Graduate School of Social Sciences

The security of : and CNPC in Saudi-Arabia and Kazakhstan

Msc Thesis Political Science International Relations The Political Economy of Energy

05-06-2020

Supervisor: Author: Dr. M.P. Amineh Jeroen Rijswijk Second Reader: 11306297 Dr. H.W. Houweling

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2 Table of Contents Acknowledgments 5 Abstract 7 Maps 8 List of tables and figures 11 List of abbreviations 12

Chapter 1: Research Design 15 1.1 Introduction 15 1.2 Social and academic relevance 16 1.3 Literature review 17 1.4 Theoretical framework 24 1.5 Hypotheses and operationalization 27 1.6 Methodology 29 1.7 Structure of thesis 30

Chapter 2: The People`s Republic of China: Energy Situation, Policy and National Oil Companies 33 2.1 Introduction 33 2.2 China`s rising import dependence 33 2.3 China`s power structure and energy policies 37 2.4 The role of National Oil Companies in China 42 2.5 Towards a new external energy security policy 47 2.6 Conclusion 54

Chapter 3: Oil, Power and the external relation with China in Saudi-Arabia & Kazakhstan 55 3.1 Introduction 55 3.2 Power structure, economy and energy in Saudi-Arabia 56 3.3 China-Saudi relationship: diplomacy, trade, investments & energy 62 3.4 The role and position of Saudi-Arabia in the BRI 66 3.5 Power structure, economy and 68 3.6 China-Kazakhstan relationship: diplomacy, trade, investments & energy 75 3.7 The role and position of Kazakhstan in the BRI 78 3.8 Conclusion 80

Chapter 4: The activities of Sinopec and the CNPC in Saudi-Arabia and Kazakhstan 83 4.1 Introduction 83 4.2 Trade, Investment & Finance in Saudi-Arabia 84 4.3 Trade, Investment & Finance in Kazakhstan 91 4.4 Yanbu Aramco Sinopec Refining Company 99 4.5 Development of Kashagan oil field 101 4.6 Kazakhstan-China oil pipeline 103 4.7 Conclusion 105

Chapter 5: Geopolitics and Geo-economics in the Middle-East and Central-Asia 109 5.1 Introduction 109 5.2 Domestic challenges for the Sino-Saudi & Sino-Kazakhstan energy relations 110 5.3 Geopolitics and Geo-economics in the Middle-East 113 5.4 Geopolitics and Geo-economics in Central Asia 120 5.5 Conclusion 127

Chapter 6: Conclusion 129

Bibliography 137

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4 Acknowledgements This thesis, on the energy relationship between China and Saudi-Arabia & Kazakhstan, is the final results of 6 months of hard work and study. While I say 6 months, I have actually been studying the energy supply security of China and the impact of the on China`s energy situation for almost 2 years now. Already during my bachelor, I was very interested in geopolitics. This eventually led me to the course ‘Security and Geopolitics in the Middle East and Central Eurasia’, which was taught by mr. M.P. Amineh (Mehdi). Here I was first introduced to the study of energy and the interesting case of China. After that, in my master, I signed up for the ‘Energy and Geopolitical Economy in Eurasia’, which was also taught by mr. Amineh. During these classes, my interest for the energy supply security of China further increased and mr. Amineh invited me to study this topic within his research project ‘the political economy of energy’. The cases of Saudi-Arabia and Kazakhstan really attracted me since they arguably both play a large role in the energy supply security of China, but on different levels. This has resulted in the work that lies before you. Although there is always room for improvement and further analysis, I am proud of what I have achieved in the past six months. With regard to the completion of this thesis, I would first and foremost like to thank mr. Amineh. Over the past 2 years, I have come to know mr. Amineh as the most inspiring, dedicated and caring teacher I have encountered during my academic career. He is always willing to provide support, additional information and feedback on my work. Throughout this process, his efforts have tremendously increased the quality of this thesis. Second, I would like to thank Dr. H. Houweling for his time and effort to read my work. Furthermore, I would especially like to show my gratitude for my twin brother, Kevin, who has helped me tremendously by supporting me and proof-reading a large part of this thesis. Finally, I would like to thank my family and friends, who have had to miss my presence during these intense months, but kept on supporting and encouraging me.

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6 Abstract

This thesis provides a comprehensive analysis of the activities of Sinopec and CNCP in the energy sectors of Saudi-Arabia and Kazakhstan. To do so, it uses the geopolitical economy theoretical framework that helps to understand the configuration between market forces and the state and explains the combination of geopolitical and geo-economic tools for the power projection of the Chinese state. It will be argued that the import dependency of China has grown because of its economic development. To satisfy domestic consumption, Chinese NOC`s are stimulated to acquire access to overseas resources, such as in Saudi-Arabia and Kazakhstan. The BRI plays a large part in this, since it arguably forms the new external of the PRC. It redirects investment towards resource-rich countries and intensifies the activities of Chinese NOC`s. Furthermore, it will be argued that the activities within Saudi-Arabia focusses mainly on trade and investments in the downstream production process. Saudi-Arabia is the second largest import destination for China and therefore important for the energy supply security of China. In the case of Kazakhstan, most activities focus on the upstream production process and the acquirement of equity oil in the country`s oil and gas fields. Oil from Kazakhstan lowers China`s dependency on energy imports from the Middle-East and, therefore, arguably increases China energy supply security.

Keywords: China, Saudi-Arabia, Kazakhstan, energy supply security, BRI, NOC`s, trade investment and finance

7 Maps Map 1: China

Source: Nations Online Project. Map of China. Available from: https://www.nationsonline.org/oneworld/map/China-Political-Map.htm

8 Map 2: Middle-East

Source: Nations Online Project. Map of Western Asia and the Middle East. Available from: https://www.nationsonline.org/oneworld/map/small_middle_east_map.htm

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Map 3: Central Asia

Source: Nations Online Project. Small Map of Central Asia. Available from: https://www.nationsonline.org/oneworld/map/central-asia-map-800px.htm

10 List of tables and figures Figures 2.1 China`s total and production 34 2.2 China`s total energy consumption by sector 35 2.3 China`s total supply per energy resource 36 2.4 Origin of oil imports in 2017 37 2.5 Hierarchical structure state-class China 39 2.6 Energy institutions in China 40 3.1 Saudi-Arabia oil export/total export, oil revenue/GDP & oil revenue/total state revenue (1995-2018) 58 3.2 Global oil price & profit and loss account of Saudi-Arabia (1990-2018) 61 3.3 Value of top 4 crude petroleum importing countries from Saudi-Arabia (1995-2017) 65 3.4 Rank and value of China`s crude petroleum imports from Saudi-Arabia (1995-2017) 66 3.5 Kazakhstan petroleum exports to major importers (1995-2017) 77 3.6 Rank and value of China`s crude petroleum imports from Kazakhstan (1995-2017) 78 4.1 Total value of imports from Saudi-Arabia to China, compared with crude petroleum imports (1995-2017) 85 4.2 Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019) 86 4.3 Value of investments by Sinopec and CNPC in Saudi-Arabia (2005-2019) 89 4.4 Timeline of major investments by Sinopec in Saudi-Arabia 91 4.5 Total value of imports from Kazakhstan to China compared with crude petroleum imports (1995-2017) 92 4.6 Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019) 94 4.7 Value of investments by Sinopec and CNPC in Kazakhstan (2005-2019) 97 4.8 Timeline of major investments of CNPC in Kazakhstan 99

Tables 2.1 China`s National Oil Companies on the Fortune 500 43 2.2 Overview key figures CNPC in 2018 45 2.3 Overview key figures Sinopec in 2018 46 3.1 Saudi-Arabia oil and natural gas statistics in 2016 60 3.2 Major oil and gas fields, operating companies and reserves in Saudi-Arabia 61 3.3 Kazakhstan oil export/total export, oil revenue/GDP & oil revenue/total state revenue (2000-2019) 71 3.4 Kazakhstan Oil and Natural gas statistics in 2016 72 3.5 Major oil and gas fields, operating companies and reserves in Kazakhstan 74 4.1 Investments by Sinopec and CNPC in Saudi-Arabia (2005-2019) 88 4.2 Investments by Sinopec and CNPC in Kazakhstan (2005-2019) 96

11 List of abbreviations AEI American Enterprise Institute AIIB Asian Infrastructure Investment Bank AMG AktobeMunayGaz BBL Barrel BPD Barrels Per Day BRI Belt and Road Initiative BTC Baku-Tblisi-Ceyhan CA Central-Asia CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Company CPC Caspian Pipeline Consortium CPC Communist Party China CSTO Collective Security Treaty Organization CU Customs Union EEU Eurasian Economic Union EuraAsEc Eurasian Economic Community FPCL Fujian Petrochemical Company Limited FREP Fujian Refining & Petrochemical FYP Five Year Plan GCC Gulf Cooperation Council GDP IEA International Energy Agency IMF International Monetary Fund KSA Kingdom of Saudi-Arabia Ktoe Kilotons of oil equivalent M&A Merger and Acquisition mb/d Million Buckets per Day MBS Mohammed Bin Salman ME Middle-East MMG MangistauMunaiGas MoC Memorandums of Cooperation MoU Memorandums of Understanding NCOC North Caspian Operating Company

12 NDRC National Development and Reform Commission NEA National Energy Administration NOC National Oil Company NPC National People`s Congress NPCSC National People`s Congress Standing Committee OBOR One Belt One Road OEC Observatory for Economic Complexity OFDI Overseas Foreign Direct Investment ONGC Oil and Natural Gas Corporation OPEC Organization of the Petroleum Exporting Countries PRC People`s Republic of China PSC Politburo Standing Committee R&D Research and Development RMD SASAC State-owned Assets Supervision and Administration Commission SCO Cooperation Organization Sinopec China Petroleum & Chemical Corporation SOE State-Owned Enterprise SPR Strategic petroleum reserve SV30 Saudi Vision 2030 tcf Trillion Cubic Feet USD United States Dollar WITS World Integrated Trade Solution YASREF Yanbu Aramco Sinopec Refining Company

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14 Chapter I Research Design

1.1 Introduction In the past 40 years, China has undergone a process of unprecedented industrialization and economic development. This has significantly improved the country`s capabilities and opportunities and enhanced its position on the global stage. However, a side effect of this development has been the rapidly increasing domestic energy consumption in China. To satisfy energy demand, the country is forced to look abroad for its energy supply. Due to the large negative consequences inherent to a shortage of energy, the availability of these resources can be considered as a security issue. To increase its energy supply security, the People's Republic of China (PRC) has, since the 1990s, incentivized its National Oil Companies (NOC’s) to acquire resources abroad. Over the years, these NOC's have grown out to be among the largest companies in the world and play a large role in the energy supply of China. As these companies are state-owned, they, for the most part, follow the national interest. Therefore, their activities can be seen in light of the national interest of the country. This research will look at the economic activities of these NOC's for the cases of Saudi-Arabia and Kazakhstan. These economic activities are related to the trade, investments, and finance of these companies. Both Saudi-Arabia and Kazakhstan, arguably, play a role in the energy supply security of China for different reasons. Saudi-Arabia is the largest oil exporter in the world and the second-largest (behind Russia) exporter to China. Supply disruptions from this country will, therefore, have a substantial impact on the energy supply of China. Kazakhstan, on the other hand, is a less significant exporter to China. However, as China aims to decrease its dependence on Middle-Eastern resources and thereby reduce its oil imports through the 'strait of Malacca', this enhances the importance of Kazakhstan as an alternative to the Middle-East. Diversification of the oil exporting countries and supply routes also increases the energy supply of China. The aim of this thesis is to analyze the economic activities of two of the largest Chinese NOC's (Sinopec and CNPC) in the energy sectors of Saudi-Arabia and Kazakhstan. It will do so in the context of the ‘Belt and Road initiative’ (BRI). This initiative has arguably shaped the external energy policies of the PRC and had a significant impact on the activities of Chinese NOC's. It has, arguably, both intensified and redirected the trade and investment businesses of these companies. To investigate the role of the activities of Chinese NOC's in Saudi-Arabia and Kazakhstan in the energy supply security of China, the main research

15 question that this thesis will answer is: What are the activities of Sinopec and CNPC in Saudi- Arabia and Kazakhstan, and to what extent do they contribute to the energy supply security of China?

In order to answer this question, this thesis will first answer the following sub-questions: 1. How has the energy situation in China developed over the past 20 years, and what is the role of the NOC's in China's energy supply security policy? 2. How has the 'Belt and Road' initiative improved China's external energy security policy? 3. How are the energy sectors in Kazakhstan & Saudi-Arabia regulated, and what is the role of energy in the economies of these countries? 4. How has the relationship between China and Saudi-Arabia & Kazakhstan in terms of diplomacy, trade, investments, and energy developed? 5. What are the activities, concerning trade, finance, and investments, of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and how have these changed over time and between these countries? 6. What are the domestic challenges for the energy relationship between China and Saudi-Arabia & Kazakhstan? 7. What are the geopolitical and geo-economic dynamics within the Middle-East and Central-Asia, and how do these affect the power projection of China in these regions?

1.2 Social and academic relevance In recent years, China has become an increasingly dominant player on the world stage and may even threaten our contemporary world order. Economic development and subsequent rising energy demands have forced China to look abroad for its energy supply. Chinese activities in resource-rich countries with relation to trade, finance, and investment are increasing China's influence in the resource-rich regions in the world. As a result, many of the countries within these regions are reorienting their energy export from the West to the East. This reorientation has even further accelerated under the new 'Belt and Road' Initiative that aims at connecting China to the world. The importance of this new initiative for the cross- border activities of the ‘State-Owned Enterprises’ (SOE) in China cannot be understated. Almost every action from the Chinese government on the international stage has been in light of this initiative. Every investment of SOE`s or investment banks now falls under the banner of the BRI.

16 Due to the importance of this initiative, research that analyzes the motivations and effects of the BRI is needed to provide a coherent picture of the Chinese strategies. Similarly, the rise of China and its growing energy demands can have severe implications for the energy supply security of Europe. These different energy importing countries compete with each other over the available resources. This competition can be a catalysator of conflict. Studies that analyze the energy supply security of China are of significant importance since it is paramount to get a better understanding of China's strategies concerning energy. On top of that, this thesis aims to contribute to two current debates within the topic of China's energy supply security. The first debate is on the relationship between the Chinese government and the National Oil Companies. Do these companies operate fully according to the interest of the state, or are they equipped with a degree of autonomy? The second debate is on the motivations of the Chinese government for the implementation of the 'Belt and Road' initiative. Is this initiative mainly driven by economic incentives to increase trade with other parts of the world? Or is it more politically driven to establish a new political order in the region?

