China Picks Up Stalled Kazakh Gas Pipeline Plan


Night skyline in Shanghai, China's biggest consumer of energy. Photo: Henry Yao

WASHINGTON—China has reopened negotiations with Kazakhstan to build a trans-border gas pipeline, in the face of growing demand for cleaner-burning fuel and concerns over energy security, experts told RFA.

Stalled for eight years, the proposed pipeline would be the second energy project linking China with its western neighbor, which is becoming an increasingly important source of oil and gas.

Energy experts told RFA in recent interviews that policymakers in Beijing appeared to be returning to pipeline projects previously dismissed as too expensive.

"They've obviously said to themselves, this is something that must happen regardless of cost," Philip Andrews-Speed, a China energy expert at the University of Dundee, told RFA reporter Michael Lelyveld.

They've obviously said to themselves, this is something that must happen regardless of cost.

Natural gas is expected to account for 4.6 percent of China's energy demand this year, increasing from 2.5 percent five years ago, industry sources estimate.

China's consumption of gas rose by 18.5 percent last year, to 41.5 billion cubic meters, official figures show.

The Kazakh pipeline could potentially feed the 4,000-km West-East gas pipeline, which was abandoned by foreign partners last August after it became clear that the returns on their investment would be too low.

Unlike liquefied natural gas (LNG), which is transported in container ships, piped natural gas cannot be stored, and therefore operators must find users before it is piped to terminals.

No overall strategy

Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, said China's concerns over energy security had become even more acute in the last year.

"If they bring in LNG, they're probably a little bit concerned about that because tankers on the high seas are vulnerable," Ebel told RFA. "Second, if they bring in gas by pipeline, that gives them security of supply through diversity of supply."

"So, from a Chinese point of view they might be willing to pay a little extra in terms of national interests to bring in gas by pipeline, even though it really isn't a financially viable operation."

But the government appears to lack a satisfactory overall gas strategy, analysts said.

"When all these proposals come to the government, I think they approve them based on the different considerations. But unfortunately, China doesn't have a national plan for all these things," Kang Wu, head of China energy projects at the East-West Center of the University of Hawaii, said.

They may not totally lose money but the returns on the capital can be so poor that no private investor would do it in such a way.

Wu said centrally planned projects such as the gas pipeline could be underutilized, if large volumes of LNG and pipeline gas started to compete in the same markets. For example, in Shanghai, LNG shipments had already begun competing with the West-East pipeline.

China's energy majors—with listed companies on major stock exchanges and strong political pressure on parent companies to fulfill national policy goals—frequently appear to act in a contradictory manner, experts said.

Wu said commercial considerations were not necessarily uppermost in the minds of state-owned companies such as China National Petroleum Corp. (CNPC), in part because the government had ordered them to meet China's energy needs, regardless of the profits or costs.

Demand hard to gauge

"Definitely, if it were private investment, then things would not be going this way," he said. "They may not totally lose money but the returns on the capital can be so poor that no private investor would do it in such a way. That's a problem with state-owned energy companies."

Robert Ebel said Chinese officials would have to do a much better job of estimating gas usage and growth in consumption before the country invested many more billions of dollars in new pipelines.

"While they can make a mistake and underestimate demand, they can also make a mistake and overestimate demand, and all of a sudden they find out that they've contracted for a lot of gas that they really can't use at the present time," Ebel said.

CNPC and Kazakhstan are already working on a 988-km oil pipeline, which is expected to open in 2006. CNPC recently approved a major expansion of its Dushanzi petrochemical complex in Xinjiang, costing 27.2 billion yuan (U.S.$3.3 billion).

The plant will use oil from the U.S.$700-million pipeline that will run from Atasu in central Kazakhstan, initially supplying 10 million tons of oil per year, or 200,000 barrels per day.

One possibility is that the gas pipeline could follow much of the same route.

But the gas line could be much more expensive, since it would connect with China's giant West-East pipeline project to Shanghai.

CNPC is said to be considering a second line to increase the capacity of the 4,000-km West-East route, which cost U.S. $5.8 billion for the pipeline alone.

Total cost for the West-East project has been put at over $18 billion, including networks in Shanghai and other eastern cities, as well as field development in Xinjiang.

Most of Kazakhstan's gas resources are also located in the far western part of the country, so that gas would have to travel some 7,000 kms before reaching China's big markets in the east.

The distance means either that gas prices would have to be too high for Chinese consumers or the government would have to subsidize them at a high cost.


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