January 2020, Vol. 247, No. 1

Features

For China, 2020 Looks Like the Year of the Pipeline

By Gordon Feller, Energy Writer

Beijing’s leaders are increasingly concerned about China’s heavy dependence upon energy suppliers who worry, with a special concern centered on Russia and others in Africa and the Mideast. 

In order to reduce such dependence, China’s national government has focused on diversifying its international energy sources by sponsoring the development of China-bound pipelines in such places as Myanmar and Central Asia. As a result of these massive investments of financial and political capital, both Southeast Asia and Central Asia has become considerably more important to China’s energy policy. 

Central Asia has an abundance of oil and natural gas deposits, and the region accounts for about 4% of global energy deposits. The oil reserves in Central Asia and along the Caspian Sea coast amount to 17 bpd to 33 bpd – with more unexploited deposits. China has turned to Central Asia for energy supply because it synchs well with Beijing’s central aim: to compete aggressively in ways that increase the country’s energy security. Central Asia’s current need for capital synchs with Beijing’s key strategy – to develop its “energy diplomacy” in this region. 

Developing close ties with Central Asia through an energy nexus helps China deter threats from the separatist activists in the Xinjiang Uyghur Autonomous Region. China has reorganized the army units in Xinjiang to safeguard its oil fields given the 2,050-mile (3,300-km) western border with Kazakhstan, Kyrgyzstan and Tajikistan.

The roots of the deep connections linking Central Asia with China go all the way back to ancient times of the Silk Road. Diplomatic relations between China and the Central Asian countries have been strengthened since 1991. Trade between China and the five Central Asian countries rose from $527 million in 1992 to $60 billion in 2019. In Central Asia, China has sought to establish a regional free trade zone as one way to tap into the region’s vast energy resources.

The major Chinese energy players in the Central Asian region are China National Petroleum Corporation (CNPC), China National Offshore Oil Corporation (CNOOC), China Petroleum and Chemical Corporation (SINOPEC) and PetroChina. They have each partnered with local companies in order to compete in exploration and extraction of oil and natural gas. The competitors have been traditional power players from Russia, and also Western-based multinational companies – especially Total Chevron, ExxonMobil and BP. 

CNPC’s focus has been to bring its natural competitive advantages to this partnership, drawing on expertise developed through domestic oil and gas exploration and development, ncluding in specialty engineering, technical support, and services. 

Two main pipelines from Central Asia to China, the Central Asia-China gas pipeline and Kazakhstan-China oil pipeline, are already in operation: 

The Central Asia-China Gas Pipeline (CAGP), spanning Turkmenistan, Uzbekistan and Kazakhstan, and crossing Xingjian at the border town of Horgos, transported 40 Bcm of natural gas when it was first built. It’s connected with China’s second west-east gas pipeline, which starts from Horgos and ends in Hong Kong, stretching a total of 5,408 miles (8,704 km). 

China imported about 18.4 Bcm of natural gas through its first cross-border pipeline the last 2 years. Given China’s plan to increase gas imports from Central Asia by five times, by 2019, the Central Asia-China Pipeline’s capacity will expand up to 55-60 Bcm of gas per year.

Upon the possible addition of what’s now known as “Line D,” the Central Asia-China Gas Pipeline will have an annual deliverability of 85 billion cubic meters, the largest gas transmission system in Central Asia.

The Kazakhstan–China Oil Pipeline is China’s first direct oil import pipeline allowing oil import from Central Asia. This pipeline flows from Caspian shoreline, on Kazakhstan’s side, to China’s Xinjiang. The pipeline is jointly owned by CNPC and the Kazakh state-owned oil company KazMunayGas.

Three other pipelines have recently been in the news, and each one provides some helpful context to understand the full PRC menu of 2020 pipeline projects: 

West–East Gas Pipeline (WEPP) – This internal Chinese natural gas pipeline runs between the east and west of China. The Phase One began its trial run in October 2004, before entering into commercial operations in 2005. PetroChina WEPP Corp., a subsidiary of PetroChina, owns and operates the 2,485-mile (4,000-km) pipeline

The system runs from Lunnan, a city in Xinjiang, to Shanghai on the coastline. Overall, WEPP involves construction of four pipelines that will connect Tarim Basin in Xinjiang Autonomous Region and Turkmenistan with the Yangtze Delta and Pearl Delta regions. 