1.3 Literature review This section will provide an overview of the already existing literature on the topics relevant to this thesis, as well as analyze some academic debates within these issues. Doing so will enable three things within this thesis. First, the literature review is the foundation of this research since it shows the already available knowledge on topics related to this research. Second, this makes it possible to identify gaps in the literature that this research could contribute to. Third, analyzing the academic debates enables this thesis to position itself within these debates and provide the argumentation to do so. This literature review will first review existing work on the economic development and subsequent rising energy demand within China. After that, it will discuss the Chinese policies for its energy supply security. The most recent policy is the BRI, and this thesis will analyze the debate surrounding the motivations of the PRC for the implementation of this initiative. This will be followed by a section on the dynamics in the relationship between the Chinese government and the state-owned NOC's in China. After that, this thesis will review the literature on the relationship between China and Saudi-Arabia & Kazakhstan, with a special focus on energy. The final section of this analysis will highlight the main points in which this research aims to contribute to the debates.

17 Economic development and energy demands in the PRC The study of energy as a security issue started with the Copenhagen school, which was led by Buzan, de Wilde & Waever. They argued for a much broader conceptualization of security that encompasses all areas of government (Buzan, Waever & de Wilde, 1998). Since issues like health, education, environment, and poverty have a large impact on the quality of life, they can also be considered security issues. Similarly, the availability of energy resources is also considered to be a prerequisite of economic development and, therefore, has a large impact on the state (Cao & Bluth, 2013). Thus, the sufficient and sustainable supply of energy resources was considered to be a matter of energy supply security. This further enabled academics to investigate the activities of countries to enhance their energy supplies. Within the study of energy supply security, China is particularly interesting because of its recent economic development and industrialization. While this development has significantly improved the living standards of the population and created a new middle-class in China, it has also caused a rapidly increasing demand for energy sources (Amineh & Yang, 2014). While China has sufficient supplies, its oil and gas reserves are lacking. Until now, the country mainly relies on coal as its source for energy (Danreuther, 2011). However, because of the damage coal does to the environment, the PRC is increasingly aiming to diversify its energy sources towards oil and gas (Lin, 2010). Therefore, the country is dependent on imports from other countries to sustain its energy demand.

China's external energy policies and the BRI In the 1990s, three general issues forced China to increase its overseas economic activities. First, the large production of industrial commodities required extra export markets. Second, the export of these commodities led to a capital surplus in China. Therefore, the SOE's in China started to invest in overseas projects to further increase their profit (Gonzalez-Vicente, 2011). Third, rising energy consumption increased the import dependency of China, which caused the country to enhance its economic relations with resource-rich countries (Wu, 2012, p. 59). Because of these problems, from the 1990s, the Chinese government started to stimulate its SOE`s and especially its NOC`s to move abroad and interact with the global market. This ‘going out’ policy was further upgraded with the implementation of the BRI in 2013. The BRI constitutes a continuation and intensification of the internationalization process that was initiated in the early 2000s. Through the BRI, China is providing loans to other countries, including many resource-rich countries in the Middle-East and Central-Asia.

18 In these countries, the projects that China is funding are mainly connected to the energy sector (Umbach, 2019). According to Duan et al. (2018, p. 535), the majority of the energy resources in the world are located in countries along the BRI routes. These percentages are 58.8% of all oil, 79.9% gas, and 54.0% coal (Duan et al., 2018). This shows the focus on and importance of energy resources in the BRI. One of the ways in which the government in China is trying to enhance its economic relations with these resource-rich countries is by diverting the 'outward foreign direct investment' (OFDI) of its companies. Liu et al. (2017) argue that the PRC has been successful in this objective since the percentage of OFDI towards countries included in the BRI, relative to total OFDI, has risen from 10.8% in 2015 to 44% in 2017. A large number of articles are written about the motivations behind and the consequences of the BRI project. Some of this work has focused on the issue whether the BRI is a politically motivated program, meant to enhance the political position of China in both the region and the world, or an economic program that aims at increasing the trade relations with other countries (Leverett & Bingbing, 2017, p. 111). On the one hand, academics like Summers (2016) and Yu (2019) have argued that the BRI, as a program, is implemented to further increase the economic development of the PRC. According to Summers (2016), this initiative displays China's compliance with the international capitalist system and its assumptions, such as the beneficial aspect of enhanced trade relations for domestic economic prosperity. Furthermore, he argues that the BRI is not a geopolitical strategy but a spatial fix. This means that the current era of globalization forces countries, such as China, to integrate their economy in both the regional and global economies. For China, this is done through the BRI (Summers, 2016, p. 1638). On the other hand, according to experts like Fallon (2015) and Yu (2017), the BRI is a geopolitical strategy in which China wants to exert its regional dominance and counterbalance US hegemony. Yu (2017, p. 355), for example, argues that this initiative reveals China's aspirations to establish a new world order. The BRI increases the diplomatic and economic influence of China within a number of countries in the region. This enables China to become the political and economic center of the region (Yu, 2017, p. 354). On top of that, the PRC is increasingly providing countries with an alternative against US hegemony. According to Yu (2017), definitely developing countries that rely on China for financial aid and investments are eager to go along with this alternative. Similarly, Fallon (2015, p. 141), has argued that the BRI is the grand strategy of the PRC to restore the Chinese nation and once again establish itself as a superpower. Therefore, he argues that the BRI is the revelation of Chinese global and regional ambitions (Fallon, 2015).

19 In contrast to the two earlier points of view, recently, a new strand of scholars has combined the geopolitical and geo-economic aspects of this initiative (Leverett & Bingbing, 2017; Pu, 2016; Wong, 2014). For example, according to Leverett & Bingbing (2017, p. 124), the BRI is indeed a grand strategy of China, but one that both encompasses economic, environmental, and strategic challenges, as well as the Chinese desire for a more multipolar world. Similarly, Pu (2016) emphasizes the five objectives of the BRI, which are: connecting infrastructure, enhancing trade, increase financial activities, policy communication, and people to people bonds. According to him, the first three focus on economic activities, while the latter two are more strategically oriented (Pu, 2016, p. 115). He, therefore, argues that in reality, "political factors and economic factors are not separable in the design and implementation of OBOR. As China's new global action plan, OBOR could be largely viewed as China's new geo-economic strategy" (Pu, 2016, p. 115).

Dynamics of the relationship between China's NOC and the Chinese government The Chinese NOC's are so-called 'State-Owned Enterprises' (SOE's). This means that the shares of the company are in the hands of the government, and all profit eventually runs back to the state. While one would think that this gives the government ultimate control over these companies, different experts have different opinions on the extent to which they are fully regulated by the state or exert some form of autonomy. The first group of academics has argued that the government remains in control of these businesses. They, for example, highlight the role of the 'State Assets Supervision and Administration Commission' (SASAC) as the supervising power of these SOE's (Francisco & Beachler, 2013). According to Francisco & Beachler, 2013, pp. 20-21), although the NOC's might have some operational autonomy, "the strategic and administrative control of the SASAC over them limits their capacity to pursue their own interests that may be divergent from the state's interest". Meidan (2016, p. 55) agrees with this and argues that the autonomy of the NOC's remains within the playing field of the state interest. However, she also emphasized the dynamical character of the relationship between state and companies, by arguing that it is characterized by times of centralization as well as decentralization (Meidan, 2016, p. 55). Similarly, Amineh & Yang (2018, p. 29) have also argued that the Chinese NOC's activities can be seen in light of the national interest of the PRC. Overall, these companies are not driven by economic motives that include the maximization of profit, but by increasing the energy supply security of China (Amineh & Yang, 2018, p. 29). Therefore, the commercial interest of these companies is subordinated to the national interest of the PRC.

20 However, on the other hand, other scholars have argued that this is not the case and describe a trend of increasing independence and autonomy for these NOC's. Kong (2006, p. 67), for example, has identified cases in which the economic interest differs from the national interest of the state, and in which the NOC eventually chose to pursue its own commercial agenda. One of these cases is when the international oil price is higher compared to the domestic Chinese oil price. In such instances, the profit of the NOC's is higher if they opt to sell oil on the international market. However, it is in the national interest to sell it domestically. In some of these cases, the NOC still chose to move the energy to the international market and increase its profit (Kong, 2006, p. 75). Similarly, Ma & Andrew- Speed have also argued that the autonomy of these companies has increased in recent years. They emphasize the growing difference between national state interest and company interest and also argue that these businesses, therefore, receive less support from the government (Ma & Andrew-Speed, 2006 p. 27). According to Liao (2015, p. 55), the increasing autonomy of the NOC's is due to the inability of the government to supervise and control the companies. The size of these large businesses has increased their political influence and technical knowledge, and this has enabled them to seek their own commercial interest (Liao, 2015). Related to that, Wang (2019, p. 305) has argued that even in China, where the market is supposedly dominated by state forces, companies exercise an intrinsic form of power. This is due to the technological advantage of these companies. Therefore, it is impossible for the government to assess to what extent the NOC's comply with the national interest (Wang, 2019, p. 305). Finally, according to Jiang & Sinton (2011, p. 7), the NOC's in China are state- owned but not state-led. They also believe that the increasing size of these companies provides them with political power. Therefore, these NOC`s can also influence decision making on the state level. Consequently, Jiang & Sinton (2011, p. 27) argue that the relationship can be described as a two-way stream in which both the companies and the government affect each other and have an influence on the interest and activities of the other.

Relationship between China and Saudi-Arabia One of the resource-rich countries along the BRI that has a large priority for China is Saudi- Arabia. Sino-Saudi relations have historically been good, and Saudi-Arabia is the second- largest supplier of oil to China (Chen & Han, 2019, p. 19). In 2018, 12.4% of all oil imports in China came from Saudi-Arabia (Workman, 2019). Between 2005 and 2015, the total investment flows between Saudi-Arabia and China have increased by more than twenty times (Chen & Han, 2019, p. 12). Also, Saudi-Arabia has already indicated that the BRI is an

21 excellent opportunity for the country to attract new investments from China (Chen & Han, 2019, p. 6). There are many scholars that have investigated the energy relation between China and Saudi-Arabia. Al-Tamimi (2012), for example, has argued that the relationship between these two countries is an energy-economic partnership. China's influence in Saudi-Arabia is not incentivized by desires to gain power in the Middle-East but by economic interest in the energy sector of the country. For China, the large energy reserves in Saudi-Arabia make it an important partner to trade with, while for Saudi-Arabia, the large and growing market in China provides it with a reliable export market (Al-Tamimi, 2012). Similarly, Qian has argued that China's overall strategy in the Middle-East is one of "strategic cooperative relationship based on long-term friendship" (2016, p. 615). The Middle-East is also an important region for the BRI. This initiative tries to further develop China's relation with the resource-rich countries in the Middle-East, as these countries are inherently crucial for China's energy security. However, Qian (2016) also points to China's aim of preventing overdependence on supplies from the Middle-East and diversify its import routes to Africa, South-America, and Central-Asia. Also, a number of scholars have identified the rivalry between Iran and Saudi-Arabia as a possible challenge for China's energy relation with Saudi-Arabia (Zavareh & Barzoki, 2018). China aims at diversifying its energy imports and, therefore, has good relations with almost all resource-rich countries, including Iran. According to Zavareh & Barzoki (2018), China aims to make a balance between all countries in the Middle-East. This is against the interest of Saudi-Arabia who aims at maximizing its share in China's energy market. This may result in conflict and decreasing energy relations between the two countries. There are also experts, such as MacGillivray (2019), who argue that the Sino-Saudi relationship is moving beyond mere energy security and is evolving into a more political and strategic partnership. According to him, Saudi-Arabia is using its ties with China to influence their decision making on Iran. However, since both Saudi-Arabia and Iran are part of the BRI strategy, a conflict between these countries is against Chinese interest. Therefore, China's aim in the Middle-East is to act as a neutral negotiator and prevent conflict (MacGillivray, 2019).

Relationship between China and Kazakhstan Since the disintegration of the Soviet-Union in 1991, a large number of scholars have identified a rivalry among large actors (China, the US, the EU, and Russia) for increased influence in the new countries that were formed in Central-Asia (Afridi et al., 2017; Griffin,

22 2018; Misiągiewicz, 2020). This rivalry has mostly focused around the access to the resources within the countries of Central-Asia, and has been called 'the new great game'. According to Smit-Stegen & Kusznir (2015), this 'new great game' is increasingly being won by China through their large investments in the energy sectors of these countries. Access to the resources in Central-Asia, and predominantly Kazakhstan, is essential for China since it aims to diversify its energy supply, while most energy now originates from the Middle-East (Misiągiewicz. 2020). Energy from the Middle-East is transported over the sea through the 'strait of Malacca', which is strategically risky in the case of a blockade (Duarte, 2019). Even though Kazakhstan is only ranked 12th in the world concerning energy reserves, Duarte (2019) argues that the country can still play a big part in the energy supply security of China because the oil is transported through pipelines. These pipelines can be better protected in the case of conflict. Other scholars have similarly argued that securing access to the resources in Central-Asia can help China to diversify its supply of energy, and thereby increase its energy supply security (Xuanli Liao, 2019). One of the strategies for access to the resources is through the investments of the NOC's. In her master thesis, van Driel (2017) tried to analyze the activities of the Chinese NOC's in trying to secure energy supply security from Kazakhstan and Turkmenistan. She argued that China is actively using its economic and political tools to acquire resources in these countries through the CNOC's. However, the regional instability and vulnerability of the government of Kazakhstan can potentially be detrimental to the energy supply security of China from these countries.

Contributions of this research for academics There has been a large number of studies that investigated the motivations and importance of the BRI. However, most of these studies have identified this initiative as either a political project to create a new (regional) order or as an economic plan to increase its overseas economic activities and capitalist expansion. Thereby, these studies have, arguably, overlooked the connection and interaction between the geopolitical and geo-economic components of this initiative. This research will contribute to the debate concerning the BRI because it will argue that the BRI is a tool of the PRC to enhance its power projection overseas and especially in the Middle-East and Central-Asia. Through this power projection, China will increase its influence in both the political as well as the economic domain. This enables the PRC to better address domestic security issues such as the sufficient supply of

23 energy. The BRI is, therefore, both a geopolitical as well as a geo-economic tool. It is arguably incorrect to separate these two and treat them isolated from each other. Previous research has also focused on the energy relationship between China and Saudi-Arabia, as well as the energy relationship between China and Kazakhstan. Some of these studies also have, although briefly, touched upon the role of Chinese NOC's in these relationships. There are two ways in which this thesis will contribute and add on to these studies. First, although these studies have shortly noticed that the NOC's play a role in the energy relationship between China and Saudi-Arabia & Kazakhstan, they have not fully explored the ways in how they do so. This thesis will look in-depth at the economic activities, related to trade, investment and finance, of both Sinopec and CNPC in Saudi-Arabia and Kazakhstan. It will also analyze to what extent these activities contribute to the energy supply security of China. This allows for a more comprehensive understanding of the role of these Chinese NOC's. Second, this research will also look at the role of the BRI in the energy relationship between China and Saudi-Arabia & Kazakhstan. While many studies have either discussed the BRI or the role of the NOC`s in the energy security of the PRC, studies that combine these two and identify the influence of the BRI on the businesses of the NOC`s are limited. The BRI has, arguably, redirected and intensified the economic activities of Chinese NOC`s towards the countries included in this initiative. It, thus, has had a large impact on the endeavors of these companies. This thesis aims to provide an analysis of the economic activities of Sinopec and CNPC in Saudi-Arabia & Kazakhstan. The BRI has had a large impact on these activities, and it is, therefore, highly relevant to include the initiative in the analysis of this research.

