow the affected countryto buy its way out of a short-term The focus of most governments is on long-term security of supply. The lowest cost and most effective way of achieving this is throughthe physical and regulatory integration of the national market for oil and gas with the wider marketsfor those resources-at the regional level for gas and the international level for oil. It is importantto note that oil and gas marketsoperate in quite different ways. The marketfor crude oil and oil products is essentially international,and a large proportionis sold on spot markets or shortterm contracts. Though pipelines have to be constructed,they generally deliver to the marketratherthan to a specific contractedcustomer. In contrast, internationallytraded natural gas tends to be sold on long-term contracts. This relates to 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 infrastructurefor using gas is poorly developed in most countries and therefore the supplier of gas needs assurancethat an operatingmarket exists. Integratingnational markets with broader ones abroad should be supplemented by enhancing the physical security of sea-lanes and pipelines, the effective use of domestic resources of oil and gas, the appropriate management of energy mix in domestic consumption, and the measures pursued, preferablythroughthe market,to raise energy efficiency. Such an approach does not requirethe ownership of overseas resources in the groundby either the governmentor a state company. However, many in the Chinese government, as well as Chinese academics and commentators,take the view that such ownership should be an essential component of the country's energy to policy, whetherthe petroleumis transported China or sold for dollars. Indeed, some authorsportrayit as a matterof urgency and national pride that China must access acreage now, because otherwise there will be none available. China is seen to be in a competition with other countries that is perceived as being one of capital investment.44 Such a formulationof the issue ignores the facts that most internationaloil companies are financedprivately

44. Chang-le Yan, ed., China's Energy DevelopmentReport (Beijing: Economic and Management Press, 1997), p. 70.

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and not obliged to supply their home states, and that productioncost as much as capital availability lies at the heart of 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 governments often for nationalistic rather than economic reasons. China is no exception, and CNPC is in the forefrontof this expansion as documented above. Indeed, one of the objectives of the 1998 reforms of the country's oil sector was to produce two vertically integrated companies, CNPC and Sinopec, that would be of international stature,at least in size and range of activities. Before this reform,CNPC was predominantly active in explorationand productionand Sinopec in refining and distribution. Both are now involved in both upstreamand downstreamactivities, CNPC in northernand western China and Sinopec in the south and east. To date, no frameworkfor competitionbetween the two has been drawn up. Such questions aside, althoughinternalstrategydocuments are not available for examination, it is clear that the objective of the international investmentprogramis to project CNPC into the top 10 oil companies in the world.45 Overseas investmentis particularlyappropriate CNPC, given the likely for limited scope for furtherlarge discoveries within China. In addition to, and possibly more importantthan, the profit motive, there is the need to maintain or expand the company's revenue and find work for the large proportionof CNPC's 1.5 million workforce who might otherwise be unemployed. However, 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 China preparedto pay to gain its objectives? These questions are especially pertinentin the light of the high level of the bids being submittedby CNPC in international licensing rounds and the recent volatility 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 governmentofficials and academics, focuses on security of supply and is based on a combinationof militaristicthinkingand a poor understanding how the of internationalpetroleum industry and markets operate. The second, held by the oil companies themselves, is based on a commercial vision of how the present situationmay be used to promote the corporateinterest. This apparent convergence of governmentenergy policy and industrystrategymay not
45. See China Petroleum Industry Yearbook1997 (Beijing: China Petroleum IndustryPublishing Company, 1997), p. 239. Here CNPC strategywith respect to international investmentis stated as being aimed at "two naturalresources" (oil and gas), "two markets"(domestic and international)and "two currencies"(domestic and foreign). This explanation of international corporatestrategy contains no mention of national interests.

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be long lived. Despite the return of oil prices to levels above US$20 per barrelin 1999 and as high as US$30 per barrelin early 2000, their low level in 1998 has placed pressure on all oil companies to improve their technical and financial performance. State companies, such as CNPC and Sinopec, generallyhave higher unit costs for any given oil or gas field than the international companies. If the Chinese governmentis determinedto reformits state enterprises and enhance profitability,the companies will have to cut costs and be much more selective in their investments. If such a policy is followed through,the scope for Chinese oil 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 Central Asian 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 contrasting nature of oil and gas markets, the strategic need to secure long-termsupplies is much less for oil than for gas. China has 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 transportinland by pipeline are clearly the least-cost strategy. However, the governmenttakes the view that its coastline is sensitive to blockade, as are the sea-lanes through the Malacca Straits and the South China Sea. In this context, Kazakhstan'soil resources are attractiveas an alternativesource of supply in an immediately adjacentcountry. Should the Chinese governmentdecide eventually to supportCNPC's ambition to build an oil pipeline from Kazakhstanto the heart of China, the countrywill incur a numberof costs. First, there would be the immediateand substantialcost of constructinga pipeline that does not provide the least expensive 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 oil prices fall to US$10 per barrelagain. Third,the existence of this pipeline will act as a disincentive to develop economically viable and environmentallyfriendly substitutesfor oil products in the transport sector.

