China Shelves Central Asia Gas Plan – Analysis

By Michael Lelyveld

After two decades of investing in Central Asia’s energy sector, China appears to be shelving its gas pipeline expansion plans, prompting doubts about its economy and demand for the cleaner fuel.

According to Russian reports, the fourth branch of China’s far-flung pipeline system to carry gas from Turkmenistan through neighboring Uzbekistan has been put off “indefinitely.”

“The project has been postponed indefinitely with the agreement of the Chinese side,” an unnamed official of the state oil and gas company Uzbekneftegaz told Interfax on March 2.

Chinese officials have yet to comment on the suspension.

Western media cited an initial report by Russian state news service RIA-Novosti that spending for the 210-kilometer (130-mile) Uzbek part of the project was left out of this year’s state investment program, despite a rescheduled start date in April.

After at least two previous delays since late 2015, the reports suggest that the planned project known as Line D, approved by President Xi Jinping in 2013, has been dropped.

If the largest planned link in China’s supply network from Central Asia has in fact been cancelled, it could mark a turning point on several levels as the country’s economy cools.

When gas started flowing through China’s first 2,000-kilometer line (1,242-mile) from Turkmenistan in late 2009, Chinese investment and future gas demand were regarded in the region as virtually limitless.

Everything has changed

But with declines in global energy prices and China’s lower economic growth rates, all that has changed.

Despite environmental pressures and bullish projections, China’s gas consumption growth has moderated since the start of the economic slowdown.

Consumption rose 5.6 percent in 2014, 3.6 percent in 2015 and 8 percent last year, reaching 205.8 billion cubic meters (7.2 trillion cubic feet), according to official data and estimates by Platts energy news.

The increases are a shadow of the double-digit growth rates of the previous decade.

In November, a researcher at state-owned China National Petroleum Corp. (CNPC) said the country could face a gas surplus of 50 billion cubic meters (bcm) a year by 2020 due to long-term contracts for imports of liquefied natural gas (LNG) and pipeline expansion plans, Platts reported.

The utilization of China’s import pipelines stood at “around 50 percent” last year, said Feng Chenyue, senior economist at CNPC Research Institute of Economics and Technology.

The outlook may have doomed the Line D project to add up to 30 bcm of annual capacity to the 55 bcm already in service from the three existing strands of the Central Asia system.

Last year, China imported 72.1 bcm of gas including LNG, according to Platts.

The numbers suggest that the Line D plan has become a casualty of the same overcapacity problem that has plagued the coal and steel industries, despite government efforts to switch more of China’s energy consumption to the cleaner fuel.

And although the government pushed CNPC to make big investments in the China-Central Asia system, it never devised a pricing policy that would avoid losses on gas imports or make the pipelines pay for themselves.

“The economic justification for Line D was always dubious,” said Edward Chow, senior fellow for energy and national security at the Center for Strategic and International Studies in Washington.

Aside from the economics, the Line D plan holds a special place in China’s regional policy because it called for a new route through Uzbekistan, Kyrgyzstan and Tajikistan to the Chinese border, unlike the first three strands through Uzbekistan and Kazakhstan.

China’s routes from Turkmen gas fields had previously bypassed the two poorest countries in the region, in large part because of a history of diversions by Kyrgyzstan from Russia’s Soviet-era pipelines and fears of instability.

The calculations changed in 2013 after CNPC acquired a one-third interest in Tajikistan’s Bokhtar oil and gas field, which was said to be a giant discovery with 3.2 trillion cubic meters of gas reserves.

The Line D route offered a chance for China to tap a major new regional resource and knit the region together at the same time. But prospects for Bokhtar development have been stalled by lack of financing and further complicated by legal disputes since last year.

Lower energy prices

The economics of the costly project also appear to have been overtaken by lower energy prices.

“I have to imagine, whatever the geological findings might be, that their exploration interests waned considerably after the drop in oil and gas prices last July,” Chow said.