1.4 Theoretical framework This research will apply the theoretical framework of geopolitical economy. This framework has its foundation in the critical approach that was developed by the Frankfurter Schule in the first half of the second century. The works of both Harvey (1985) and Mercille (2008) have been influential in the development of the geopolitical economy. Harvey (1985) tried to explain the structure and mechanics of capitalism and introduced two concepts that are prevalent in capitalist societies. First, the capitalist logic of power is the tendency for the market to grow and for businesses to keep looking for new markets to sell their products. The second logic is the territorial logic of power. This refers to the incentives of countries to interact with one another and exchange capital and goods (Harvey, 1985). Mercille (2008)

24 reformulated these logics into the geo-economic logic of power and geopolitical logic of power and argued that these elements could diverge for states and capitalist. This tension between the geo-economic logic of power and the geopolitical logic of power is the crux of the geopolitical economy theory. Amineh & Guang (2014) have argued that in order to gain or maintain access to the resources in the resource-rich countries, energy importing countries use their geo-economic and geopolitical power. This usage of power in other countries is what they called power projection. According to Amineh & Yang (2018, p. 26), the amount of power projection a country has economically is determined by the amount of control over the capital flows between countries. These capital flows are characterized by both trade, investment and finance. Therefore, to assess the geo-economic power of a country in a specific case, it is essential to analyze the level and nature of the trade, investment and finance that this country has in the case. The ability to project power into foreign countries is determined by the current geopolitical order. According to the geopolitical economy theory, this geopolitical order is created by the sequence in which countries transformed their mode of production from an agrarian to an industrial base of production. This has allowed these countries to have strong economic development and create wealth for its citizens. This increase in wealth gave them, consequently, also an increase in power in comparison to other states. The fear of exclusion and peripheralization creates an incentive for other countries to kickstart this same process of industrialization. The sequence in which countries around the world have initiated this process of industrialization has been called the process of 'sequential industrialization' by Amineh & Houweling (2010). Britain is the only country that industrialized naturally without state intervention. In all other countries, this process has to be inserted and supported by the state. The same applies to China, which tried to prevent domination by western nations and therefore had to initiate a process of state-led industrialization and economic development. After a country has transformed from an agricultural society into an industrial society, its economy is totally reliant on the access to energy resources. Energy sources, on which all industries run, are fossil fuels (coal, oil and natural gas), nuclear energy & (solar, wind, hydro, geothermal, biomass & tidal). The availability of these resources is paramount to keep the economy running. The term that is established to assess the availability of these resources is 'energy supply security'. A secure supply of energy implies the steady availability of affordable energy in every form (Cao & Bluth, 2013).

25 Animeh & Guang (2014) have introduced a resource scarcity model for analyzing the level of energy supply security in a country. According to them, there are three different forms of scarcity that can negatively influence the access to the resources. The first is demand-induced scarcity. As a result of increasing energy demand, there is no longer enough supply to satisfy demand. This increasing demand is caused by a process of industrialization. As a consequence of industrialization, countries rely more and more on fossil fuels to keep their economy running. The second form of scarcity is supply-induced scarcity. Here, the domestic production of energy supply can no longer satisfy demand because of a lack of supply. The domestic production can no longer increase because of the limited reserves available in a country or other technological problems that make production impossible. When domestic production can no longer satisfy demand, countries are forced to look at resource-rich countries for their energy supply security. The reliance on these resource-rich countries gives them another option to induce scarcity. This is called structural-induced scarcity, which refers to the ability of third parties to block the supply of energy to a country. Structural scarcity is often used as a political tool to influence the actions of energy importing countries. The theoretical framework of geopolitical economy has some apparent advantages that are helpful for this particular research. First, in contrast to realism and liberalism, geopolitical economy is more capable of explaining the complicated relationship between the Chinese government and the NOC's within China. On the one hand, realism would focus on the Chinese government and argue that they have absolute control over the actions of the NOC's (Francisco & Baechler, 2013; Meidan, 2016). On the other hand, liberalism would emphasize the power of cooperate businesses within politics and argue in favor of these NOC's (Ma & Andrew-speed, 2006; Wang, 2019). The unit of analysis within geopolitical economy is not the state nor business but the state-market complex. This means that this theory recognizes and focusses on the interplay between government and businesses and the ways in which one holds control over the other. Therefore, this theory is better able to explain the relationship between China and the NOC's that operate in the market. Second, the theoretical framework of geopolitical economy is, arguably, best able to describe the relationship between the quest for energy supply security of the Chinese state and the BRI strategy. There is a lot of scholarly debate whether the BRI has a pure economic incentive or whether it is more politically orientated. However, this thesis would argue that the BRI is a geo-economic strategy that combines both political and economic motivations. Economic and political motives are interlinked with each other and, therefore, inseparable.

26 While realism focusses on the geopolitical aspect and liberalism on the geo-economic element of this initiative, the theoretical framework of geopolitical economy combines them with each other. Therefore, this framework is best in understanding the link between economic and political motivations without prioritizing one over the other.

1.5 Hypotheses and operationalization The objective of this study is to analyze how the economic activities of Sinopec and CNPC in both Saudi-Arabia and Kazakhstan contribute to the energy supply security of China. It will do so by answering the following research question: What are the activities of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and to what extent do they contribute to the energy supply security of China?

On the basis of previous literature as well as the framework of geopolitical economy, this research has the following expectations concerning the answer to the research question:

H1: China is considered as an authoritarian state in which the state has full control over the market. Therefore, the NOC's in China are tools of the state-class to enhance the domestic energy supply security. These companies are pushed by the state to maximize access to overseas resources in countries such as Saudi-Arabia and Kazakhstan. Therefore, it is to be expected that Sinopec and CNPC are both heavy traders and investors in these resource-rich countries. On top of that, due to its large energy reserves and export towards China, Saudi- Arabia is a big contributor to the energy supply security of China. In the case of Kazakhstan, the efforts of the PRC to reduce its overdependence on Middle-Eastern resources and diversify supply routes enable Kazakhstan to play an active role in the energy supply security of China. Therefore, it is to be expected that the trade and investments of Sinopec and CNPC in both cases are highly beneficial for the energy supply security of China.

To assess the viability of this hypothesis, this thesis takes the state-market-society complex as its unitary actor. China is an authoritarian state, which means that the state-class has full control over both the market and society. A large share of all big companies in China are SOE's, including all companies within vital sectors like the energy sector. Since the NOC's are owned and controlled by the state-class in China, the activities of the NOC's can be seen as a general strategy of the Chinese state-class towards a country. These economic activities are generally categorized under trade, investments & finance. To

27 analyze these activities, this thesis will first use data on the trade relations between China and Saudi-Arabia & Kazakhstan. It will also look at the investments of both CNPC and Sinopec in these countries. Finally, it will look at the support that these NOC's receive from the Chinese state-class. It is also necessary to understand the policies of the Chinese-state class towards the cases. To do so, this thesis will analyze policy documents of China, as well as diplomatic agreements and visits. Combined, the policies of the Chinese state-class and the activities of the CNPC, which is primarily controlled by the state-class, determine the geopolitical and geo-economic power and thereby the power projection of the Chinese state-class in these countries. The Chinese state-class, arguably, use this power projection as a strategy to get access to the energy resources in these countries and thereby enhance their own energy supply security. The first term that will be used is that of energy supply security. A secure supply of energy implies the steady availability of affordable energy in every form (Cao & Bluth, 2013). To analyze how the availability of energy resources can be disrupted by different forms of scarcity, Animeh & Guang (2014) have introduced a resource scarcity model. According to them, there are three different forms of scarcity that can negatively influence the access to the resources. The first is demand-induced scarcity. As a result of increasing energy demand, there is no longer enough supply to satisfy demand. This increasing demand is caused by a process of industrialization. As a consequence of industrialization, countries rely more and more on fossil fuels to keep their economy running. The second form of scarcity is supply-induced scarcity. Here, the domestic production of energy supply can no longer satisfy demand because of a lack of supply. The domestic production can no longer increase because of the limited reserves available in a country or other technological problems that make production impossible. When domestic production can no longer satisfy demand, countries are forced to look at resource-rich countries for their energy supply security. The reliance on these resource-rich countries gives them another option to induce scarcity. This is called structural-induced scarcity, which refers to the ability of third parties to block the supply of energy to a country. Structural scarcity is often used as a political tool to influence the actions of energy importing countries. Empirically, this resource scarcity model shows that we can look at the energy supply security by analyzing first, the domestic energy demand and domestic energy production. By comparing these numbers, we can extract the import dependency of a country. A large import dependency means that a country is forced to look at resource-rich countries for their energy

28 supplies. Thereafter, for assessing the energy supply security, it is necessary to include the possibility of structural scarcity. A risk-assessment of possible energy disruptions are paramount in evaluating the energy supply security. In the case of China, one clear weak point is the strait of Malacca, through which three-quarters of all China's energy imports run and which is easily blocked in case of conflict.

1.6 Methodology This research aims at providing a description of the energy relationship between China and Saudi-Arabia & Kazakhstan, and the role of the Chinese NOC`s in this relationship. To do so, it will conduct a single-case study. According to Yin, a single-case study is “an empirical enquiry that investigates a contemporary phenomenon in depth and within its real-life context, especially when the boundaries between phenomenon and context are not clearly evident” (Yin, 2009, p. 18). The phenomenon that will be studied in this research is the influence of the Chinese energy relationship with Saudi-Arabia & Kazakhstan on the energy supply security of China. In order to do so and answer the research question and related sub-questions, this research will be conducted using a mixed-methods approach. This method is a combination of both quantitative analysis and qualitative research. Qualitative research will be used to analyze the relationship between the Chinese government and the National Oil Companies in China, as well as the state-market complex in China. On top of that, it will also be used to investigate the impact, importance and consequences of the new 'Belt and Road' initiative for China's energy supply security. This qualitative research will be done through an analysis of a large number of resources. This includes academic work such as books and peer-reviewed articles, primary sources as policy reports, diplomatic meetings and annual reports of NOC's. Finally, it will also use secondary sources, such as media reports. Quantitative research will be conducted to first give an overview of the energy situation in China and second, to analyze the activities of the NOC’s in Kazakhstan and Saudi-Arabia. These are the activities that are related to trade, finance & investment. In order to do so, it is necessary to collect and process the required data. Data on energy production, consumption and export will be drawn from both the 'International Energy Agency' (IEA), as well as the 'Energy Information Administration' (EIA). Furthermore, data on the (energy) trade between China and Saudi-Arabia & Kazakhstan is available through the 'Observatory for Economic Complexity' (OEC). Finally, data on the trade, investments and finance of these

29 NOC's will be mostly drawn from a combination of the 'American Enterprise Institute' (AEI) China Global Investment Tracker and the annual reports of both Sinopec and CNPC.

1.7 Structure of the thesis After this introductory chapter, this thesis will consist of five more chapters to fully comprehend the activities of CNCP and Sinopec in Saudi-Arabia and Kazakhstan. First, chapter 2 will introduce the problem of China's energy supply security. It will analyze the growing energy demand in the PRC and explain which institutions and policies are being used to resolve this problem. Arguably a significant role in the external energy policies of China is reserved for the BRI program that was established in 2013. The problem of energy supply security that is analyzed in chapter 2 provides the foundation for explaining the strategic relationship between China and Saudi-Arabia & Kazakhstan. Chapter 3 will introduce these cases by first looking at the political economy and the energy sectors in both Saudi-Arabia and Kazakhstan. After that, it will investigate the relationship between China and these resource-rich countries in the areas of trade, investment & finance with a special focus on the energy relations. It will also look at the role of these two cases within the BRI. This provides the background for chapter 4, in which this thesis will focus specifically on the activities of Sinopec and CNPC in Saudi-Arabia and Kazakhstan. The first part will analyze the investments of these NOC's in these cases and the general trends that can be found in these investments. After that, chapter 4 will go more in-depth about the origin, development and role of specific projects of Sinopec and CNPC within Saudi-Arabia and Kazakhstan. For Saudi-Arabia, this thesis will look at the 'YASREF' oil refinery in Saudi- Arabia, which is a joint venture between Sinopec and Saudi Aramco. In the case of Kazakhstan, it will investigate the involvement of CNPC in the Kashagan oil and gas field, as well as the construction of the Kazakhstan-China crude oil pipeline. These projects will provide a clear image of the type of activities in which the Chinese NOC's are investing. While chapter 4 has analyzed the specific activities of CNPC and Sinopec in Saudi- Arabia and Kazakhstan, chapter 5 will investigate the political environment in which these activities take place. As state-owned enterprises, these Chinese NOC's are subjected to broader geopolitical dynamics in the region. To demonstrate how this affects the energy relations between China and Saudi-Arabia and Kazakhstan, chapter 5 will first look at some domestic challenges within the two cases that could influence its energy relationship with China. After that, it will describe the geopolitical and geo-economic activities of major

30 powers in the Middle-East and Central-Asia that also have an effect on the energy relationship and the activities of the Chinese NOC's in Saudi-Arabia and Kazakhstan. Finally, chapter 6 will highlight the main arguments of this thesis and provide an answer to the main research question.

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32 Chapter II The People`s Republic of China: Energy Situation, Policy and National Oil Companies

2.1 Introduction The aim of this chapter is to provide an overview of the historical development of China's energy supply security in the past 20 years, as well as, to analyze the energy policies of the Chinese state class with a focus on energy supply security. In doing so, it will answer the following sub-questions: How has the energy situation in China developed over the past 20 years, and what is the role of the NOC's in China's energy supply security policy? And How has the 'Belt and Road' initiative improved China's external energy security policy? To answer these sub-questions, this chapter will consist of four parts. The first part will analyze how China's energy import dependence has risen over the past 20 years. To be able to give an overview of the energy situation in China for the past 20 years, this thesis will use a number of indicators. These indicators can be derived from the resource scarcity model from Amineh & Yang (2014) and are domestic production, domestic consumption, energy imports & energy exports. The second part will look at the development of China's national energy policies in the past 20 years. These policies governed and guided China's energy sector as the country transformed from an energy-exporting country to the largest importer in the world. After that, the third part will look at the role of the NOC's, and in particular Sinopec and CNPC, in the . It will look at the complex relationship between the Chinese state-class and the NOC's and discuss how the NOC's manifest themselves in the global energy market. Finally, in the fourth part, the place of the 'Belt and Road' initiative in China's energy policy will be discussed. It will be argued that the BRI initiated an upgrade in the external energy policy of China towards a more aggressive and assertive strategy.