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In the case of naturalgas, Chinahas a wide variety of options for import.46 These include the proven and producinggas fields of West Siberia as well as less developed reserves in East Siberia and the Russian Far East. In addition to piped gas from these regions, the importof liquefied naturalgas to China's coastal provinces is also a realistic proposition. Against these alternatives, the pipeline from Turkmenistan startsto look expensive and time-consuming. China is not the only Asian countryassessing the gas resources of Central and East Asia. Both Japanand South Korea have a keen interest in securing long-term access to new gas reserves for themselves; cooperationwith China could form the basis of a major gas transportnetwork in Central and East Asia. However, the cost of such projects will be very high because of the need for infrastructure both transportand distribution. The recent Asian for recession will limit the ability of these countriesor their industriesor both to fund infrastructure projects that are not commercially viable. In the short and medium term, the only commercial gain available to Chinese petroleumcompanies in CentralAsia is likely to be restrictedto development; productionand sale of oil into the local, regional, or international markets;and the provision of services. All of these activities are subject to the influence of internationaloil prices. The constructionof substantialexport lines eastwardinto China will be driven more by political and strategic concerns than by the need to secure low-cost supplies of oil or gas. One event that would change this assessment would be the discovery of large and China. The cost of commerciallyviable reserves of oil or gas in northwestern the pipeline network from Central Asia to China's heartlandcould then be partly born by these new discoveries. In the context of foreign policy, China has clear political and strategicinterests in CentralAsia that are quite independentof petroleum. As discussed above, they may be categorized as establishing regional influence, maintaining regional stability, and engaging in economic cooperation. These interests are accentuatedby the presence of a large regional petroleumresource,which in turnhas enhancedthe attentionpaid to CentralAsia by three other parties: the West, Russia, and Iran. For China, this provides two parallel challenges: to prevent the other parties from gaining excessive influence in the region, while continuingto develop bilateralrelations with these parties, both inside and outside the region. From this perspective, there exists a strong convergence between China's foreign policy and its current energy policy. Both would be supportedby massive Chinese investments in resources as well as transportsystems in
46. Keun-Woon Paik, Gas and Oil in Northeast Asia: Policies, Projects, and Prospects (London:Royal Instituteof International Affairs, 1995); "GazpromOpens Some Projectsto Foreigners-Provided They Help Build a Pipeline to China,"Russian PetroleumInvestor (February 1999), pp. 31-35.

395 ANDREWS-SPEED VINOGRADOV AND CentralAsia. China's political presence and influence would be enhancedat the same time that it secures new supplies of energy. Petroleum could become a tool of foreign policy and establish China as a majorplayer in Central Asia. Serious political drawbacksmight appearonly later. For example, foreign policy in the region could become the servant of energy policy once such investments had been made. Such a partnership energy and foreign policy is viable as long as someof body is preparedto pay the cost. In the early 1990s, the relatively high oil prices, the soft budgetary constraints on Chinese state companies, and the ample potential for financing from Japan and Korea meant that finance was not a critical issue. Given the present volatile and uncertainnature of oil prices and the drive to make its state companies profitable,the Chinese governmentwill need to reassess to what extent it can afford to use petroleumas a tool of foreign policy in CentralAsia. of Furtherconstraintson the partnership energy and foreign policy in Central Asia are providedby China's relationshipwith Iran and 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 cheaper than any from Turkmenistan.Were China to make strategicinvestmentsin oil and gas pipelines eastwardfrom Kazakhstanand Turkmenistan,it would be acting against the interests of Iran or Russia, respectively. The Viewfrom CentralAsia Securing export routes for their petroleumis a key priorityfor most Central Asian states. The two countries for which China provides a potential export route for petroleum are Kazakhstan,for oil, and Turkmenistan,for natural gas. However, it is essential to understandthe prioritiesof both these countries and the foreign companies, which provide most of the investment. Governments and companies alike wish to develop the fields, construct the transportnetworks, and start productionas soon as possible. A number of factors constrain the speed with which they can move: providers of finance have to be persuaded of the commercial viability of the projects; domestic and external political conflicts of interest have to be resolved; time is requiredfor 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 shortest completion time, all other things being equal. Both will want at least one export route from any one country in order to prevent themselves being held hostage by a transitstate. However, the recent volatility of oil prices will constrain the scope for achieving this. In addition, the