Construction on the second pipeline (known as WEPP II) started in February 2008 and was completed in December 2012. The WEPP III was completed in August 2014, while WEPP IV remains in the planning stage.

Eastern Siberia-Pacific Ocean Oil Pipeline (ESPO) – Stretching more than 2,980 miles (4,800 km), ESPO is vital because it exports crude oil from Russian domestic oilfields into the Asia-Pacific markets, with a focus on supplying Japan, China and South Korea. 

The system was built by, and has always been operated by, Russia’s state-owned pipeline company, Transneft. Construction of the pipeline’s initial stage, which totals 1,713 miles 2,757 km, began in mid-2006. ESPO opened for business in December 2009, with a capacity of 30 mtpa. A second leg of the pipeline, ESPO-2, opened in December 2012, and that part of the system extended the original project by an additional 1,305 miles (2,100 km).

The Power of Siberia Pipeline (PoS) – This is Gazprom’s new natural gas pipeline that will flow west-east-south. It is under construction in Eastern Siberia, and it’s designed to transport Yakutia’s gas to Primorsky Krai, through the Russian city of Khabarovsk, to Far Eastern customers. This pipeline’s diameter is 4-foot, 8-inch, while the pipeline’s length is 2,485 miles (4,000 km). PoS’s maximum discharge, when fully operational, will be 61 Bcm per year.

In April of 2019, Reuters reported that three of the four Chinese oil and gas giants have each set in motion ambitious spending plans. It seems likely that Sinopec recorded the largest capital spending increases in both the company’s 2019 exploration budget and development budget. 

The spending increases mostly likely focused on the expansion at the Shengli oilfield and at the Fuling shale gas field.  Sinopec plans to increase its year-on-year capital spending by 41%, to reach their target of $8.54 billion, or 60 billion Chinese renminbi (RMB). The other two companies have been busy: CNOOC increased its year-on-year capital spending by 20%, to $10.67 billion (75 billion RMB). CNPC is set to increase its year-on-year capital spending by 16%, to $32.45 (228 billion RMB).

According to analyses published by these three firms, and by other China-based oil and gas companies, investments in land-based pipelines over the next four years will increase by 14% – when compared to the spending reported during the past five years. 

The cumulative increase in investment value could total as much as $193 billion. In another four years there could be 94,778 miles (152,531 km) of long-distance pipelines built worldwide, with the U.S. and the Asia-Pacific region laying out the longest sections. By then the U.S. will have built a total of 34,183 miles (55,013 km) in pipelines, while the total built by Asia-Pacific regions will reach 29,715 miles (47,882 km), making them number one (at 36.1% of the global total) and number two (at 31.4% of the global total), respectively.

China will invest heavily on long-distance natural gas pipelines, including plans to build 17,400 miles (28,000 km) between the years 2019 and 2020, and 36,660 miles (59,000 km) between the years 2021 and 2025.   If you calculate the pipelines at a cost of $1.85 million (13 million RMB) per kilometer, the cumulative investment amount of the pipelines will come to about $1.64 trillion (11.5 trillion RMB).  In addition to such infrastructure upgrades, new oil and natural gas pipeline investments will continue to grow.

These investments all involve new spending for oil and natural gas pipelines. The central government believes that these budgets will benefit China’s own pipe-manufacturers and help some of the larger engineering-construction firms. Experts expect from 2019 to 2022, China will have to invest in a minimum of $14.23 billion (100 billion RMB) per annum, in order to satisfy the expected 2025 demand for natural gas supplies – more than 400 Bcm.  

The expectation is that during the period of only two years, from the beginning of 2019 through the end of 2020, building out the natural gas pipeline network will require as much as $42.68 billion (300 billion RMB). 

What is the future likely to bring? For Kazakhstan and Turkmenistan, energy cooperation with China allows both to successfully play what might be called a “multi-vector energy strategy.” 

This kind of strategy is aimed at three different but parallel goals: to diversify their export routes; to weaken Russia’s traditional control of Central Asian oil and gas exports; to attract the investments and the know-how which are needed in order to increase domestic hydrocarbons production and develop new fields.

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