• E-mail
• Print
• Comment
• Font Size
• Digg
• del.icio.us
• Discuss article

Hong Kong Paper Reviews Importance of China-Kazakhstan Oil Pipeline Project

Posted on: Monday, 4 July 2005, 09:00 CDT

Text of report by Karen Teo headlined: "Kazakhstan supply key to oil artery" by Hong Kong newspaper The Standard website on 4 July

The first phase of the China-Kazakhstan oil pipeline project is slated for completion by the end of this year with the goal of supplying the mainland with 10m tonnes annually from 2006.

But due to uncertainty over Kazakhstan's commitment to provide long-term oil supplies, the mainland is still hesitating over an ambitious plan to build an oil artery connecting its remote west to the energy-starved east.

A need to secure more oil supply to feed the pipeline may explain why China National Petroleum Corp is among a group of oil firms reportedly looking to buy Canada-based PetroKazakhstan last week.

According to the Financial Times, CNPC, along with oil firms from Russia and India are interested in bidding for PetroKazakhstan, which has assets in Kazakhstan and is valued at some 2.4bn US dollars (18.72bn HK dollars).

China is depending on Kazakhstan crude to fulfil its ambition to link oil produced in the remote west to booming oil-consuming regions in the east.

Mainland companies now produce some seven million tonnes of crude oil annually in Kazakhstan, according to Bloomberg. This is insufficient to meet demand of the first phase of the pipeline.

It is not known how much oil can be supplied from Kazakhstan as it currently exports to Europe and Russia.

The 3,000-kilometre pipeline is to be built in three phases. The 1,300-km first phase will link Atasu in Kazakhstan to Alashankou in northwest China. It will deliver 10m tonnes of oil to China initially, doubling to 20m tonnes in the second phase.

In the first phase, crude from the pipeline will feed PetroChina's refinery in Dushanzi, Xinjiang province. PetroChina plans to boost the refining capacity at the plant to 10m tonnes per year from the current six million.

It is also mulling building a finished-products pipeline, connecting Dushanzi to Lanzhou in Gansu province in the central part of the country, which will be able to carry up to 10m tonnes of oil products annually. This pipeline will connect with several others in the country, feeding the oil-consuming regions in the east. But that plan is contingent on oil supply from the second phase of the China- Kazakhstan pipeline and increased production from Xinjiang oil fields, according to a PetroChina source.

The mainland is not willing to advance the plan if there is insufficient crude supply from Kazakhstan, he said.

The Dushanzi-Lanzhou oil project will link existing oil pipelines in central regions to petrochemical enterprises in eastern and southwestern China, forming a massive west-to-east artery. This will fulfil China's ambition to use Xinjiang as an energy base to supply the booming east. But if there is insufficient oil supply from Kazakhstan, the project may not be economically viable.

"The volume of crude oil that Kazakhstan can supply us in the second phase of the China-Kazakhstan pipeline will determine whether we will build this finished-products pipeline," said the source.

Due to the uncertainty over the oil volumes, PetroChina has only spent 190m US dollars on the 270-km section in the mainland. The cost for the first phase is 1.71bn US dollars, said the PetroChina source said. Kazakh oil will also have to compete with crude shipped from the Middle East and refined in the major oil-consuming eastern provinces.

"The Chinese would also lose the bargaining power for the price of Kazakh crude if they go ahead and build the finished-products pipeline without securing enough oil supply," said Victor Shum, a consultant with Pervin&Gertz. "China provides an important market for Kazakhstan to expand its oil exports. But since there is uncertainty on how much oil Kazakhstan can supply, there is no guarantee that China will build the finished-products pipeline from Xinjiang."

The China-Kazakhstan project was revived last year, partly as high oil prices made it attractive to the Kazakhs, but largely because of Moscow's lukewarm attitude on which route to use to transport Siberian oil to Asia.

With reserves at the mainland's largest oil-producing region in Daqing being depleted, China is looking to the west for energy.

Crude from Kazakhstan, which neighbours western Xinjiang, would aid this strategy.

China plans to more than double its Xinjiang output to 50m tonnes by 2010, from 22m tonnes last year, according to China Daily. But the complex geology makes it difficult to explore for oil because deeper drilling is involved.

Meanwhile, the mainland sources more than 60 per cent of its crude from the Middle East and its oil import dependency is expected to rise to 50 per cent of total consumption by 2007 from 30 per cent.

Source: BBC Monitoring Asia Pacific

More News in this Category