KAZAKHSTAN-CHINA GAS PIPELINE PROJECT: STATUS

C O N F I D E N T I A L SECTION 01 OF 03 ALMATY 000410

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E.O. 12958: DECL: 02/01/2015
TAGS: ENRG EPET KZ CH
SUBJECT: KAZAKHSTAN-CHINA GAS PIPELINE PROJECT: STATUS
UPDATE

REF: ALMATY 323

Classified By: POEC Chief Deborah Mennuti for reasons 1.4(B) and (D)


1. (C) Summary: The state-owned Kazakhstani and Chinese oil
and gas companies recently completed a "pre-feasibility
study" for the construction of a 30 billion cubic meter (bcm)
gas pipeline from Central Asia to China. The study outlines
three proposed pipeline routes across Kazakhstan, the
economic and technical merits of which will be analyzed in
the next-stage "feasibility study," targeted for completion
by year-end 2006. While Kazakhstan's "big three" oil fields
-- Karachaganak, Tengiz, and Kashagan -- are the logical
source for associated gas to fill the pipeline, discussions
to secure guaranteed volumes of gas from those fields for the
pipeline are in their infancy. A gas pipeline to China would
give Kazakhstan needed relief from its current dependence for
gas exports on the Gazprom monopoly. However, despite its
clear advantages, the project's complexity and expense, along
with Kazakhstani fears of Chinese monopsonistic power, render
the project's future uncertain. End Summary.

Progress: From "Pre-Feasibility" to "Feasibility" Study
-------------- --------------


2. (C) KazMunaiGas (KMG) subsidiary "Kazakh Institute of Oil
and Gas" (KIOG) and the Chinese Petroleum Pipeline
Engineering Institute (a CNPC subsidiary) recently completed
a joint "pre-feasibility study" on a potential
Kazakhstan-China gas pipeline. According to Sabr
Yessimbekov, Executive Director of KMG's Oil and Gas
Transportation Division, the pre-feasibility study (a)
established China's medium-term need for at least 30 bcm of
Central Asian gas, and (b) outlined three potential routes
for a gas pipeline across Kazakhstan. KMG is now
contributing economic and technical analysis to the project's
"feasibility study," due to be completed by year-end 2006.
Based on the findings of the feasibility study, Yessimbekov
explained, a route would be chosen and engineering work
begun.


3. (C) While Yessimbekov's office is studying issues of
tariffs and take-off prices, KIOG is providing technical and
engineering analysis. The Institute's Director, Dr. Serik
Burkitbayev, told Econoff that a combination of the
pipeline's length (3000 km in Kazakhstan alone, according to
one variation),and the high volume of gas (30 bcm) required
to make the project economically viable, made the project a
"true engineering challenge." Pressures of up to 140 bars
would have to be maintained in a large-diameter pipeline,
necessitating the "newest metals and the best technologies."
Russian technology "wouldn't be good enough," he said, adding
that he hoped that Western firms would participate in the
project.

Choosing Between Three Proposed Routes
--------------


4. (SBU) Three principal routes are being considered for the
pipeline: (a) a "Northern" route, which would enter
Kazakhstan from Russia at Petropavlosk, and continue through
Astana, Karaganda and Atasu, where it would parallel the
recently-completed second leg of the Kazakhstani-Chinese oil
pipeline (reftel) to the Chinese city of Alashankou; (b) a
"Central" route, from Makat (a pumping station on the Central
Asian Gas Pipeline, near Atyrau) through Kenkijak, Chelkar,
Karakojyn, and Balkash, and on to Alashankou; and (c) a
"Southern" route, which would run from Makat to Chelkar, then
Southeast through Aralsk, Kyzylorda, Taraz, and Almaty, and
on to the Chinese border at either Khorgos or Alashankou.


5. (C) Yessimbekov indicated that the Chinese were also
interested in a variation of the Southern route. Under this
proposal, the existing Gazli (Uzbekistan) - Shymkent - Almaty

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gas pipeline would be repaired, expanded, and extended from
Almaty to the Chinese border. However, Yessimbekov said, the
Chinese did not know it yet but President Nazarbayev had
"just sent the signal" to exclude this option from
consideration. "We don't want Turkmenistan's and Uzbekistan's
participation in this project," he explained. Burkitbayev
echoed Yessimbekov's distrust of Uzbek involvement, casting
doubt on Uzbekistan's ability to supply gas for export. Due
to subsidized gas prices, he said, "the Uzbeks use 95% of
their gas domestically. And they have shortages every
winter."


