Tracing the Chinese Footprints in Kazakhstan’s Oil and Gas Industry

In the long term, Kazakhstan is the most important partner for China’s strategic priority to shift trade and energy dependence from sea to land. Both sides are enthusiastic about deepening cooperation, especially in trade. But an overwhelming amount of this economic cooperation surrounds the Kazakh energy industry, and it is fragile.

From 1992 to 2013, bilateral trade between China and Kazakhstan grew steadily – from $368 million in 1992 to $3.3 billion in 2003 and $28.5 billion in 2013. Then it collapsed. Between 2013 and 2019, bilateral trade between China and Kazakhstan fell by 23 percent to $21.8 billion. In 2016, total bilateral trade was at $13 billion, the lowest between China and Kazakhstan in a decade. 

The energy trade was particularly sensitive to two factors during this period: the Chinese economic downturn and the crash of the Kazakh tenge.

First, in 2014, when China released its slowest economic growth figures in 24 years, there was a sharp decrease in oil imports from Kazakhstan. According to data reported by the Chinese Academy of Sciences, from 1997 to 2013, China’s oil imports from Kazakhstan experienced substantial growth – from 45,000 tons in 1997 to over 1 million tons in 2002, peaking at 11.98 million tons in 2013 (4.25 percent of China’s total oil imports that year). The figure fell to 5.68 million tons in 2014, 4.99 million tons in 2015, and 3.23 million tons in 2016 (1.84 percent, 1.49 percent, and 0.85 percent of China’s total oil imports respectively).

Second, on the back of the 2014 Russian financial crisis the Kazakh tenge tumbled; this also served to shrink Kazakh imports from China.

With poor oil and gas infrastructure, Kazakhstan’s oil exports to China are low-grade, imported by Beijing to feed the needs of the country’s domestic refined oil and petrochemical manufacturing industry instead of for direct consumer use. Kazakh oil exports to China were therefore sensitive to Chinese economic growth as its domestic production slowed.

Since 1997, Kazakhstan has exported crude oil to China in exchange for processed gasoline, kerosene, and motor oil. In 2012, China and Kazakhstan formalized this with a duty-free deal for Kazakhstan to export crude oil to China for processing, which is then returned to the domestic market in Kazakhstan. Kazakh crude oil export revenue also translated into large imports of Chinese-made products, especially petrochemical products that Kazakhstan has no capacity to produce itself. 

This balance worked for quite some time, but as the Kazakh economy became increasingly vulnerable to global oil prices, Kazakhstan has looked to advance its oil and gas processing capacity with the aim to reduce reliance on imported processed oil and create a diversified export portfolio. China is among the top three countries of origin for processed oil in Kazakhstan.

The mantra of “win-win” was the backdrop for government-to-government industrial transfer deals between China and Kazakhstan. The $2 billion China-Kazakhstan capacity cooperation fund began in 2013 to kick-start industrial transfer planning from China to Kazakhstan. By December 2014, during Chinese Premier Li Keqiang’s state visit to Kazakhstan, China committed another $18 billion to the fund. During Li’s visit, accompanied by almost 300 Chinese business representatives in Nur-Sultan, a long list of 79 projects were identified by the Kazakh government and submitted for approval to their Chinese counterparts. By 2019, 56 projects had been officially approved by the Chinese, 15 of which have now been completed.

The logic was simple: Kazakhstan needs processing technologies to develop its oil and gas sector and increase export capacity of other industries; for China, moving excess industrial capacities away was necessary in a slowing economy to free up space and develop its own economy beyond manufacturing. 

But progress has not been easy. 

Kazakhstan’s lack of capital combined with a reluctance to allow foreign investors (especially Chinese) more control over long-term profits in Kazakhstan’s national strategic assets made large-scale bilateral project negotiations difficult. 

In 2015 and 2016, 10 projects, totaling $2.1 billion, began construction under the 2015 China-Kazakhstan government-to-government industrial capacity transfer agreement. As the Kazakh economy began to show signs of recovery, in 2017 and 2018, the availability of capital enabled 11 projects worth $6.5 billion to begin construction under the agreement. 

In these industrial capacity transfers, China is happy to transfer those production capacities that do not threaten existing Chinese export patterns to Kazakhstan. Among 56 projects under the 2015 agreement, only 11 projects are in the oil and gas sector. Three are completed: the modernization of a polypropylene powder production unit in Pavlodar, a facility to process and recycle plastic bottles in Turkestan, and the modernization of an oil refinery in Shymkent. Two project are currently active: the construction of a new polypropylene factory in Atyrau and an industrial explosives plant in Karaganda. 

In the post-COVID world, the Chinese presence in Kazakhstan’s energy sector will continue to expand in the long term, driven by China’s core strategic goal to shift its energy reliance from sea-based trade routes. In the next five years, Chinese economic indicators will dictate the willingness of Chinese state-owned enterprises to commit to new large oil and gas projects in Kazakhstan, made possible by funding from Chinese policy banks. 

A quickly recovered Chinese economy is likely to see large investments for downstream projects, increasing Kazakh capacity for quality energy and introducing production of oil-based products. 

As the Chinese economy moves forward, Beijing’s international reputation may further rest on it cleaning up its domestic refined oil and petrochemical manufacturing industry. Environmental concerns domestically will increasingly motivate Chinese companies to go abroad. Kazakhstan is likely to be picked for its prime location, given its oil resources and low market competition. For example, Kazakhstan has little to no capacity to produce synthetic fabric and China is eager to move away this production chain, which has a high level of chemical waste and carbon emissions associated with it. 

Under the 2015 agreement between China and Kazakhstan, six more projects in the oil and gas industry will begin in the coming years. They include a carbon black production plant in Aktobe, a combined heat and power plant construction in Almaty, a hazardous waste oil treatment plant in Mangistau, a gas turbine power plant capacity expansion in west Kazakhstan, oil-based product manufacturing projects such as the cable production facility in Karaganda, and a full solar panel production-cycle in Almaty.

Beyond these, in the first six months of 2020, evidence pointed to other potential large, new projects. On May 12, CNPC’s Pipeline Engineering Company and Alashankou Daodu Pipeline Company signed a design contract for a new China-Kazakhstan liquefied petroleum gas (LPG) pipeline. The new pipeline is designed to cope with insufficient transportation capacity and end reliance for LPG transportation on trucks and cargo trains that are high in cost, as well as in oil and gas loss, and subject to weather problems. 

During COVID-19, the need for this LPG pipeline was heightened as border controls restricted the numbers of cargo trucks permitted to cross. 

On January 14, China Oil HBP Group announced that the company had secured a processing plant agreement for the Kashagan field, spiking company stock. However, the Kazakh Ministry of Energy reported a day later that the project was still at the stage of consideration.

Either way, facilitated by a high level of political trust, it is clear that China and Kazakhstan are responding to bilateral trade problems and are actively introducing measures to strengthen trade dynamics. With increased capacity for quality energy and introduction of oil-based product manufacturing, this production relationship is welcomed by Kazakhstan. 

For China, keeping Kazakhstan happy is a necessary step in its effort to shift its trade and energy dependencies from sea to land.