2.2 China's rising import dependence In the last 50 years, China has witnessed a process of rapid industrialization and subsequent economic development. Since 1960, the GDP in China has risen from $60 billion USD to $13.6 trillion USD last year (Worldbank, 2019). Thereby, China is currently the 2nd largest economy in the world, behind the USA. This process of industrialization was initiated by the government and has changed the Chinese society and economy from an agrarian-based economy to an industrial-based economy in less than 50 years. They are now the largest manufacturer and exporter of goods in the world, which has given them the nickname of 'factory of the world' (Xiangguo, 2007).

33 One consequence of the industrialization that is present in all industrialized countries is the increasing reliance on fossil fuels. In an industrial society, the presence of energy resources is indispensable for sustainable economic development. While China has been a large energy-exporting country since the 1970s, the industrialization has led to a rise in domestic energy consumption. This means that China nowadays has to import large quantities of energy resources. The PRC became a net importer of oil in 1993, natural gas in 2007 and coal in 2009 (IEA, 2016). Figure 2.1 shows the overall production and consumption of energy from 1990 to 2017.

Figure 2.1: China`s total energy consumption and production

Total Energy 160 140 120 100 80 60 40

Energy(Quad Btu) 20

0

1996 1990 1991 1992 1993 1994 1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year

Production (quad Btu) Consumption (quad Btu)

Note: Figure created by author Source: Energy Information Administration. (2020). China. total energy. Available from: https://www.eia.gov/international/data/country/CHN

That this rapidly increasing energy consumption is the result of a process of industrialization becomes clear when analyzing the total energy consumption per sector, as is provided in figure 2.2. This shows the development of energy consumption for the different sectors from 1990 until 2015. While the energy consumption for the industrial sector was only 235.396 Ktoe in 1990, this number had risen to 1.020.003 Ktoe in 2015. This means that the share of the total energy consumption for the industrial sector has also increased from 36% in 1990 to 52% in 2015.

34 Figure 2.2: China`s total energy consumption by sector

1200000

1000000

800000

600000

400000

200000

0 Industry Transport Residential Commerical & Agriculture Non-specified Non-energy use Totalenergy consumption(Ktoe) Public services

Sector

1990 1995 2000 2005 2010 2015

Note: Figure created by author Source: International Energy Administration. (2019). China. Key Energy Statistics. Available from: https://www.iea.org/countries/china

The reason that production in China is somewhat able to keep up with consumption is the abundance of coal reserves in China, as well as the reliance on coal for energy consumption (Leung, 2011, p. 1331). Figure 2.3 shows China's total primary energy supply from 1990 to 2010. Here, it is clear that China's economy is mostly reliant on coal. In 2017, coal accounted for 64% of all energy consumption, while this is only 6% for natural gas and 19% for oil (IEA, 2019). Although environmental challenges have forced China to produce and consume more green energy, these numbers are even lower for renewables. Only 3% of all energy consumption came from hydro energy, 2% from solar and wind, 4% from & 2% from nuclear energy (IEA, 2019). This shows that, while China has ambitions to move towards a greener , they are still heavily reliant on traditional fossil fuels for their energy consumption. Even though China has abundant coal reserves, the sheer size of consumption has made the PRC a net importer of coal in 2009. These abundant resources do not, however, apply to the oil & natural gas reserves. China's domestic oil & natural gas reserves and production are not big enough to satisfy demand. Therefore, China has to import large quantities of both these resources from resource-rich countries. While the Chinese state-class is planning to increase the amount of natural gas in the energy mix, natural gas is still only a minor contribution to the total energy consumption. As figure 2.3 shows, oil, on the other hand, already increasingly plays a large role in the energy consumption of China. Since China

35 has only minor oil reserves, most of this is imported. In 2004, China imported only 2.6 million b/d. However, in 2017, this number rose to 8.4 million b/d, which makes China the largest oil importer in the World (EIA, 2017).

Figure 2.3: China`s total primary energy supply per energy resource

Total Primary Energy Supply 3000000

2500000

2000000

1500000

1000000

500000 PrimaryEnergy Supply (ktoe)

0 1990 1995 2000 2005 2010 Year

Coal (ktoe) Natural Gas (ktoe) Oil (ktoe) Hydro (ktoe) Wind & Solar (ktoe (ktoe) Nuclear (ktoe)

Note: Figure created by author Source: International Energy Administration. (2019). China. Key Energy Statistics. Available from: https://www.iea.org/countries/china

These imports mostly originate from two regions with the largest proven oil and natural gas reserves, which are the Persian Gulf and the Caspian Sea. Almost 50% of all proven oil reserves in the world are located in 5 countries around the Persian Gulf; Saudi- Arabia, Iraq, UAE, Kuwait and Iran. Similarly, almost 70% of proven gas reserves are located in countries around the Persian Gulf and the Caspian Sea. The rising energy demands in China, in combination with the scarcity of fossil fuels, have increased the strategic importance of these resource-rich countries. This also applies to China, which imports large quantities of these resources from these regions. Figure 2.4 shows the countries from which China was importing most oil in 2017. Most of these countries are located around the Middle-East.

36 Figure 2.4: Origin of oil imports in 2017

2,60% 2,50% 2,60% 16% 4,00%

4,40%

5,10%

14% 7,50%

7,70%

13% 8,60%

12%

Others Russia Saudi Arabia Angola Iraq Oman Iran

Brazil Kuwait Venezuela UAE USA UK Note: Figure created by author Source: Observatory for Economic Complexity. (2017). Were does China import Crude Petroleum from. Available from: https://oec.world/en/visualize/tree_map/hs92/import/ chn/show/2709/2017/

In sum, the process of state-led industrialization and subsequent economic development in China has led to rapidly rising energy demands and consumption. While domestic production was not large enough to satisfy this demand, China was forced to start importing these energy resources. The rising energy consumption and import dependence have also led to a number of challenges for the Chinese state-class. The next section will identify these challenges and analyze the institutions and policies used by the Chinese state- class to resolve these problems and increase the energy supply security of the PRC.

2.3 China's power structure and energy policies Power structure To understand the manner in which the Chinese companies operate, first it is necessary to analyze the configuration between state and market forces in China. In liberal societies, as can be found in much of Europe and the US, market forces operate autonomously from the state. The companies within these countries have their own interest, are independent and control their own actions. However, in more authoritarian societies, the market forces are not independent and regulated by the state. The state exercises control over the market. This

37 means that the companies are not autonomous and that their interest is aligned with the interest of the country. Similarly to Amineh & Yang (2014), this thesis will argue that China can be categorized as an authoritarian state. Within the People's Republic of China (PRC), the highest political institution is the National People's Congress (NPC) (O'brien, 2008). This institution is responsible for all legislation and is, with almost 3000 members, the largest parliament in the world. Since they only convene once a year, most power is delegated to the National People's Congress Standing Committee (NPCSC) (O'brien, 2008). Besides the formation of new legislation, this committee is also in charge of electing the president & vice-president of the PRC. Although the NPC is formally the most powerful organ in China, in practice, this is not the case. Within the PRC, most power resides with the Communist Party of China (CPC). The CPC has its presence in all parts of government institutions and is even integrated into the Chinese constitution (Guo, 2018). It is impossible to become a high-ranking government official without being a member of the CPC. Officially, the people that are responsible for overseeing the CPC are the 25 members of the Politburo. In practice, power is even further centralized to the Politburo Standing Committee (PSC). The PSC is comprised of the top leaders of the CPC and generally known as the 'supreme decision-making body in China'. The most important and powerful person within the PSC is the general secretary, who is, at the same time, president of China. This position is since 2013 held by Xi Jinping. Figure 2.5 gives an overview of the hierarchical structure of the state-class in China.

Energy institutions The energy institutions that are currently responsible for the energy policies in China are the result of big reforms that started in 2003. At that time, China was facing an . As previously discussed, due to industrialization and high energy intensity, there was a massive increase in demand, while supply remained relatively the same. Therefore, China was faced with an energy shortage that resulted in numerous power blackouts (Cheng, 2008). The highly fragmented energy sector in China was assigned as one of the factors for the non-existence of efficient energy policies (Andrews-speed, 2009). As a result, the Chinese state-class started to reform the energy institutions with the aim of regaining control over the energy sector as well as establishing a more coherent energy strategy (Andrews-speed, 2010).

38 Figure 2.5: Hierarchical structure state-class China

Note: Figure created by author Source: Andrews-sp Andrews-Speed, P. (2010). The Institutions of energy governance in China. Institut français des relations internationales. Available online: https://www.ifri.org/sites/default/files /atoms/files/noteandrewsspeedenergychina_1.pdfeed (2010)

The final results of these reforms are visible in figure 2.6. This figure shows all government institutions that play a role in the formation of new energy policies. The most important institutions are the state council (i.e., state-class), the National Development and Reform Commission (NDRC), and the National Energy Administration (NEA). The NEA is charged with the day to day regulation of the energy sector. It is, for example, responsible for the enhancement of international cooperation in the energy sector, as well as reviewing and approving large overseas investments of the NOC` s (IEA, 2016). The NDRC is responsible for the macro-economic development of China. They are in charge of new economic reforms with the aim of increasing economic growth and rising living standards (Kong, 2011; Zhou, Levin & Price, 2010). Although less influential, different ministries are also involved in the establishment of energy policies, but only to the extent that is provided to them by the state council (IEA, 2016). The state council oversights all these institutions and makes sure that the policies of these institutions are in accordance with the general strategy of the PRC. Overall, the Chinese state-class uses these institutions as tools to establish new energy policies with the aim of enhancing its energy supply security.

39 Figure 2.6: Energy institutions in China

Source: International Energy Agency (IEA). (2016). China’s Engagement in Global Energy Governance, IEA Publications

Policies Energy security has not been a large issue in Chinese policies before the 2000s. Before that, domestic production was large enough to roughly satisfy domestic consumption in China. Until then, only oil was imported on a small scale. However, in the early 2000s, the consumption of energy started to outpace the supply. This has led to a number of power shortages in 2004 and 2005. These shortages placed the problem of energy security high on the Chinese agenda. New policies were implemented with the aim of increasing the energy supply security. These policies can be split up in domestic policies and external policies that tried to secure the reliable import of sufficient energy sources. Domestically, before the power shortages, the main priority of the PRC was to increase energy production as much as possible (Andrews-speed & Dannreuther, 2011). After 2004, domestic policies started to encompass different aspects of energy security. For example, to maintain economic growth while decreasing energy consumption, one major priority of the PRC was to reduce the energy intensity (Andrews-speed & Dannreuther, 2011). These changes are also noticeable in the increasing attention of energy security in the 'Five Year Plans' (FYP) of China. These plans show the large strategy of the PRC in the next five years in their economy, society, political system and international relations. The term energy security was first introduced in the 10th FYP (2001-2005) (Wu, 2014). To increase their energy security, China wanted to follow the example of Japan and a couple of Western countries and build a 'strategic petroleum reserve' (SPR), that could supply China with energy

40 for a number of days in case of a blockade or other supply disruptions (Cao & Bluth, 2008; Wu, 2014). The 11th FYP (2006-2010) saw an even further emphasis on the energy security of China and aimed at accelerating the construction of the SPR (Wu, 2014). On top of that, China's state-class started to realize that the consumption of fossil fuels was detrimental to the Chinese environment (Trombetta, 2018). Therefore, it was also included in the 11th FYP that the energy sector had to prevent damage to the environment as much as possible (Wu, 2014). This was even further developed in the 12th FYP (2011-2016), which aimed at limiting the energy consumption of China and develop renewable energy sources that could replace fossil fuels (Odgaard & Delman, 2014; Wu, 2014). Finally, in the 13th FYP (2016-2020), the development of renewable energy sources, as well as , received even more priority (Gosens et al., 2017). In its external energy relations with resource-rich countries, China's main concern is to secure the supply of oil and gas while trying to avoid overdependency on imports from relatively unstable countries in the Middle-East (Cao & Bluth, 2013, p. 383). It does so by trying to diversify both its energy import locations as well as the resources that it imports. Similarly, the Chinese state-class aims at keeping the price and price volatility of oil and natural gas as low as possible. To do so, Leung (2011, p. 1336) has argued that they are actively protecting the international energy security since a stable international energy market will keep price volatility low. On top of that, China has historically been hesitant to interfere in the domestic affairs of countries and has prioritized its economic and diplomatic relations (Kong, 2011). These strong relations with mainly resource-rich countries has enabled them to expand their access to the resources in these countries (Odgaard & Belman, 2014) In recent years, one of the considerable challenges identified by the Chinese state-class is the 'Malacca dilemma'. The majority of Chinese oil imports have to be transported through the Strait of Malacca. This makes the strait a strategically weak point. It can easily be blocked in case of conflict by, for example, the US navy (Duarte, 2019). To overcome this problem, China has tried to further diversify its energy imports by importing more resources from other regions such as Latin-America and Central-Asia (Odgaard & Delman, 2014). Arguably, an import strategy of the Chinese state-class to enhance their energy supply security, by acquiring access to foreign energy sources, is that of energy mercantilism. China believes that the international energy market is politicized and that international banks and hedge funds deliberately drive up the price of oil (Odgaard & Delman, 2014). To counter this, the Chinese state-class actively supports its NOC`s in getting access to resources abroad (Kong, 2011). This is mostly done by China's financial institutions that lend large sums of

41 money to foreign governments or NOC's (Kong & Gallagher, 2017). Together, the China Development Bank and the Export-Import Bank of China provide as much financial support to the energy sectors of resource-rich countries as all other multilateral development banks combined (Kong & Gallagher, 2017). Two strategies that they are most prone for are the 'loans-for-oil' and 'projects-for-oil' deals (Kong, 2011). In the first, a concessionary loan is provided to the energy sector of a for which, in return, Chinese contractors are hired in the projects that are funded by these loans (Kong, 2011). In the second deal, the Chinese development banks also fund resource-rich countries. In return, China receives an annual amount of oil against future market prices (Kong & Gallagher, 2017). On top of that, the Chinese state-class diplomatic actions in resource-rich countries have also helped the NOC's significantly in securing major oil deals (Cheng, 2008, p. 314). Through the support of the Chinese state-class and the development banks in China, these NOC's are able to attract more resources by overpaying the market price (Ma & Andrews-Speed, 2006, p. 24). This enhances the energy supply security at the cost of the energy security of other energy importing countries. Here, the importance of the Chinese NOC's in the Chinese energy supply security becomes clear. The next section will further analyze their role as well as the complex relationship between the NOC's and the Chinese state-class.