6. (C) Burkitbayev and Yessimbekov outlined advantages and
disadvantages of all three routes for both the Kazakhstanis
and the Chinese. The Chinese favored the Central route
because it bypassed major Kazakhstani population centers,
thus delivering 100% of the gas for China. The Southern
route was ideal for Kazakhstan: not only would it help solve
the problem of bringing Caspian gas to market, it would also
require the least investment, by utilizing existing gas
lines. Furthermore, it would bring gas to the Almaty's
gas-starved South, thus freeing that region from energy
dependency on Uzbekistan. Burkitbayev explained that in a
worst-case scenario -- in which the Chinese, for whatever
reason, abruptly refused to take delivery of the gas -- the
Kazakhstanis would be able to find a use for "30-50%" of the
gas along the Southern route. On the other hand, the Chinese
were unhappy with the fact that the Kazakhstanis would "lift"
a significant amount of gas from a Southern pipeline, leaving
less for delivery to the border.


7. (C) The Northern pipeline had the advantage of passing
through Astana and Karaganda, where additional gas could be
used to support population and industrial growth. Swaps into
this line could work to Kazakhstan's advantage, with
Kazakhstani gas delivered to Russia in Kazakhstan's gas-rich
West, in return for Russian gas delivered into the Northern
pipeline. However, the Northern route would leave the project
dependent on Gazprom -- the very problem the Chinese gas
pipeline was meant to alleviate.

Where Will the Gas Come From?
--------------


8. (C) Haunting all of these discussions, Yessimbekov
admitted, was the question of where the Kazakhstani gas to
fill a Central or Southern pipeline would come from. In
geological terms, the answer is evident: over 70% of
Kazakhstan's proven gas reserves lie in just three fields:
Karachaganak, Tengiz, and Kashagan. Production of this
"associated gas" will grow dramatically in the near-term as a
consequence of planned increases in crude production at all
three fields. Increased gas production from these fields, in
turn, comprises the bulk of the GOK's forecasted short-term
growth in gas production and export.


9. (C) However, while either the Central or Southern pipeline
would be well-placed to tap gas from these fields,
negotiations to secure guaranteed gas supplies for the
pipeline were, in Yessimbekov's words, "barely getting
started." Complicating factors include the producing
companies' desire to re-inject$high v/lumes of gas in(irdurJto"maqntaIn nil,reserwoir rrucwtre,!hm g0unePkb!Beid)riQ*ylQollT$esQxsQuy1)N&gaSkodq mmk@4te GQC#r}1Q+ilmtmdf$G,?jQgo!S}u_k-mBQ@EikOw3evQs 1nm/jsN`&)ma0ave resurfaced in the aftermath

ALMATY 00000410 003 OF 003


of the Ukrainian-Russian gas dispute (Burkitbayev, for
example, told Econoff that his Institute had just been
instructed to "begin looking into" the project),the pipeline
to China is the only gas transportation project underway
which lessens Kazakhstan's dependence on Gazprom. However,
growing Chinese involvement also comes with a price.
Burkitbayev told Econoff (and Yessimbekov confirmed) that the
Chinese had predicated their participation in the pipeline
project on being granted offshore oil and gas blocks --
ostensibly to secure their own gas reserves with which to
fill the pipeline.


11. (C) The GOK is also wary of increasing its dependence on
a monopsonistic buyer of oil and gas. When Econoff asked
Yessimbekov if he thought the project would ever be realized,
he hesitated before answering. "Two weeks ago, I might have
said 'yes'," he replied. However, he said, the Kazakhstani
Embassy in Beijing had just written an "extremely persuasive"
report warning of the dangers of over-dependence on China as
a buyer of Kazakhstani oil and gas. As a consequence of the
report, he said, "enthusiasm for the gas pipeline project has
cooled."
ORDWAY