China's thirst for energy fuels westward expansion

tubesALMATY (Reuters) - China's insatiable demand for energy to power its economy has made it a serious contender in the fight for control over vast energy resources in its thinly populated and impoverished western backyard.

Lying on some of the world's biggest oil and gas reserves, strategically placed Central Asia has for centuries been at the heart of a fierce tug-of-war between Russia and the West.

China shares a 2,800-km (1,740-mile) border with Central Asia but has long remained on the sidelines, keeping a watchful eye on regional power politics from afar.

Now, with traditional players hit hard by the latest global economic slump and its own economy roaring forward, China is mounting a diplomatic offensive which analysts say will only get more aggressive in the years to come.

"Western and Russian oil firms will stay in the game thanks to their operating experience... but their power will get marginalised by China's financial might over the long term," said Gordon Kwan, head of regional energy research at Mirae Asset Securities in Hong Kong.

The second half of 2009 saw a whirlwind of Chinese activity. In December, President Hu Jintao opened a new big gas pipeline linking gas-rich Turkmenistan with China's western regions.

It also agreed to lend Turkmenistan $4 billion to develop the huge South Iolotan field containing up to 14 trillion cubic metres of gas, according to Britain's GCA consulting company.

Kazakhstan -- a vast nation lying on three percent of global oil reserves and home to Kashagan, the world's biggest oil discovery in 40 years -- is particularly attractive.

"Their (Kazakhs') assets per capita are almost unrivalled," said Kingsmill Bond, chief strategist at Troika Dialogue. Kazakhstan, roughly the size of the entire western Europe, is home to just 16 million people.

"From the Chinese perspective, which is obviously extremely commodities short, it represents very, very good opportunities to leverage their capital and get some of those assets."

China's share of Kazakh oil production jumped to a quarter last year from about one-sixth after China's CNPC tied up with Kazakh state oil firm KazMunaiGas in a $2.6 billion deal to jointly take over Kazakh oil producer MangistauMunaiGas.

In addition, China lent Kazakhstan $10 billion, a much-needed liquidity boost for its $100 billion economy hit by the financial crisis and last year's slump in oil prices.

China is tightlipped on its further plans. Embassy officials could not be reached for comment. During his visit last year, Hu limited his public addresses only to broad diplomatic remarks.


Chinese presence is now felt almost everywhere across Central Asia, its influence extending from energy to construction to increasingly vibrant cross-border trade.

Kyrgyzstan's bustling Dordoi market, a maze of crowded lanes teeming with people and donkey carts, is overflowing with Chinese products, with traders shouting orders in languages ranging from Chinese to Russian, Kyrgyz and Uighur.

In neighbouring Tajikistan, the poorest country in the ex-Soviet Union, trade with China jumped 44 percent last year while falling by 23 percent with traditional partner Russia.

Although governments across the region have embraced China's foray into their region, public views remain divided.

Populated by descendants of Turkic-speaking nomadic tribes, Central Asia has a long history of conflict with China and many ordinary people are wary of falling under Chinese dominance.

In Kazakhstan, people still revere Ablai Khan, an 18-century worrier who destroyed a key pro-Chinese tribe and consolidated Kazakh lands. Anti-Chinese rallies take place periodically.

Diplomatic tension may be eventually inevitable, observers say, particularly if interests clash over a lucrative oil asset.

Some have recalled a fictional episode of the U.S. television drama The West Wing where Russia and China find themselves on the brink of war over Kazakh oil assets.

Yet, such drama is unlikely in real life, analysts say.

"Chinese pursuit of energy resources will inevitably encounter tensions in numerous nations, but the tensions are probably manageable in the near term," said Damien Ma, a China analysts with Eurasia Group.

"I think China has little choice, given its expected future growth and energy demand, but to continue with a diverse strategy that courts both Russia and the West."

(Editing by Sonya Hepinstall)

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