2.4 The role of National Oil Companies in China As China started to reform its economy and allowed market mechanisms to operate, a major role has been reserved for State-Owned Enterprises (SOE's). These businesses are allowed on the domestic and international markets under special conditions and are controlled by the state. The SOE's operate inherently differently from companies in the West. Businesses in liberal societies exercise autonomy and operate independently from the state. In authoritarian countries such as China, the government has control over the market. Companies, therefore, do not act independently, and their interest is connected to that of the state. This means that the companies within authoritarian countries can be used as a tool to achieve politically motivated goals. To get a full picture, it is thus important to integrate the state-owned oil companies in the analysis of the energy supply security of China. In the 1980s and 1990s, China deliberately transformed a number of its SOE's into giant companies that are also competitive on the international stage (Nolan, 2012). These SOE's mainly exist in sectors that are crucial for the Chinese economy, such as the energy sector. In the early stages of the PRC, the different ministries of coal, power & petroleum were themselves responsible for their domestic energy industry. During the economic reforms

42 in the 1980s, these ministries disappeared, and the responsibilities transferred to the newly established NOC's (Jiang & Sinton, 2011, p. 9). There were initially four different NOC's. Each of which had a monopoly in a specific domestic geographic location. Sinopec owned the monopoly on the energy industry in the South, CNPC in the north and CNOOC controlled the production of offshore oil. The fourth NOC, , had a monopoly on all energy imports and exports in China (Jiang & Sinton, 2011, p. 9). Market reforms that were aimed at increasing the energy supply security have removed their monopolies and introduced competition among these companies (Jiang & Sinton, 2011, p. 9; Kong, 2005, p. 45). These NOC's were now allowed and even incentivized to operate in both the domestic and international energy markets. On top of that, they were in charge of supplying the biggest energy consuming country with sufficient supply. This has enabled these companies to expand and become one of the largest and most profitable companies in the world. Table 2.1 shows that all four major NOC's are in the top 100 companies according to their revenues, while Sinopec is even listed as nr. 2 and CNPC as nr. 4

Table 2.1: China`s National Oil Companies on the Fortune 500 Company Rank Revenues ($M) Profit ($M) Assets ($M) Employees SinoPec 2 414.649 5.845 329.186 619.151 CNPC 4 392.976 2.270 601.899 1.382.401 CNOOC 63 108.130 7.331 177.193 93.601

SinoChem 88 89.358 701 71.332 66.713 Note: Table created by author Source: Fortune 500. (2019). Fortune Global 500. Available from: https://fortune.com/global500/2019/search/

The assets of the NOC's and all other SOE's in China are owned by the 'State-owned Assets Supervision and Administration Commission' (SASAC). This bureau falls directly under the control of the CPC central committee. The SASAC has the following responsibilities in controlling the SOE's (Naughton, 2006). It 1) performs investor's responsibilities, supervises and manages the state-owned assets, 2) supervises the preservation and increment of the value of these assets, 3) guides reforms in SOE's, 4) appoints and removes executives, 5) shifts state-owned capital gains from the SOE over to the state, 6) urges SOE's to follow policies, laws & regulations and 7) is responsible for the management of these SOE's (SASAC).

43 Even though these far going measures seem to give little room to the leadership of the NOC's to run the companies, a number of scholars have recently argued that these NOC's are increasingly acting autonomously from the state-class (Kong, 2006; Liao, 2015; Ma & Andrews-speed, 2006; Wang, 2019). An example of a previous situation in which the NOC's acted in contrast to the energy supply security of China is in the case of low domestic oil prices. While prices on the international market are higher compared to domestic prices, it is in the interest of the NOC's profit to sell oil on the international market. This is, however, against the interest of the Chinese state-class, since they want to direct as much oil as possible to domestic markets. There have been situations in which the NOC's opted to sell their oil on the international market, which is remarkable considering the extensive control of the Chinese state-class over these NOC's (Kong, 2006, p. 75). To remind the NOC's that the CPC in China still has ultimate control over them, from time to time the CPC decides to reshuffle the top executives of these NOC's (Meidan, 2016, p. 46). Even though formally, SASAC is in control of removing and appointing executives in the SOE's, in practice, this is mostly done by the Central Organization Department (Naughton, 2006). This department is in charge of appointing staff officials within the CPC and is controlled by the leadership of the Communist Party. In 2011, for example, the Chinese state- class moved Fu Chengyu from the CNOOC to Sinopec, and Wang Yilin from CNPC to CNOOC (Meidan, 2016, p. 46). On top of that, after his ascension to power in 2012, Xi Jinping started a large anti-corruption investigation into the SOE's and NOC's in particular. It has been argued that this investigation has also been a tactic of the Chinese state-class to regain control over the NOC's and show these executives who is in charge of these companies (Meidan, 2016, p. 46). The Chinese state-class, in recent years, has provided leeway to the NOC's to act autonomously and gain profit. Arguably, their room to maneuver has even increased in recent years due to the sheer size of these companies as well as the informational advantages that they have created for themselves (Wang, 2019). However, the reshuffling of executives, the anti-corruption program of Xi Jinping and the constant control and oversight of the Chinese government shows that NOC's only have as much autonomy as is provided to them by the Chinese state-class. On top of that, these NOC's would not be near as successful if it was not for the support from the Chinese leadership and Chinese financial institutions in their overseas activities. Thus, this thesis argues that China is an authoritarian state in which the government exercises control over the market forces and subordinates its companies. The number one

44 reason and sole purpose for the existence of these NOC's remains the energy supply security of China.

China`s National Petroleum Corporation (CNPC) CNPC is the successor of the Ministry of Petroleum Industry in China and was established in 1988 (CNPCa). While its activities were first limited to domestic upstream and downstream oil and gas operations, CNPC is currently active in over 30 resource-rich countries around the globe (CNPCb). CNPC is the largest producer, as well as supplier of oil and gas in China. It outputs over 100 million tons of oil and 100 billion cubic meters of gas a year (CNPCb). The CNPC itself is mostly active in the exploration of oil and gas fields, as well as the construction of new pipelines. It has large overseas assets in the natural resources of resource- rich countries and collaborates with other oil companies in the operation of the oil and gas fields in these countries. It has outsourced its international trading activities to one of its subsidiaries, PetroChina. CNPC owns over 80% of all shares in PetroChina (PetroChina, 2018). Table 2.2 will provide some numbers that will give an overview of the sheer size of the CNPC as well as the importance of CNPC for China's energy supply.

Table 2.2: Overview of key figures CNPC in 2018 Total Assets Total Revenue Total Profit Overseas Oil Overseas Gas (RMD) (RMD (RMD) Production Production 4,13 Trillion 2,74 Trillion 110 Billion 144 mmt 35 mmt Note: Table created by author Source: China`s National Petroleum Corporation. (2020c). Key Figures. Available from: http://www.cnpc.com.cn/en/keyfigures/about_common.shtml

The control of the Chinese state-class over the management functions of the NOC's and the CNPC, in particular, is evident when analyzing the previous positions of the current managers. The current chairman, Dai Houliang, has only been appointed as chairman of CNPC in January 2020, while previously being the chairman of Sinopec (CNPCd). Of the seven other top managers in CNPC, five of them have long careers in the energy sector of China. Three of them have even been in an executive position in another NOC besides CNPC. From the two people that did not have a career in the energy sector before joining CNPC, one, Xu Jiming, was a high ranked government official at the National Audit Office (CNPCd). The previous careers of these managers show that the CPC, under the leadership of the Chinese

45 state-class, controls the activities of CNPC. The NOC's are thus subjected to the energy policies and, ultimately, to the energy supply security of the PRC.

China Petroleum & Chemical Corporation (Sinopec) Sinopec is the largest supplier of oil and petrochemical products, and the second-largest producer of oil and gas in China, behind CNPC (Sinopec, 2020). It is also the largest refining company in the world and the third-largest chemical company. As is shown in table 2.1, the company ranks second in the fortune 500 list for the largest companies. Table 2.3 provides an overview of some of the key figures of Sinopec in 2018. This furthermore displays the impact and influence of Sinopec on the energy sector of China.

Table 2.3: Overview of key figures Sinopec in 2018 Total Assets Total Revenue Total Profit Oil Production Gas Production (RMD) (RMD (RMD) 2,26 Trillion 2,94 Trillion 97 Billion 35 mmt 28 mmt Note: Table created by author Source: Sinopec. (2019). Annual Report 2018. Available from: http://www.sinopecgroup.com /group/en/Resource/Pdf/GroupAnnualReport2018en.pdf

Similar to CNPC, the leadership of Sinopec consist of people with careers in the energy sector of China and the CPC. The current chairman of Sinopec is Zhang Yuzhuo. He is also a member of the CPC standing committee in China, which shows his affiliation with the state-class in China. Furthermore, of the seven other members in the leadership of Sinopec, two of them have held a position within the CPC. Four of them have previously worked for CNPC or CNOOC, and only one has a career outside the energy sector, but within another SOE. Both the links between the state-class in China and the leadership of Sinopec, as well as the constant reshuffling of top managers between the NOC's show the control of the party leadership over the NOC's. These reshuffles are meant to discourage managers from affiliating with one company and propagate the message that the national interest is more important than the profit or wellbeing of the company. There are also some interesting differences between these NOC's that are visible through these key figures and the information that they provide about themselves. On the one hand, CNPC focusses mainly on the production of oil and increasing its equity oil in overseas countries. They are, for example, the largest producers of energy in China, and their total assets are also much larger than that of Sinopec. On the other hand, Sinopec focusses mainly

46 on trade and the refinement of crude petroleum. They are the largest refining company in the world and the largest supplier of oil-based products in China. While these two companies differ in their activities, their objective remains the same. This is, arguably, to increase the energy supply security of China.

2.5 Towards a new external energy security policy As discussed before, China's external energy policy can best be characterized by the aim of securing a sufficient supply of oil and gas at reasonable prices, while not being overdependent on imports from the Middle-East (Cao & Bluth, 2013, p. 383). This is done through its diplomatic relations with resource-rich countries, bilateral agreements on energy and the activities of its NOC's in the foreign energy markets. However, in 2013 Xi Jinping launched a new plan with which China, arguably, entered a new path in its external energy policies. This plan is the 'Belt and Road' (BRI) initiative and aims to even further integrate China into the regional and global markets. According to several scholars, the BRI is the most ambitious Chinese foreign policy plan ever, and with it, the PRC is trying to claim its place as a world leader (Fallon, 2015; Yu, 2017). This initiative consists of the revitalization of two different trade routes that have linked China with the rest of the world for thousands of years. The first is the 'Silk Road Economic Belt', which is a land route that runs from China through Russia, Central Asia & the Middle-East all the way to Europe (Zang, Alon & Latteman, 2015, p. 2). The second is the 'Maritime Sea Road' that runs through the Sea and the Indian Ocean to Europe. Thereby, the BRI covers a total of 65 countries and more than 60% of the world population (Zang, Alon & Latteman, 2015, p. 2). There are several tools that the Chinese state-class have at their disposal and use in order to establish these trade routes and make this initiative successful. The first is its diplomatic relations with foreign countries. China's state officials are actively promoting the BRI around the globe. They emphasize the mutual benefits of this initiative for the host countries and thereby trying to persuade other countries to join and cooperate with this plan. On top of that, these state officials are also pursuing the formation of new 'free trade agreements' with countries along the BRI. These agreements ease and increase trade while simultaneously enhance the diplomatic relations with these countries (Zang, Alon & Latteman, 2015). A second tool is the large investments of Chinese SOE's in the economies of countries along the BRI. According to Liu et al. (2017), the Chinese state class has managed to redirect large numbers of 'outward foreign direct investments' (OFDI) from other countries specifically towards BRI countries. Before the establishment of this initiative, only 10.8% of

47 total OFDI was invested in these countries, while this number rose to 44% in 2015 (Liu et al., 2017). The third tool of the Chinese state-class in the establishment of the BRI is the establishment of financial development banks that fund BRI projects in developing countries. For the BRI, there are two main funding programs that provide loans to these countries. The first program is the 'Silk Road Fund'. This fund is entirely led by the Chinese state-class and funds projects that are connected to the BRI (Liao, 2019, p. 15). Within this fund, there are four operating parties, with each a part of the shares. These are the State Administration of Foreign Exchange (65%), the China Investment Corporation (15%), the Export-Import Bank of China (15%), and the China Development Bank (5%) (Liao, 2019, p. 15). The second source of funding is the 'Asian Infrastructure Investment Bank' (AIIB). This is a multilateral bank that aims at upgrading the often underdeveloped infrastructure in developing countries around Asia (Yu, 2017). While this bank was initially established by 21 countries, it currently has over 100 members, including some western countries like the UK, France & Germany (AIIB, 2020a). The AIIB has currently approved 68 projects in 21 different countries with a total value of $13.45 Billion USD (AIIB, 2020b). This shows that the AIIB is one of the largest development banks in the world. The projects that this bank is associated with involve mostly projects in the energy sector (31%), financial institutions (22%) and the transport sector (21%) (AIIB, 2020b). While the sheer number of members might suggest that the AIIB is governed by a wide variety of states, it is undoubtedly a Chinese led bank. China is by far the largest investor in this bank with almost $30 Billion USD, and the largest shareholder with over 26% of shares (AIIB, 2020a). Since decisions within the AIIB require 75% of all votes to pass, this provides China with a de facto veto power (Yu, 2016). Therefore, China can be seen as the most powerful and decisive actor in this institution. As is discussed in the literature review of chapter 1, experts disagree on whether this initiative is mainly driven by political or economic motives. Some argue that the program shows China's desire to establish a new world order, while others believe that the BRI just integrates the Chinese economy in the regional market. This thesis would argue that the BRI is a 'geo-economic' strategy that mostly embodies a continuation and intensification of earlier foreign policies. It is geo-economic in the sense that it combines economic and political motives. Political power can be derived from many different places, such as the military but also the economy. Economic power constitutes a form of 'soft' power with which one can persuade others to act in accordance with your economic and political interests. Both political and economic motives are, therefore, interrelated to one another and cannot be treated separately. The BRI is a geo-economic strategy because it enhances the economic

