Since the fall of the Soviet Union, China has focused its energy policy towards Central Asia on the upstream, investing in oil and gas extraction to fuel its growing energy demand. But recently China has started investing into the downstream sector, most notably by building oil refineries in Kyrgyzstan, Tajikistan, and Kazakhstan.
This new dimension of China’s energy policy is about more than just energy security. Due to its aging energy infrastructure and a lack of refineries, Central Asia is reliant on Russia for supplies of refined oil products, such as gasoline for transportation. By decreasing this reliance, China aims to reduce Russia’s overall economic and political leverage in the region.
China sees the reduction of Russian influence as essential to ensuring the stability of Central Asia and, in turn, the stability of Xinjiang, an autonomous region in western China that central authorities hope will emerge as a regional trading hub.
China-Backed Refineries in Central Asia
Resource rich Kazakhstan is China's major partner in Central Asia. The two countries share a 1700 km long border and Chinese companies own many oil fields around Aktobe in western Kazakhstan. The China National Petroleum Corporation (CNPC) owns shares in the giant Kashagan oil field in the Caspian Sea and has three pipelines linking China to the Caspian Sea and to gas-rich Turkmenistan.
Source: BBC News
Despite being resource rich, Kazakhstan depends on Russia for more than 40% of its fuel supply, predominantly due to insufficient refinery capacity. There is no Kazakh refinery able to refine crude to a standard better than Euro 2 (Ai 80), even though Euro 4 and 5 standard fuel constitute the bulk of the forecasted demand in the country. Plans to upgrade refineries are filling the Kazakh government’s official news, but many of these plans are not financially realistic. Furthermore, the cost of extracting and refining Kazakh crude oil, which is high in sulfur content, is higher than the cost of Russian refined products coming from western Siberia. CNPC owns the Shymkent refinery in southern Kazakhstan and is investing US$1 billion to upgrade its refining capacity to meet Euro-4 and Euro-5 standards. The goal is to refine up to 6 million tons of oil per year.
Kyrgyzstan, Kazakhstan’s southern neighbour, does not have an oil refinery and is 100% dependent on Russia for refined products. However, this situation is about to change. By the end of 2014, two Chinese-financed refineries will be installed in the towns of Kara-Balta and Tokmok. Both refineries are strategically placed on the railroad linking Kyrgyzstan to Kazakhstan and Russia, through Aktobe, where CNPC controls important oil fields from which Kazakhstan will supply these new refineries. With a combined capacity of 1.35 million tonnes of refined products per year, these two refineries could cover annual consumption of oil products in Kyrgyzstan.
In Tajikistan, a Chinese-financed refinery is under construction in the town of Dangahra, which is in the home region of President E. Rahmon. It is yet unclear from where crude will be sourced to feed this refinery, but some speculate that it will be supplied from oil fields that CNPC is exploring in the western part of the country.
Motivations for China’s New Direction in the Region
Making large investments in the downstream industry is a new move for China in Central Asia. As former Chinese Premier Wen Jiabao stated in 2012, Beijing’s energy ambitions in Central Asia are changing: “Cooperation in this field has expanded from simple imports and procurement to both upstream and downstream sectors covering design, prospecting, refining, processing, storage, transport and maintenance.”
This important turn in China’s energy policy is motivated by political considerations. Stability is China's major goal in Central Asia, due to the tense ethnic situation in Xinjiang, China’s largest autonomous region, and also one of its poorest. Xinjiang is at the heart of Central Asia, and the Chinese government aims to make Xinjiang a trading hub for the entire region. China views its foreign policy in Central Asia through the prism of the security/development nexus, which is based on China’s internal approach to development: there is no possible development without security and no security without development.
Since the fall of the Soviet Union, China has come to see Russia as a destabilizing force in Central Asia. Kyrgyzstan, Kazakhstan and Tajikistan’s reliance on Russia for low-cost refined products gives Russia substantial political leverage in these three countries. When Russia negotiated the extension of the deal for a Russian military base in Tajikistan in 2013, for example, gas stations were forced to close all over Tajikistan because Russia reduced its exports into the country. Kyrgyzstan then imposed a ban on export of refined product to Tajikistan in order to prevent its own domestic fuel shortages. China aims to counteract this type of leverage with downstream investments.
Downstream Investments: a way to foster the independence of Central Asian states
China has consistently supported the independence of Central Asia’s states and legitimized the new regimes through frequent state visits, the creation of the Shanghai Cooperation Organization, and bi-lateral economic deals. As soon as Kazakhstan, Kyrgyzstan and Tajikistan gained independence in 1991, China resolved its border conflicts with these countries and gave them new economic opportunities. China’s indirect goal has been to give Central Asian states the opportunity to remain independent from other major foreign powers, such as the US and Russia.
China strongly opposes any type of regime change in Central Asia, particularly the democratic evolution supported by the US through Kyrgyzstan's 2005 revolution. The two Kyrgyz revolutions in 2005 and 2010 were setbacks to China's aim of limiting foreign influence in the region. The 2010 revolution, in particular, was a key factor in altering China’s approach to energy questions in Central Asia. The rise in electricity and gasoline prices in the winter that preceded the ousting of President Bakiev in 2010 was mainly manipulated by Russia to pressure his regime. China felt it was necessary to get involved in downstream activities as a way to counterbalance Russian influence. When needed, China has even openly supported Central Asian governments against Russia, for example, during the Russia-Turkmenistan gas crisis of 2009, or when China backed Central Asia countries in their protest against the annexation of South Ossetia and Abkhazia during the 2008 war between Georgia and Russia.
China’s active Central Asia policy is also interpreted by some as a push to promote the Chinese political system as a “model of market-oriented authoritarianism”. According to Konstantin Syroyezhkin, Central Asian states are laboratories for China's new normative power. China has broken the Russian monopoly over Central Asian energy resources by developing and implementing projects to extract and import oil and gas, and is now trying to help guarantee the political independence of Central Asian states from Moscow through its energy policy. In so doing, China is also giving these states the instruments to follow Beijing’s political and economic governance model.