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China?s Future in Kazakhstan

In March 2003, China Petrochemical Corporation (Sinopec Group), China?s second largest oil firm, agreed to buy a stake in the Kashagan oil field in Kazakhstan from British Gas (BG) for $615 million. This deal was announced only four days after CNOC Ltd, China?s third largest company bought the same 8.

In March 2003, China Petrochemical Corporation (Sinopec Group), China?s second largest oil firm, agreed to buy a stake in the Kashagan oil field in Kazakhstan from British Gas (BG) for $615 million. This deal was announced only four days after CNOC Ltd, China?s third largest company bought the same 8.33 per cent stake in the North Caspian Sea Project from BG at the same price.

The project includes several oil-rich geographic structures including the Kashagan oil field, with reserves estimated at up to 13 billion barrels of oil equivalent (BOE). However, it is hard to evaluate the real reserves before it will start operating in 2006.

The other participants at Kashagan are Exxon Mobil, Royal Dutch/Shell, Eni and TotalFinaElf, each with a share of 16.67 per cent, as well as ConocoPhilips and NPEX from Japan, with shares of 8.33 per cent.

This acquisition was a big step in China?s search for oil to secure its booming demand. China has become increasingly reliant on imported oil. 1992 the country was a net exporter but became a net importer in 1993. By 2010 it is expected that China will need to purchase around 50 per cent of its oil abroad. Its oil production will growth at 1 - 2 per cent a year but the demand will surge to a yearly growth of up to 5 per cent. 60 per cent of the today?s imports are coming from the fragile Middle East countries, giving China a huge incentive to diversify its oil suppliers.
The participation of the two Chinese companies also bolsters the prospect of building an export pipeline from Atyrau in Kazakhstan to the Chinese border. It is estimated that it could cost $2.5 billion and carry up to 400?000 bpd of crude. The Chinese option competes against a pipeline through Iran or a connection to the Baku-Ceyhan pipeline from Baku to the Turkish Mediterranean.
The completion of the Sinopec and CNOC deal is however subject to a number of conditions, including approvals from the Kazakhstan and Chinese authorities and the existing PSA partners waiving pre-emption rights. The 60 day preemption period expires this May.

Especially Shell is considering exercising its preemption right and to buy up the stakes of BG. China was quick to warn Shell that if it would block the Chinese companies to enter the consortium, it would not be welcome for future business in China anymore. It seems that the company can hardly afford to lose its stakes in the biggest and fastest growing emerging market.

Last year, Shell signed a 50-50 partnership in China's retail market in a deal with Sinopec to invest $200 million in building about 100 retail gasoline stations in Jiangsu province this year and 500 more in the next couple of years. Moreover, in November, Shell signed a deal with CNOOC to build a $4.3 billion petrochemical complex in the southern Chinese province of Guangdong.

However, if the Chinese fail to participate in Kashagan, they should have enough of a war chest to go on the acquisition trail elsewhere in Kazakhstan, still ensuring that the China pipeline remains an option. Hurrican Hydrocarbons, renamed to PetroKazakhstan, seems to be a likely option. It is already halfway to China, operating the Shymkent refinery and having developed a rail export link to China.

Author: Andreas Wild

Source : Neftegaz.ru