48 opportunities of the PRC. This, at the same time, increases China's influence over the regions among the BRI, which can be interpreted as one of the political motives of the PRC for this initiative. Economic development in and of itself can also be seen as a political motivation. Increasing economic capabilities also increases the power of the PRC, both domestically and overseas. On top of that, the BRI is, arguably, a continuation and intensification of earlier foreign policies of the PRC because it fits so well in China's ideas on foreign relations, and is so reminiscent of what China has been doing for the past 30 years. China's foreign policy is still officially characterized by the following five principles: respect for territorial integrity and sovereignty, non-aggression, non-interference in each other's internal affairs, equality and mutual benefit, and peaceful coexistence (Mariani, 2013, p. 3). This shows that China, for its influence in other states, is looking for an option that does not include military confrontation and is focused more on the use of soft power. This is what China has done for years through its 'going out' strategy. In this strategy, SOE's were incentivized to invest in markets abroad, use surplus capital to acquire foreign assets, and become big players in the international economy (Wu, 2012). Similar to the BRI, the 'going out' strategy also focused on the use of market forces and globalization to increase the influence of the PRC overseas. Therefore, the BRI does not constitute a drastic shift in foreign policy but can be seen more like a reiteration and intensification of already existing ones. Reiteration because it follows the same principles and intensification because of the increased attention and emphasis on this initiative. While this thesis regards the BRI as a continuation of earlier policies, this does not mean that this initiative does not provide relevance for analyzing China's energy supply security. Even though the BRI is not solely focused on the energy sector and encompasses many more sectors, it has major implications for the external energy policy of the PRC. According to Duan et al., 58.8% of all proven oil reserves, 79.9% gas reserves and 54.0% coal reserves are located in countries that are included in this project (2018, p. 535). The BRI is an extension and development of the progress that started in the 1990s in which China tries to play a more active role on the international stage. For its energy supply security, this means that Chinese NOC's are increasingly seeking access to foreign energy resources and competing in the global energy market with other international and national oil companies. The BRI encourages these companies to do so and provides them with the right set of tools. These tools are, for example, diplomatic negotiations among state officials that are in light of the BRI or financial support for projects from BRI institutions such as the AIIB or the Silk Road Fund. Therefore, analyzing the activities of these NOC's in the context of the

49 BRI is crucial to understand the manner in which the Chinese state-class aims to enhance its energy supply security.

Problems and Challenges of the BRI Besides the positive effects the BRI can have on both the Chinese economic development and the economies of countries along the BRI, there are also some challenges and problems with the BRI. The first of these problems that need to be analyzed is the increasing debt of, mainly developing, countries that receive funding from China. According to the Kiel Institute (2019), while the obligations of foreign debtors to China only amounted to less than $500 billion USD in 2000, in 2017, this number has risen to over $5 trillion USD. This means that China has surpassed the IMF and the World Bank and is now the largest creditor in the world. Over 25% of the money developing countries worldwide lend for their domestic projects originates from China (Kiel Institute, 2019). The large scale loans of Chinese state-owned banks have evoked international critique. Other governments, as well as experts, have argued that these loans are a ‘debt trap’ for the developing countries. These countries are unable to repay the loans and interest over these loans. Therefore, these projects end up back in the hands of Chinese investors, which increases the Chinese influence over these countries (Sum, 2019). This is especially worrisome due to the state-driven character of the Chinese lending program. It is argued that the loans are politically motivated, with the aim of increasing the geo-economic influence of China in developing countries (Sum, 2019, p. 546). One such example is Sri-Lanka. The government of Sri-Lanka owes China $8 billion USD in total. This includes $301 million USD for the Hambantota port (Sum, 2019, p. 545). While the World Bank normally uses an interest rate of between 0.25% and 3% for such projects, China charged an interest rate of 6.3% for the port loan (Sum, 2019, p. 545). The government of Sri-Lanka has been unable to repay the loan and the interest of the port. Therefore, it has been forced to lease the port to a Chinese state-owned company. Another example of a country that is heavily indebted to China is Djibouti. In recent years, China has provided the African country with nearly $1.4 billion USD in funding. As a result, Djibouti`s debt to China has increased to roughly 80% of its GDP (Hurley, Morris & Portelance, 2019, p. 152). This has led to a financially unstable situation for Djibouti and, arguably, increased China`s influence over the country. While the situations in Djibouti and Sri-Lanka are extreme examples, Chinese debt can be a problem for more countries. According to Bandiera & Tsiropoulos (2020, p. 14), half

50 of the countries along the BRI are vulnerable for increasing debt due to the initiative. This are mostly countries that already face problems regarding their debt. These problems will be further amplified through this initiative. The increasing Chinese debt for developing countries along the BRI is definitely a big problem regarding this initiative. While China emphasizes the mutual interest and benefits of the BRI, the initiative also forms a great risk for the financial stability of some countries. Examples such as Sri-Lanka and Djibouti show the risk and possible negative consequences of Chinese loans. However, according to Hurley, Morris & Portelance (2019, p. 143), these dangers are only limited to a small number of countries. For the majority of the countries, including Saudi-Arabia and Kazakhstan, it is unlikely that the BRI will create a fundamental debt problem. Overall, the debt trap is a good example of the geopolitical side of the BRI. It shows that geopolitical and geo-economic logics are indeed interconnected with one another. Through loans from Chinese state-owned banks, China increases its influence and power projection in other countries. This means that China is employing economic tools for political motivations. It is also another example of how China uses its banks and companies in its foreign policy plans. In more liberal states, the banks and companies are independent, which makes it impossible for governments to use them for political reasons. Since China exercises full control over its state-owned banks and companies, it is able to use these institutions for political purposes. Another challenge that could impede the success of the BRI is the geopolitical tensions of China with a number of its neighbors. One example of this is the ongoing dispute for the (SCS). A number of Asian countries, including China, claim that they own the sea. A couple of these countries believe that the BRI is designed to increase China`s naval capabilities in the SCS (Yu, 2017). China has also increased its activities and projects in the SCS in light of this initiative. Other countries that claim the SCS have, therefore, expressed their concerns about the BRI and are not as willing to cooperate with the initiative (Yu, 2017). The second example of China`s geopolitical tensions with other countries, that have an impact on the BRI, is the rivalry with India. In 1962, there was a short war between the two countries over their shared border. Nowadays, there are still a number of border disputes between China and India. Recently, these tensions have revived, and the armies of the two countries once again faced each other (Ethirajan & Pandey, 2020). On top of that, China has, under the banner of the BRI, built three ports nearby India. These were built in Sri-Lanka, Pakistan and Myanmar. India is not pleased with these projects around the Indian ocean

51 because it perceives these areas as its own sphere of influence (Yu, 2017, p. 366). While the location and size of India make it an important country for the BRI, the geopolitical tensions between India and China have contained India`s enthusiasm for the initiative (Yu, 2017, p. 366). Finally, the US has also expressed its concerns over the BRI. The US fears that China, through this initiative, is establishing a new world order. Since America wants to retain its hegemonic position, it feels threatened by the increasing influence of China in the world (Chance, 2017). On top of that, the US has also warned other countries against the debt trap as a result of BRI projects, and has argued that the US offers fairer and more transparent deals (Wang, 2019). As the US aims to contain Chinese influence, it has actively tried to persuade other countries not to participate in the initiative. Overall, the geopolitical tensions between China and other countries challenge the implementation of the BRI. As the BRI aims to increase regional economic integration, the participation of a number of these Asian countries is integral for the initiative.

Implementation and goals of the BRI in the Middle-East and Central-Asia China's historical foreign strategy with the rest of the world has been one of enhancing economic and trade relations without interfering in political issues. The BRI can be seen as a confirmation, extension and intensification of exactly this policy as it aims to further increase economic interdependence, free trade and regional integration (Fulton, 2017). One of the key areas for the succession of the BRI, as indicated by scholars, is the Middle-East and, more specifically, the Gulf Cooperation Council (GCC), of which Saudi-Arabia is a member (Ehtheshami, 2018; Kamel, 2018; Qian, 2017). The GCC, furthermore, consists of the UAE, Kuwait, Qatar, Bahrein and Oman. All of these, except Bahrein, are large oil-exporting countries that have reoriented their energy export eastwards. This is one the one hand, due to decreasing energy demands in the West that are a result of American shale oil & gas production and an increase in green energy production in Europe. On the other hand, increasing energy demands in Asia, and specifically China, has transformed this region into an interesting export market for the GCC countries (Qian & Fulton, 2017, pp. 12-13). Due to the already growing relationship between the GCC and China, the GCC countries consider the BRI as a significant opportunity to further increase and intensify economic ties between them and (Kamel, 2018). For China, the success of the BRI in the Middle-East is crucial for two reasons. First, despite efforts of Beijing to diversify its energy imports, half of the oil it is importing has its

52 origin in the ME and 33% in the GCC (Kamel, 2018; Qian, 2017). Therefore, the ME plays a critical role in the energy supply security of China. Second, the ME is a strategically important region since it is the intersection between Asia, Europe and Africa. Major maritime chokepoints such as the Suez Canal, Bab al-Mandab strait and the strait of Hormuz are controlled by countries located in the ME. The availability of these canals is crucial for international trade and energy transport in particular (Kamel, 2018, p. 79). China acknowledges the importance of the ME for the BRI, and it is, therefore, actively advocating this initiative within these countries. It does so by focusing on the mutual benefits side of this initiative and identifying precisely those BRI objectives that generally align with the interest of the Middle-Eastern countries (Kamel, 2018). At the sixth ministerial conference of the China-Arab cooperation forum, Xi Jinping explained his vision on the position and priorities of the BRI within the Arab world. According to him, this should be done in a '1+2+3' model. In this model, the first and foremost driver of trade and cooperation remains the energy relation. The second priority is the trade, investment and construction of infrastructure between China and the Arab world. Finally, the third priority is enhanced cooperation in the fields of renewable energy, nuclear energy and space satellites (Qian, 2017, p. 692). Each of the countries in the ME and the GCC has considered its own national interest in endorsing and promoting the new BRI initiative, including Saudi-Arabia. Similarly to the Middle-East, another strategically important region for the succession and expansion of the BRI is Central Asia. This region consists of Turkmenistan, Uzbekistan, Tajikistan, Kyrgystan & Kazakhstan, which are all former USSR republics. Out of the six economic corridors that are included in the BRI, two are crossing Central Asia (Indeo, 2018). Through the potential economic corridors in Central Asia, China aims at enhancing the transportation possibilities and connectivity between them and Europe (Liao, 2019). Thereby, Central Asia becomes a transport and logistical hub through which goods produced in China can be transported to Europe. Although Central-Asia is pivotal in all policies surrounding the BRI, some scholars have argued that the countries in this region might be unable to fully capitalize on the opportunities provided to them through this initiative (Etheshami, 2018, p. 390). According to them, the Central-Asian region is one of the least globalized areas of the world and far from being integrated into the world economy (Etheshami, 2018). While this is indeed the case, it is also precisely this reason why the BRI has so much potential in Central-Asia and why the leaders of these Central-Asian countries have been so eager to join and support this initiative. As is continuously pointed out by Chinese officials, the BRI is potentially not only beneficial

53 for the integration and economic relations of China, but for everyone who joins it (Chen & Fazilov, 2018). For Central-Asia, the establishment of a new regional transport network through Chinese investments in the infrastructure of these countries could be highly beneficial (Indeo, 2018) While the economic relations between China and Central-Asia have been growing since the independence of these countries in the early 1990s, this process has further intensified since the launch of the BRI (Kohli, 2018). Since then, China has established itself as the second-largest importer in the region, the second-largest exporter of the region and the second-largest origin of FDI flowing into Central-Asia (Kohli, 2018).

2.6 Conclusion The aim of this chapter was to answer the following questions: How has the energy situation in China developed over the past 20 years, and what is the role of the NOC's in China's energy supply security policy? And How has the 'Belt and Road' initiative improved China's external energy security policy?. The first section has shown that the state-led industrialization and sub-sequent economic growth have led to rising energy consumption in the PRC. As a result of this, domestic energy (mostly oil & gas) production could not keep up with demand, and the import dependence started to rise. Nowadays, China is dependent on the imports from resource-rich countries for its energy supply security. To acquire these resources, the Chinese state-class is trying to enhance diplomatic relations with these resource-rich countries. Other actors that are deployed by the state to increase its energy supply security from foreign energy markets are the NOC's. These NOC's are controlled by the state and are incentivized to invest in the foreign energy market to acquire larger quantities of resources. On top of that, the Chinese state-class actively deploys a strategy of energy mercantilism. In this strategy, the government combines its own diplomatic and political power with concessionary loans from Chinese development banks, which allows Chinese NOC's to overpay for access to the resources. The strategy of China to acquire as many resources for reasonable prices has even further intensified after the implementation of the BRI. Since a large number of resource-rich countries are integrated into this initiative, it increases the opportunities of the Chinese state- class to get access to these resources. The BRI has the ability to enhance the diplomatic and economic relations with these resource-rich countries as well as redirect OFDI towards them. Together, this enables the NOC's to obtain more energy deals with these countries and boost their activities in the international energy market.

54 Chapter III Oil, Power and the external relation with China in Saudi-Arabia & Kazakhstan

3.1 Introduction Chapter 2 provided an overview of the Chinese energy situation as well as the policies of the PRC to enhance their energy supply security. This chapter will introduce the cases of Saudi- Arabia & Kazakhstan and examine how these countries regulate their energy sectors. The management of the energy sectors in these countries directly influences the strategies Chinese NOC`s pursue in acquiring access to these resources. This chapter will also analyze how the diplomatic and economic relationship between China and Saudi-Arabia & Kazakhstan has developed in recent years. It will do so with a specific focus on the BRI since this initiative arguably plays a big role in contemporary relations between China and Saudi-Arabia & Kazakhstan. The first question that will be answered in this chapter is: How are the energy sectors in Kazakhstan & Saudi-Arabia regulated, and what is the role of energy in the economies of these countries?. After that, the second question that will be answered is: How has the relationship between China and Saudi-Arabia & Kazakhstan in terms of diplomacy, trade, investments and energy developed? To answer these questions, this chapter is divided into two parts. The first part will analyze the case of Saudi-Arabia, while the second part does the same for Kazakhstan. In each of these parts, this thesis will first provide a short overview of the power structure and availability of resources in these resource-rich countries. This will allow us to analyze how Saudi-Arabia and Kazakhstan manage and control their energy sectors, and provide us with information on the importance of the energy sector for the economies of these countries as well. After that, this thesis will investigate the role and position of the BRI in both the ME and CA. This initiative has changed Beijing`s relationship with the countries in these regions, including Saudi-Arabia & Kazakhstan. It will do so by analyzing how the diplomatic and economic relations with China have developed for these countries, with a special focus on the implementation of the BRI in 2013. Finally, for both Saudi-Arabia & Kazakhstan, it will look specifically at the energy relationship with China. It will look at the change in the quantity of oil exports to China between 1995 and 2015 in comparison with other traditionally large export markets of these countries. This, arguably, shows the increasing influence and importance of China in the energy sectors of Riyadh and Astana.

