Chinese, Central Asian Leaders Celebrate Historic Launch of Gas Pipeline

Silk Road, Revisited

Three-and-a-half years ago the late Turkmen president Saparmurad Niyazov signed a long-term gas supply deal with China, an agreement that was greeted with a healthy dose of scepticism given Niyazov's history of erratic decision-making, as well as the logistical and financial hurdles that the two sides would have to overcome to implement the agreement. Niyazov's sudden death of a heart attack later that year simply increased doubts about the project, although his successor, Gurbanguly Berdymukhammedov, reiterated his commitment to the supply deal upon taking office in early 2007, promoting the agreement as a cornerstone of his policy of diversifying Turkmenistan's gas export markets.

Berdymukhammedov's commitment to this policy of diversification—together with China's regional diplomacy efforts, the deep pockets of China's CNPC, and Chinese state banks, and the gruelling work of thousands of labourers—today paid off as he presided over a ceremony in the Turkmen capital, Ashgabat, to launch the Turkmenistan-China pipeline. Berdymukhammedov was joined in the official ceremony to kick off the 1,833-km, 40-bcm/y-capacity pipeline by the presidents of China, Kazakhstan, and Uzbekistan—Hu Jintao, Nursultan Nazarbayev, and Islam Karimov. "The implementation of the Turkmenistan-China gas pipeline project exemplifies true partnership based on equality, awareness of mutual benefits, large-scale vision of the prospects and advantages that are opened up upon launching this project", Berdymukhammedov told Chinese journalists in an interview prior to the ceremony.

Today's ceremony comes just after President Hu met with President Nazarbayev in Kazakhstan on Saturday (12 December) to launch the 1,300-km Kazakh section of the pipeline, as well as the welding of the first joint in "phase two" of the pipeline that will tie into gas fields in Kazakhstan. Construction of the Beyneu-Bozoi-Shymkent pipeline is geared to supply gas from Kazakhstan's western fields to domestic consumers in the southern part of the country, as well as connect to the Turkmenistan-China trunkline and allow Kazakhstan to export gas to China. "With the launch of this pipeline, it is like the ancient Silk Road has been restored," Nazarbayev said on Saturday, adding that the pipeline "will be beneficial for all of our countries. It is a promising, strategic project."

Indeed, for the three Central Asian states, the pipeline represents a new opening to the East, giving the ex-Soviet republics the ability to diversify their export partners and loosening the stranglehold that Russia has until now maintained over their gas reserves. For Turkmenistan, the opening of the pipeline is literally and figuratively an economic lifeline, as the country has been at loggerheads with Russia's Gazprom over gas prices since supplies were halted in April following an explosion on the Central Asia-Centre pipeline. Turkmenistan has lost an estimated US$1 billion per month in gas revenues due to the ongoing halt, so the launch of the China pipeline not only will bring in needed revenue, but also strengthens Turkmenistan's leverage in its dealings with Gazprom. For Uzbekistan and Kazakhstan, the pipeline will also help reduce their dependence on Russia and enable them to monetise more of their gas reserves.

Dragon on the Silk Road

For China, the launch of the pipeline marks a significant milestone in its long-term strategy of boosting imports of gas to the domestic market to diversify and clean up its energy mix and to meet further rapid increases in gas consumption, which of late have been growing at a rate of more than 10% per year. Although China now has three operational LNG regasification terminals at Guangdong, Fujian, and Shanghai this is the first international gas pipeline launched to supply the domestic market and points to the growing role of gas imports—expected to reach 22% of China's total gas supplies by 2015—in meeting demand.

However, the pipeline will not have a large immediate impact on increasing supplies to the domestic market. Although estimates vary, in 2010 the Central Asia gas pipeline is only expected to supply between 5 bcm/y and 13 bcm/y and only reach full operational capacity in 2012–13 following completion of the intra-China section known as the Second West-East gas pipeline, due for completion in 2011. The Second West-East pipeline will connect supplies from Central Asia to China's major consuming centres on the southern and eastern seaboards; as such, its impact on domestic consumption will grow slowly over time.

Outlook and Implications

Imports of piped gas from Central Asia are expected to be priced higher than supplies from the domestic market, thus the launch of pipeline could provide further momentum for domestic gas pricing reforms expected to be announced in 2010. CNPC has already stated that it plans to supply a gas distributor in southern China called Shenzhen Gas Corp. with Central Asian gas at a price of 3,750 yuan/t (US$549) or 3 yuan/cm from 2011, significantly higher than domestic rates, raising the question of the competitiveness of Central Asian gas in the Chinese market. However, if the government decides to reform the pricing system by moving to a weighted mechanism, under which existing cheaper supplies of gas would be pooled with higher priced supplies from Central Asia at the city gate, supplies would become more competitive.

The pipeline project is important for China as part of its broader strategy of stepping up energy investments in Central Asia to gain access to resources. These have also included a US$10-billion loan to Kazakhstan, a US$3-billion loan to Turkmenistan to develop the South Yolotan field, and the joint acquisition with Kazmunaigaz of oil producer MangistauMunaiGas (MMG). Moreover, the pipeline project is politically significant for China in its long-term aim of increasing its geopolitical influence in Central Asia, which borders its vulnerable north-west frontier. China's strategy of investing in projects like the Central Asia gas pipeline is designed to strengthen regimes in the region against various security threats by providing them with stable revenues while helping promote Central Asia's role as a transit region, which China hopes might one day connect the country to the markets of Europe and the Middle East.

CNPC is expected to supply around 13 bcm/y for the pipeline from its project to develop gas on the right bank of the Amu Darya River, with Turkmenistan supplying another 17 bcm/y from other gas fields in its gas-rich south-eastern region. Turkmenistan expanded the original 2006 gas deal in committing to supply as much as 40 bcm/y of gas to China via the pipeline over a 30-year period, although with both Kazakhstan and Uzbekistan eager to export some of their own gas, the Central Asian states may in the future have to sort out a deal on sharing pipeline capacity.