Rationale for Kazakhstan’s growing energy cooperation

President Xi Jinping’s visit to Kazakhstan in September saw the signing of energy deals worth $30 billion that are part of a rapid expansion of cooperation and contacts between the two countries.

CNPC, China’s largest oil and gas producer, agreed to buy an 8.33% stake in the supergiant Kashagan field in the Caspian that has just begun production. The company also committed to covering half of Kazakhstan’s financing costs for the critical second phase of field development. This is an important outcome in view of the deadlock in the consortium developing the field over how to finance phase two development. Kashagan is the largest oil field outside the Middle East and the project is one of the most technically challenging ever undertaken in the history of the global oil and gas industry.

The two Presidents oversaw the opening of the first stage of a 1.143 km gas pipeline from Bozai in western Kazakhstan to Shymkent in the south. When completed, this will allow Kazakhstan to supply gas to consumers in 14 cities along the route and to link the line with the Central Asia – China pipeline that begins in Turkmenistan and transits through Kazakhstan.

During President Xi’s visit, China also committed to provide financing for a new oil refinery in Kazakhstan.

These major developments are part of a fast-growing expansion of trade ties between Kazakhstan and China that has also seen the creation of a new rail corridor linking China with Europe and progress on establishing an 8,445 km modern highway linking Western China with Western Europe with nearly 2,800km passing through Kazakhstan.

Bilateral trade was $24 billion in 2012, up 18% on the 2011 level and with the rapid expansion of transit flows and the construction of new infrastructure, it is clear that trade relations are likely to continue to grow fast.

Energy ties will have a particularly important role to play in this process, which speaks volumes about the overall quality of the relationship between Astana and Beijing for three reasons.

Firstly, large-scale trans-national energy co-operation requires alignment of strategic interests between resource holder and buyer based on matching supply with demand.

Secondly, there are intangible elements to any major energy partnership that are essential for taking a project from the drawing board to reality. Both sides must see mutual benefit in equal measure and they must have confidence in the long-term stability of their relations. In particular, they must agree that their cooperation in this strategic and sensitive area will enhance their relationship and not unbalance or damage it.

Thirdly, alignment of interest in energy relations is optimal when producer countries have diversity of markets and consumer countries have diversity of supply.

All these conditions are strongly in place in Kazakhstan’s relations with China.

Firstly, China is keen to diversity its energy supply sources and sees Kazakhstan as a country that can play an important role in meeting its rising energy demand for hydrocarbons. Kazakhstan has significant energy resources, it also has large deposits of oil and gas as well as coal and uranium, and it is strategically located between China and the resources of the Caspian. Therefore, it has a transit role to play as well.

Secondly, the peoples of Kazakhstan and China have many centuries of trading experience. As President Xi said during his recent visit to Astana, “close neighbors are closer than distant relatives”.

Kazakhstan and China’s leaders know from history that it is natural and logical for them to seek mutual benefit from their respective competitive advantages. In this case, Kazakhstan holds the energy resources while the size and depth of China’s economy makes it a very competitive player in delivery of financing.

Thirdly, Kazakhstan has a strong strategic interest in diversifying the markets to which it supplies its energy resources and the routes along which it transports them. Similarly, China has an equally strong interest in diversifying its supply sources and avoiding overdependence on one market or one supply route. As a landlocked country, it suits Kazakhstan to be able to exports its energy products to the Chinese market across a single border while China benefits from the same convenience without having to be concerned about the security of a single shipping channel such as the Strait of Malacca. Although China is the fifth largest oil producer in the world, it has been a net importer since 1993 and imported 54% of total demand in 2011, with over 50% coming from the Middle East alone.

The strategic rationale for energy cooperation is clear and convincing for both Kazakhstan and China. It means that the foundations are in place for a long and productive relationship that will be complemented in other areas, including outside the natural resources sector.

The author is Ambassador at Large in Kazakhstan’s Ministry of Foreign Affairs.