55 3.2 Power structure, economy and energy in Saudi-Arabia Power structure The Kingdom of Saudi-Arabia (KSA) was founded in 1932 and is characterized by an authoritarian political system. The country is ruled by an absolute monarch that shares its power only with its own family. This family is the royal ‘Al Saud’ family, after which the country is named. The ‘Al Saud’ family has dominated the political sphere in Saudi-Arabia for the past 90 years. The king is elected by the ‘allegiance council’, which comprises of specific members of the royal family (Mahoney & Alboaouh, 2017, p. 247). Currently, this king, who also acts as prime minister, is Salman bin Abdulaziz al Saud. He is advised and assisted by the council of ministers, or cabinet, which includes a member from each of the 22 government ministries in Saudi-Arabia (Saudi embassy, 2020a). The council of ministers is responsible for establishing policies in all fields such as defense, education, health and foreign policies. The ministers within the cabinet are all elected by royal decree, which also shows the importance of the royal family (Saudi embassy, 2010). The crown prince of KSA is also included in this council of ministers and is the deputy prime minister. The current crown prince is Mohammed Bin Salman (MBS), who is also the minister of defense, chairman of the council for economic and development affairs, and chairman for the council of political and security affairs. Many experts agree that, although King Salman is officially the most powerful and influential person in Saudi-Arabia, the de facto leader of the country is MBS (Graham-Harrison, 2018). He is the one who directs the policies of the countries and is the main representative of Saudi-Arabia abroad. Saudi-Arabia is only one of two countries in the world, together with Vatican City, without a separate legislative body. There is no separation of powers, and the king combines legislative, executive and judicial powers. Similarly, there are no political parties nor national elections in Saudi-Arabia. The kingdom also does not have a written constitution, but the laws are being formed out of the Quran and the Sunnah. These are open for interpretation, which is done by the Ulama. These are the Islamic scholars within Saudi-Arabia. Furthermore, besides the council of ministers, the different ministries and the ‘allegiance council’, the only other formal political institution is the ‘consultative council’. This council consists of 150 members that are appointed by the king for a four-year term (Saudi Embassy, 2020b). Although this body can not implement new policies, it has the power to advise the king on important affairs and propose new legislation (Dekmejian, 1998). While the previous sections would suggest far going powers of the king and the council of ministers, it has been argued that all major policy decisions within Saudi-Arabia

56 are established outside the formal political institutions (Teitelbaum & Ochsenwald, 2020). Most of these are formed through consensus building among members of the royal family. As is discussed in chapter 1, the theoretical framework of geo-political economy that is used in this thesis assumes the existence of a state-class in authoritarian societies such as Saudi- Arabia. This state-class comprises of all members with a considerable amount of power and influence and can be seen as a composition of the interest groups in the country. In Saudi- Arabia, the political sphere is dominated by the Al-Saud family, and political participation for non-members is highly limited. Although the total number of princes within the Al-Saud family is unknown, it has been estimated that there is a total of 15.000 members within the Royal Family, of which 2.000 belong to the inner circle (House of Saud, 2020). The wealth and revenue of Saudi-Arabia that is largely created by the oil export has enabled the royal family to prevent other interest groups from gaining power (Hertog, 2011). Therefore, the state-class in Saudi-Arabia only comprises of these 2.000 people that belong to the inner circle of the royal family.

Economy of energy Saudi-Arabia is nowadays a relatively wealthy country. Its GDP per capita is just above $23.000 USD, which is around the same level as that of Portugal and Greece (Worldbank, 2020). However, the same circumstances that allowed Saudi-Arabia to undergo a process of development are also threatening the sustainability of its economy. Almost all of the country`s wealth is based on its energy reserves and the exportation of these resources. Figure 3.1 shows the percentage of oil export compared to total export, as well as the percentage of oil revenue compared to both total state revenue and country GDP. It displays that nowadays, roughly 80% of all exports in Saudi-Arabia consist of energy exports. On top of that, revenue from these exports constitutes approximately 70% of total state revenue and 20% of the countries GDP. This figure also shows some interesting drops in these percentages that can help to further understand the position of the energy sector in the overall domestic economy of Saudi- Arabia. All three significant drops visible in the figure are caused by a rapid drop in oil prices. In 1998, 2008 and 2016 the price of oil dropped drastically. This drop in oil prices simultaneously creates a decrease in oil revenue and, thereby, lower levels of oil revenue compared to total revenue and GDP. These oil price drops also had a negative impact on the GDP of Saudi-Arabia since the GDP also dropped at the same time as the oil price (SAMA, 2019).

57 Figure 3.1: Saudi-Arabia oil export/total export, oil revenue/GDP & oil revenue/total state revenue (1995-2018)

100 90 80 70 60 50

40 Perentage 30 20 10 0

Year Percentage of Export Percentage of total revenue Percentage of GDP

Note: Figure created by author Source: Saudi-Arabia Monetary Authority (SAMA), (2019), Annual statistics 2018. Available from:http://www.sama.gov.sa/en-US/EconomicReports/Pages/YearlyStatistics.aspx

According to the IMF, there are three main reasons why overreliance on the energy sector is dangerous for the economy and why countries have a need for diversification. The first is the insecure development of global oil prices (IMF, 2019). Oil prices are highly volatile, and there have been incidents in the past were the price of oil had dropped dramatically. One example is when the oil prices doubled from 2009 to 2011 to over $100 USD, while eventually dropping back to $50 USD in 2016 (IMF, 2019). If the economy is reliant on oil revenue, it cannot handle such a price drop without creating additional debt (Alkhteeb, 2017). The impact of the oil price on oil revenue and even state revenue is already shown in figure 3.1. The second reason why the diversification of the economy in countries like Saudi-Arabia is necessary is the employment rates. Saudi-Arabia is characterized by a large number of young people that will enter the labor force in the coming years. However, the energy industry offers almost no direct jobs. Therefore, the IMF estimates that Saudi- Arabia needs to create up to 1 million extra jobs in the coming five years (IMF, 2019). Finally, even though Saudi-Arabia ranks second in the world for proven oil reserves, these reserves will eventually run out. On top of that, will arguably redirect global energy demand away from oil towards green sources of energy. To be prepared for these situations, Saudi-Arabia`s reliance on energy revenues needs to drop (IMF, 2019).

58 In order to diversify, Mohammed Bin Salman has created the ‘Saudi Vision 2030’ (SV30). This is a development plan that is based on three pillars. The first pillar is the status of Saudi-Arabia as the nexus of the Arab and Islamic world. The second pillar is facilitating the influx of foreign investments in a multitude of sectors. The third pillar is using Saudi- Arabia`s unique location to become a global hub that connects Asia, Europe and Africa with each other (Vision 2030, 2020). To accomplish these three pillars, the kingdom aims to increase investments in the domestic economy to develop non-oil sectors such as tourism, retail and manufacturing (IMF, 2019). SV2030 shows the Saudi-Arabian effort to diversify its economy. On top of that, the attention that this program receives from inside as well as outside the country displays the seriousness and scope of the initiative. However, oil revenues still amount to almost 70% of total government revenues, showing that Saudi-Arabia is still deeply reliant on its energy sector.

Energy sector The energy sector, thus, plays a dominant role in the overall economy of Saudi-Arabia. This section presents an outline of the energy sector as well as the practices of the Saudi state-class to govern this vital sector. To display the size of this sector in Saudi-Arabia, table 3.1 shows the size of the oil and natural gas reserves, production, consumption and export in the country in 2016. With 267 billion bbl, the country ranks second in reserves only behind Venezuela. On top of that, its oil production exceeds the 12.000 mb/d. Only the United States and Russia produce more oil compared to Saudi-Arabia. However, these countries consume a large part of the oil they produce themselves. The domestic consumption in Saudi-Arabia, on the other hand, is low. This enabled the country to become the largest exporter of oil in the world. Saudi-Arabia also has significant natural gas reserves. However, it only produces a minimal amount of gas, which is only for domestic consumption. These energy resources are located in a number of large oil fields, which includes the largest oil field in the world. This is the Ghawar oil field, which holds 25% of Saudi-Arabia`s oil reserves. Furthermore, onshore, the fields Khurais, Khursaniyah and Shaybah collectively amount to 17% of reserves. Offshore, Safaniyah, Zuluf, Marjan, Manifa and Berri account for 25% of the reserves (Patrick, 2016).

59 Table 3.1: Saudi-Arabia oil and natural gas statistics in 2016 Reserves Production Consumption Export Oil 267 billion b (rank 2) 12403 Mb/d (rank 3) 3119 Mb/d 7334 Mb/d (rank 1) Natural gas 300 tcf (rank 4) 3739 bcf (rank 8) 3739 bcf 0 Note: Table created by author Source: Energy Information Administration. (2020). Saudi-Arabia Data. Available from: https://www.eia.gov/international/data/country/SAU

Since Saudi-Arabia is an example of an authoritarian state that is fully dependent on its energy sector, it is only logical that the state-class exercises full control over this sector. Officially, this control is exercised through the ministry of Energy, Industry and Mineral Resources. However, as is previously discussed, the main policy decisions in Saudi-Arabia are realized outside the formal institutions. The energy sector is no different and is thus regulated by high ranking members of the royal family. The sole NOC in Saudi-Arabia is Saudi Aramco. This company has a monopoly on operating in the oil fields of the country. The effect of this monopoly is clearly visible in table 3.2, that shows the largest oil and gas fields in Saudi-Arabia as well as their estimated reserves. These reserves are estimations since the government does not publish data on this. There are no fields that are being jointly operated by a multitude of companies, which means that Saudi Aramco is the sole producer of oil and natural gas in the kingdom. The relationship between the state-class and Saudi Aramco is fairly similar to the relationship between the Chinese government and the NOC`s that is previously discussed in chapter 2. The government has granted its NOC some autonomy to develop its operations and grow into one of the largest oil companies in the world. However, in all its actions, Saudi Aramco remains confined to the interest of the state. The institution that is responsible for controlling the actions of the NOC is the Supreme Council for Petroleum and Minerals Affairs. They review and approve al national oil and gas policies, which includes those of Saudi Aramco (Akhonbay, 2012, p. 2). The people that run this institution and those in charge of the energy policies are all appointed by senior members of the royal family (Patrick, 2016).

60 Table 3.2: Major oil and gas fields, operating companies and reserves in Saudi-Arabia

Field Companies Reserves (bbl) Ghawar Saudi Aramco 70,0 Khurais Saudi Aramco 25,0 Zuluf Saudi Aramco 31,0 Marjan Saudi Aramco 2,3 Safaniya Saudi Aramco 34,0 Shaybah Saudi Aramco 13,6 Note: Table created by author Source: A Barrel Full. (2020). Oil and Gas fields in Saudi-Arabia. Available from: http://abarrelfull.wikidot.com/middle-eastern-oil-and-gas-fields.

The most important objectives in the energy policies of Saudi-Arabia are the maximization of revenue and maintaining production levels and market share (Fattouh & Sen, 2015, p. 22). The importance of the maximization of oil revenue and stabilization of the oil price is shown in figure 3.2. This figure shows the change in oil price from 1990 until 2018, as well as the profit and loss account for Saudi-Arabia. This profit and loss account consists of all government revenue minus all government expenditure. As shown in the figure, there is a clear relationship between the oil price and the profit and loss account. This demonstrates the importance of a stable oil price for a healthy financial situation in Saudi-Arabia.

Figure 3.2: Global oil price & profit and loss account of Saudi-Arabia (1990-2018)

Oil price Profit and Loss account

120 800000

100 600000 400000 80 200000 60 0 40

OIL PRICE (US$) PRICEOIL -200000 20 -400000

0 -600000

PROFIT AND (M RLS) ACOUNT LOSS AND PROFIT

1995 2017 1990 1991 1992 1993 1994 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2018 YEAR

Note: Figure created by author Source: Saudi-Arabia Monetary Authority (SAMA), (2019), Annual statistics 2018. Available from:http://www.sama.gov.sa/en-US/EconomicReports/Pages/YearlyStatistics.aspx

61

To be able to influence these oil prices and prevent massive drops in revenue, Saudi- Arabia is a member of the ‘Organization of the Petroleum Exporting Countries’ (OPEC). In case of a drop in oil prices, countries in this organization can collectively decide to drop oil production in an attempt to decrease the supply of petroleum and bring oil prices back up. Since Saudi-Arabia is the largest energy exporter, it has historically performed the role of swing state in this organization. It would be the first to decrease or increase production, depended on the market, and then persuade other countries to follow. However, a number of scholars argue that Saudi-Arabia nowadays has lost this position and that the country`s influence over the international energy market has decreased (Hanewald, 2017; Krane & Agerton, 2015). This is partly due to two challenges facing Saudi-Arabia`s energy sector. The first of these challenges, which is observed by energy experts, is the increasing domestic demand for energy in Saudi-Arabia. While Saudi-Arabia is only the third-largest producer of crude petroleum, its historically low domestic consumption has allowed the country to become the largest oil exporter in the world. This is, however, changing today as Saudi-Arabia is increasingly starting to consume what it produces (Patrick, 2016). The energy consumption in Saudi-Arabia has more than doubled in the last 15 years (EIA, 2020). The second challenge is the transformation of the United States from a large energy importing country to an energy exporting country. While the US has historically been one of the largest export markets of Saudi-Arabian oil, recent technological improvements in the shale gas and oil industry have allowed the US to become the largest producer of oil. This has both removed a large export market for Saudi-Arabia and created a new competitor on the international energy market. On the other hand, it has also been argued that growing energy demands in Asia might enable Saudi-Arabia to redirect its energy exports to the East to find new markets for its resources.