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CentralAsian governments,and possibly some of the companies, would prefer to avoid dependence on transitthroughRussia. The export routes throughChina are unlikely to satisfy the need for speed and low cost. This raises the question of whetherthe CentralAsian states are just using the discussions with China as a bargaining chip in negotiations with other states or as an excuse for developing closer ties with China. Pursuing such a strategymay have been the case two or three years ago, but the low oil prices of 1998 have shown the Caspiangovernmentshow uncompetitive their petroleumresources are. As the largest marketfor petroleumadjacent to Central Asia, China's attractivenessas a destination for petroleum exports has been enhanced. A furtherchallenge for CentralAsian oil producers is that a numberof Gulf states, such as Iran and Saudi Arabia, are planning to open their upstreamindustries to 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 respond positively to Chinese approachesin the mid-1990s to constructexport pipelines to the east for oil and gas, respectively, given that the Chinese parties appeared to have the funds and that normal commercial criteria did not seem to apply. In additionto the need for petroleumexportroutes, the CentralAsian states have a wide range of political reasons to build close relationswith China that relate to regional stability,balancingoutside influences, and economic development, as discussed above. For these states as well as for China, the involvement of Chinese companies in the exploitation of CentralAsian petroleum resources and the construction of export networks eastward to China initially held a strong appeal for both political and economic reasons. The recent volatility and uncertaintyof oil prices and the potential availabilityof new sources of petroleum supply in the Gulf may together force the Central Asian states to focus on commercial rather than political criteria in their choice of export routes. That being said, if a particularCentralAsian state finds that it is unable to sell a large proportionof its potential productionof oil or gas to the anticipated markets-as a result of oversupplyor low prices-it may be obliged to develop an alternative strategy to prevent its economic development being stifled. If China persists in its approachto achieving security of energy sup, ply and is preparedto pay for it, then the interests of both China and the respectiveCentralAsian state could be served by constructingan exportpipeline 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 Central Asian state would increase its foreign exchange earnings from petroleum and strengthenan importantpolitical relationship.

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Conclusion
CentralAsia has become a focus of strategic,political, and economic interest for many parties, including the U.S., Europe, Russia, Iran, and China. Even without the presence of substantialpetroleum reserves, the newly independent CentralAsian states would have become a battlegroundfor competing outside interests seeking to establish their influence. Petroleum has only heightened the stakes. China has a range of motives for its involvement in Central Asia. The search for security of petroleumsupply is complementedby a range of political, economic, and securityconcerns. China's ability to implementits ambiin tious plans for investmentin petroleumresources and export infrastructure the CaspianSea region are likely to be temperedby a numberof factors. The confused and conflicting natureof the motives for investing in overseas petroleumprojectswill probablybe broughtto the fore in these times of volatile oil prices and Asian recession. The sheer scale of funds needed for the pipeline projects running eastward to China seems certain to render them unattractive to commercial lenders and this would place the risk firmly on the shoulders of the Chinese governmentor the state oil company, CNPC. The purchase of petroleum resources in the ground and subsequent exploitation by CNPC is not the lowest-cost way to achieve security of energy supply. Oil price volatility, combined with China's desire for its state companies to returna profit, may undermineCNPC's investment plans for Central Asia. Likewise, from the 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 strategic concerns that keep China's oil companies in CentralAsia. The Chinese government considers the sea-lanes from the Gulf to the Chinese coast to be vulnerableto attackor blockade. From this perspective, a pipeline networkfrom CentralAsia would provide a viable complementarysource of supply as well as enhance Beijing's political standing in the region. However, the greater the uncertaintyover future oil 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 enhanced by lower oil prices. If investment in exploration and development dwindles in the Caspianregion and grows in the Gulf, China's promised investments suddenly become not only attractive but potentially important componentsof nationaldevelopmentfor Kazakhstanand Turkmenistan.This asymmetryof interests between China and the CentralAsian states is likely to prove a major stumblingblock to both constructionof export routes to the east and other involvement of China in CentralAsia's petroleumindustry.