Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

In our firm's 2005.04.14 "Crisis on the China Rim..." (CCR) analysis, Laguna Research Partners pointed to the significant geo-strategic importance of Kazakhstan as one of just three "land bridges" directly connecting China to important energy reserves or to important energy-related sea lanes.  Here is what we wrote on page 42 of CCR.

"Within the China Rim 14, there are three countries that Laguna Research Partners believes deserve special attention. These three, Pakistan, Burma, and Kazakhstan, provide critical land links directly from China to huge oil reserves (Kazakhstan to the Caspian Sea) or to important shipping lanes (Pakistan to the Arabian Sea and Burma to the Bay of Bengal). The significance of these "land bridges" cannot be overestimated given that China is land-locked to its north, west, and south."

About Kazakhstan specifically, we wrote the following.

"...the Central Asian Republic of Kazakhstan shares a 1,533 kilometer land border with China to its east ...it also enjoys a 1,894 kilometer coastline with the northeast shores of the Caspian Sea, a gateway to the oil-rich Caspian Basin reserve ...in October 2004, construction began on the 3,040-kilometer Atasu-Alashankou pipeline linking western Kazakhstan with China’s Xinjiang Uygur Autonomous Region ...in March 2005, construction commenced on the pipeline’s 240-kilometer Chinese section ...this pipeline is expected to have a capacity of 75 to 80 million barrels of oil annually, with planned expansion to 150 million barrels at a later date ...construction costs for the entire project are expected to reach US$3 billion ...Kazakhstan aims to boost its annual crude oil production from the 2003 figure of 437 million barrels to 740 million barrels by 2010 ...this target implies compound annual growth in production of 7.8% ...China is also interested in building a 390-kilometer pipeline through Iran to that country’s frontier at the southern shores of the Caspian Sea ...ultimately, that pipeline could be connected to the Atasu-Alashankou pipeline, boosting the potential strategic value of the Atasu-Alashankou pipeline even further"

On November 13, 2005, the final link in the pipeline was welded into place at China's Altaw Pass.  Since then, Kazakh Energy Minister Vladimir Shkolnik has indicated that the pipeline will enter service on December 16, 2005.

The pipeline was constructed by the state-owned China National Petroleum Corporation (CNPC) and the Kazakhstan National Petroleum and Natural Gas Company.   CNPC recently completed its acquisition of the Canada-based PetroKazakhstan which holds significant energy assets in Kazakhstan.

Officials continue to indicate that the initial rated capacity of the pipeline will be 75 million to 80 million barrels of crude oil annually.   Chinese and Kazakh officials also continue to anticipate that throughput capacity will be boosted to 150 million barrels per year at a later date.

Russia announced late last week that it plans to export crude oil to China via the Atasu-Ala-Shankou leg of the new Atasu-Alashankou pipeline connecting China and Kazakhstan.  Russia is hoping to first transport oil to Kazakhstan via the Omsk (Russia) to Pavlodar (Kazakhstan) pipeline, and then to China.

Laguna Research Partners estimates that, from a production / consumption standpoint, that China runs a crude oil production deficit, vis-à-vis consumption, of 750 million barrels annually.  (Specifically, China produces about 1.3 billion barrels of crude annually while consuming more than 2.0 billion barrels.  The new trans-Kazakhstan pipeline, then, appears to have the potential to cut this deficit by an estimated 10.0%.  Once annual oil transmission through Atasu-Alashankou is boosted to the 150 million barrel level, China appears to have the potential to cut its annual crude oil production / consumption deficit by 20.0%.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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