The problems for Line D are reminiscent of the false start to China’s “go out” policy for Central Asian energy development in 1997, when it first promised to invest U.S. $9.5 billion (65.5 billion yuan) in Kazakhstan.

The plans were set back for years after the onset of the Asian currency crisis. If the Line D cancellation is a replay of the 1997 experience, it may also be a measure of China’s current economic concerns.

The indefinite postponement of the Line D project stands in contrast to official statements about China’s big investment in its “One Belt, One Road” initiative to promote trade routes and infrastructure for exports.

Speaking during China’s annual legislative sessions this month, a top planning official said the country had invested more than U.S. $50 billion (345 billion yuan) in “Belt and Road” countries since 2013.

He Lifeng, head of the National Development and Reform Commission (NDRC), said progress under the initiative was “better than expected,” the official Xinhua news agency reported.

Judging by the Plan D stoppage, the same does not apply to infrastructure investment for energy imports.

“This episode also raises questions about the Belt and Road strategy when political aspirations meet economic reality,” Chow said.

If the pipeline cancellation turns out to be a watershed for China’s energy investment in Central Asia, it may also be a turning point for its regional influence.

In 2013, the plan for a transit route through the previously bypassed countries of Kyrgyzstan and Tajikistan suggested that China might advance its hegemony in Central Asia and provide a measure of energy security. Unlike Turkmenistan, Uzbekistan and Kazakhstan, both Kyrgyzstan and Tajikistan are importers of oil and gas.

During a visit to Kyrgyzstan in 2015, Turkmenistan President Gurbanguly Berdymukhammedov played up the security benefits of the Line D project.

“The issues we are discussing concern the energy security and transport corridors that are of great importance not only for the region but also for the whole world,” Berdymukhammedov said, according to an Interfax report at the time.

Pulling in its horns

As China pulls in its economic horns and limits foreign investment with tighter capital controls, those prospects for the region may be diminished.

Western reports have highlighted the negative fallout for Turkmenistan, which has become almost exclusively reliant on the Chinese market for gas sales after having lost its business with Russia and Iran.

China has made huge investments to support development of Turkmenistan’s vast but technically challenging gas resources since providing an initial U.S. $3-billion (20.7-billion yuan) loan for developing the Galkynysh gas field in 2009.

In 2011, China Development Bank agreed to lend an additional U.S. $4.1 billion (28.3 billion yuan) for second-stage development at the mammoth field, which ranks among the world’s largest.

In December, a CNPC official said gas imports from Turkmenistan had reached 152.9 bcm over the seven-year period, including 52.4 bcm produced by CNPC from Turkmenistan’s Bagtyyarlyk contract territory under a production-sharing agreement.

But if the Line D setback is a letdown for Turkmenistan, it may also be bad news for Russia, which has been investing in its Power of Siberia gas pipeline to China without the benefit of Chinese financial support.

By the end of February, Russian monopoly Gazprom had completed 500 kilometers (311 miles) of the 3,000-kilometer (1,864-mile) project, which would eventually deliver 38 bcm per year through an eastern route to the Chinese market.

Completion was initially scheduled for next year but initial supplies have since been predicted for 2019-2021. Whether China will need Russian pipeline gas by then remains to be seen.

Gazprom has more than doubled its budget for investment in the Power of Siberia project from 72.1 billion rubles (U.S. $1.2 billion) in 2016 to 158.8 billion rubles (U.S. $2.7 billion) this year. But the increase falls short of the 250 billion rubles (U.S. $4.25 billion) that the company had projected earlier, Interfax reported in January.

On March 10, the company announced plans to complete 663 kilometers (412 miles) of the Power of Siberia route this year.

But earlier this month, a Gazprom official indicated that prospects were poor for Russia’s preferred pipeline project to reach China from the west through Xinjiang due to weakening demand.

“The process of talks has slowed down a little bit due to objective reasons,” Gazprom deputy chairman Andrei Kruglov told the South China Morning Post.

Kruglov cited “transformational changes” in China’s economy as affecting gas demand, while the country’s gas industry was “undergoing reform,” the paper said.

RFA

RFA

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