3.3 China-Saudi relationship: diplomacy, trade, investments & energy Diplomacy The relationship between Saudi-Arabia and China in terms of diplomacy, trade and investment has increased and tightened in recent years. For the diplomatic ties between the two countries, the first relationship between the countries was established in 1990 with the opening of a representation of China in Saudi-Arabia (Valentin, 2019). After that, in 2008, the bilateral relations between the countries were boosted into a ‘strategic partnership’ (Chen, Shu & Wen, 2018). Finally, in 2016, this relationship was even further upgraded to a

62 ‘comprehensive strategic partnership’. After the ‘comprehensive strategic co-operative partnership’, this is the second-highest level of bilateral relations that China can have with any country. The relationship is regarded as comprehensive when it encompasses a wide range of areas, dimensions and layers. It covers, for example, economic, political, cultural and scientific relations on both bilateral and multilateral levels (SCMP, 2016). The relationship is regarded as strategic if the cooperation is stable and long term. The relationship will not be affected by a change in the ideology of a country or a specific event, but will last for a long time (SCMP, 2016). There have also been a number of visits between the leaders of these countries, in which they have signed agreements, deals and Memorandums of Understanding (MoU). For example, in January 2016, when Xi Jinping visited Saudi-Arabia and other ME countries. During this visit, in which Xi promoted the integration of the ME into the BRI, he also indicated that he would inject $55 Billion USD in loans into the region (Kamel, 2018). Later that year, in August, the vice-premier of China, Zhang Gaoli, also made a visit to Saudi- Arabia in which China and Saudi signed a number of deals with a total value of $70 billion (Gao, 2017). The same month, bin Salman also visited Beijing, where he and Xi Jinping signed 15 bilateral agreements (Gao, 2017). After that, in March 2017, bin Salman made another trip to China in which the countries signed 21 Memorandums of Cooperation (MoC) and deals worth $65 billion in total (Fulton, 2017; Chen, Shu & Wen, 2018). This also included an MoU between Saudi Aramco and China North Industries Group Corp (Norinco) to build new refining and petrochemical plants in China (Kamel, 2018, p. 84). Finally, in February 2019, at Saudi Arabia-China economic forum, the two countries signed deals worth a total of $28 billion that included the building of a petrochemical plant in China that would refine oil originating from Saudi-Arabia (Neuhauser, 2019; Valentin. 2019).

Trade & Investments Evident from the numerous deals and agreements between Saudi-Arabia and China is the focus on their economic relations that transcends the political issues within these countries. While the EU and the US have spoken strongly against the murder of journalist Jamal Khashoggi by Saudi-Arabia and the detention of millions of Muslims by China, these two countries remain remarkably silent about each other`s political scandals (Bodetti, 2019). The prioritization of their economic activities is also clear when analyzing the sheer volume of trade and FDI flows between these countries in recent years. In terms of trade, Chen & Han (2019, p. 10) have calculated that the trade dependence of Saudi-Arabia on China has risen

63 from 4.2% in 2001 to 14.4% in 2017. Similarly, between 2001 and 2012, the total value of this trade has increased from $4 billion to $73 billion (Chen & Han, 2019, p. 10). Thereby, China is the largest trading partner of Saudi-Arabia. While the trade dependence of the PRC on the kingdom remains relatively low, Saudi-Arabia is now the largest trading partner of China in the ME. The majority of trade that runs from Saudi-Arabia to China is oil. Export from China to Saudi-Arabia consist mostly of “industrial commodities, electrical equipment, machinery, furniture, clothing and footwear (Chen & Han, 2019, p. 11). A similar picture, albeit less extensive, applies to the FDI flows between Saudi-Arabia and China. According to Chen & Han (2019, p. 12), these flows increased by more than twenty times between 2005 and 2015. A considerable destination for FDI from Saudi-Arabia to the PRC is the petrochemical sector in China. The NOC of the kingdom, Saudi Aramco, already owns 25% of the refinery in Fujian, while also having the ambition to invest in refineries in and Yunnan (Reuters, 2007; Meng & Tan, 2018). In total, FDI stock from Saudi-Arabia to the petrochemical sector of China now exceeds $35 billion (Kapsarc, 2019, p. 14).

Energy relation Historically, the most important destinations for Saudi-Arabia`s energy export were western industrialized countries. These are the US, West-European countries such as Germany & France, Japan, and, at a later stage, South-Korea. However, figure 3.3 shows that as China began to industrialize and transform its economy into a large energy importer, it joined the Western countries as a major oil importer from Saudi-Arabia. This has led to a situation in 2017 in which China was the second-largest export destination for Saudi-Arabia`s petroleum (OEC, 2017). What furthermore stands out in figure 3.3, is the large drop in value in 2015 and 2016. The reason for this drop is the massive decrease in oil prices that year. While the oil price amounted to more than $100 US in 2014, this number dropped to less than $50 US in 2016 (SAMA, 2019). Figure 3.3 shows the rising significance of China as an oil importer from Saudi- Arabia. There are a couple of reasons why experts believe that this trend will continue in the future, and China will extend its significance for Saudi exports. First of all, oil demand from the West is decreasing, and this will only decrease more as time progresses. The US has transformed from a large energy importing country to an energy exporting country due to its shale oil and gas operations (Valantin, 2019). Similarly, the Western countries are nowadays prioritizing the development of renewable energy, since this is less harmful to the

64 environment (Qian & Fulton, 2017, pp. 12-13). Second, China`s further economic development is likely to boost its energy consumption and oil imports. This presents Saudi- Arabia with a large opportunity to export more petroleum to China. In sum, the decreasing oil demand from the traditional partners of Saudi-Arabia forces Riyadh to consider different export markets. The rising energy demands in China make Beijing an excellent replacement for Saudi`s energy export.

Figure 3.3: Value of top 4 crude petroleum importing countries from Saudi-Arabia (1995- 2017)

Note: Figure created by author Source: Observatory for Economic Complexity. (2017). Where does Saudi-Arabia export Crude Petroleum to?. Available from: https://oec.world/en/visualize/tree_map/hs92/export/sau/show/2709/2017/

As can be seen in figure 3.4, the value of Chinese crude petroleum imports from Saudi-Arabia has risen extensively since the 2000s. Similar to figure 3.3, the massive drop in the oil price in 2015 and 2016 is also visible here and causes a decrease in the value of petroleum imports from Saudi-Arabia. While the oil price does not influence market shares, Saudi-Arabia maintained its position as the largest oil exporter to China. Currently, Russia has overtaken Saudi-Arabia in oil exports to China, and the kingdom is now the second-largest. Nowadays, still 15% of all oil imports of China originate from Saudi-Arabia (OEC, 2017). This, arguably, shows the importance of Saudi-Arabia for the energy supply security of

65 China. However, in recent years China is aiming to be less reliant on the Middle-East for its energy security and diversify its energy import locations. Therefore, it is starting to import more from regions as Latin-America, North-America, Central-Asia and Russia and less from the Middle-East. Despite their efforts for diversification, the sophisticated diplomatic relations between the countries, as well as Saudi`s massive energy reserves, arguably indicate that Saudi-Arabia will retain its crucial position in the energy supply security of China.

Figure 3.4: Rank and value of China`s crude petroleum imports from Saudi-Arabia (1995- 2017)

12 45000 40000 10 35000 8 30000 25000 6

Rank 20000

4 15000 Value(M$) 10000 2 5000 0 0

Astitel

Value (M$) Rank

Note: Figure created by author Source: Observatory for Economic Complexity. (2017). Where does China import Crude Petroleum from. Available from: https://oec.world/en/visualize/tree_map/hs92/import/chn/show/2709/2017/

3.4 The role and position of Saudi-Arabia in the BRI In chapter 2, this thesis discussed the position and role of the Middle-East in the BRI. The BRI aims to connect the Chinese economy with that of the rest of the world, including that of the Middle-East. The vast amount of resources located in this region makes the ME and the GCC particularly important for the Chinese BRI (Rakhmat, 2019). Energy and the access to energy resources remain key objectives of the Belt and Road (Galkin, Chen & Ke, 2019). Therefore, the Middle-East is the perfect partner to integrate into the BRI and enhance diplomatic and economic ties with. While the BRI and its implications for the Middle-East are already discussed in Chapter 2, this section will focus on the role and position of Saudi- Arabia in the initiative.

66 The main objectives of the BRI are twofold. First, China has created a large capital surplus due to its large production and manufacturing industry. This capital surplus can be used by China for economic and political motives abroad. The BRI enables China to invest in foreign countries and thereby expand its capital overseas. Second, to be able to continue its domestic economic development and industrialization, China requires a large sum of energy imports. To be able to secure this inflow of resources, the PRC requires access to the markets in the resource-rich countries. The BRI facilitates actions by the Chinese state class and thereby provides opportunities to acquire access to these resources and increase the energy supply security of China. Therefore, resource-rich countries are the crux in the succession of the Belt and Road. Duan et all. (2018) have tried to quantitatively analyze which of these resource-rich countries provide the highest reward and lowest risk for energy investments. They argue that the high reserves in Saudi-Arabia, compared with the relatively stable regime in the kingdom, make Saudi-Arabia one of the best places for new energy investments under the BRI. According to Valentin (2019), there are two main reasons why Saudi-Arabia is of great importance for the BRI. First, increased access to the massive oil and natural gas reserves in Saudi-Arabia would help to satisfy China`s increasing energy needs. As the previous section on the energy relation between Riyadh and Beijing has shown, energy cooperation continues to be the foundation of the total relationship between both countries. The second interest of the Chinese BRI in Saudi-Arabia is its strategic position. Saudi-Arabia lies at the crossroads of both Europe, Africa and Asia and controls access to the Red Sea. The Red Sea is, thereafter, connected with the Suez Canal, which provides naval ships access to the Mediterranean Sea and Southern Europe (Valentin, 2019). Thus, the BRI in Saudi-Arabia enhances the access of Chinese maritime ships to the Red Sea and thereby the Suez Canal and the Mediterranean Sea. Through its crucial position, Saudi-Arabia plays a crucial role in facilitating the integration of the Chinese economy with Africa and Europe (Chen, Su & Wen, 2018). Cooperation between China and the Arab world, which includes Saudi-Arabia, should follow the ‘1+2+3’ cooperation framework, according to Xi Jinping (Qian, 2017, p. 692). This framework also emphasizes the importance of energy in the BRI. According to this model, collaboration under the Belt and Road Initiative should first prioritize the energy cooperation between Saudi-Arabia and China. Second, it should focus on the implementation of infrastructure and facilitate trade & investments. Third, it should jointly develop and establish breakthroughs in the fields of nuclear energy, renewable energy and aerospace (Chen, Su &

67 Wen, 2018). This shows that energy and investments in the energy sector remain the number one concern of Beijing and that the BRI is used as a tool to achieve the objective of energy supply security. The BRI is well received by Saudi-Arabia, and there have been numerous occasions in which the country showed its support for the initiative (Kapsarc, 2020). On top of that, the kingdom is also included as a member of one of the main institutions of the BRI, the AIIB (Chen, Shu & Wen, 2018). For Saudi-Arabia, the BRI provides a large opportunity to intensify the economic relations of the kingdom with China and ensure the largest export market in the world (Kapsarc, 2019). Also, Saudi-Arabia can gain benefit from the investments made to enhance infrastructure in order to connect China to the world. This is possible due to Saudi-Arabia`s strategic location. It is located along the large transport routes towards Europe and Africa and Saudi-Arabia has already announced that it would actively participate in enabling possibilities for economic and trade relations between China and Africa (Chen, Shu & Wen, 2018). On top of that, for Saudi-Arabia, the initiative provides the opportunity to connect the BRI with the kingdoms own development program, which is Saudi Vision 2030 (SV30). During bin Salman`s visit to Beijing in August 2016, he argued that the BRI is “one of the main pillars of the Saudi Vision 2030, which would seek to make China among the kingdom’s biggest economic partners” (Fulton, 2017). The SV30 includes the aim to increase the country`s attractive force of FDI and use these investments to develop other sectors of Saudi-Arabia`s economy. The BRI is one of the largest attractors of investments around the globe (Liu et al., 2017). Therefore, the BRI can help Saudi-Arabia to increase its inflow of FDI and boost the SV30. Furthermore, during the visit of MBS in March 2017, Xi Jinping endorsed the Saudi Vision 2030 (SV2030) and expressed his support for the vision (Chen, Shu & Wen, 2018). The mutual approval and commitments to cooperate in favor of the BRI and the SV2030 between the countries shows the great relationship between the countries.

3.5 Power structure, economy and energy in Kazakhstan Power structure The Republic of Kazakhstan is a former USSR country in Central-Asia. It is the largest of the Central-Asian countries and also the latest to declare its independence on the 16th of December in 1991. Similar to other former Soviet countries, major power structures and political institutions remained intact after its independence. Officially, Kazakhstan is a democratic republic with a presidential system that includes the separation of power in an

68 executive, legislative and judicial branch. The manner in which these branches are organized and the different checks and balances that are implemented are documented in the constitution of Kazakhstan, that exists since 1995. According to this constitution, the legislative branch consists of a parliament that is made up of both the Senate (upper house) and the Majilis (lower house) (Bowyer, 2008). Judicial power resides in the supreme court and other local courts, and the executive branch consists of the government. Constitutionally, the president in Kazakhstan is not part of any of these three branches of power and exceeds these institutions (Kanapyanov, 2018, p. 84). This already shows the special place of the president in Kazakhstan’s political system. Different scholars agree that the power of this president far exceeds that of presidents in other presidential systems, such as in the US (Bowyer, 2008; Kanapyanov, 2018; Satpaev, 2007). The president in Kazakhstan is both head of government as well as head of state. This person is responsible for the main domestic and external policies while simultaneously being the representative of the country abroad (Akorda.kz, 2020a). The first president of Kazakhstan was Nursultan Nazarbayev, who was appointed in 1990. He remained president of Kazakhstan until 2019 when he appointed Kassym-Jomart Tokayev as the new president. Tokayev is a close companion of Nazarbayev and also part of the ruling political party ‘Nur Otan’. Although there are several political parties in Kazakhstan, the ‘Nur Otan’ party is by far the most important and influential. This party was founded by Nazarbayev, and he is currently also the party`s chairman. In the last parliamentary elections, they received 82.2% of the votes, which gave them 84 out of the 98 seats in the Majilis (ElectionGuide, 2020). The fact that one party has so many seats in parliament shows that there is a clear lack of opposition. This lack of parliamentary opposition also impedes the possible checks and balances on the power of the president since he is a member of the same party as the far majority of parliament. Among scholars, Kazakhstan`s political system is regarded as semi-authoritarian (Olcott & Ottaway, 1999; Satpaev, 2007). On the one hand, Nazarbayev has included some democratic institutions like a constitution, separation of power, and even presidential and parliamentary elections (Olcott & Ottaway, 1999). On the other hand, these institutions are a mere façade, and the elections are not free nor fair. The opposition in Kazakhstan is weak, serious candidates have remained absent from these elections, and the media is also controlled by the state (Satpaev, 2007). This has resulted in re-election outcomes for Nazarbayev such as 91.15% support in 2005, 95.5% in 2011 and 97.75% in 2015 (Akorda.kz, 2020b). Therefore,

69 these elections can be seen as a mere method of justification for the absolute control of the president (Olcott & Ottaway, 1999). As is discussed in chapter 1, the leadership in authoritarian countries resides with a small group of people. This group controls the power and the political and social institutions and are, in this research, indicated as the state-class. For Kazakhstan, the state-class arguably consists mostly of the president, who is the highest authority in the country, the government which he has appointed and the leaders of the ruling political party ‘Nur Otan’. When analyzing the state-class in Kazakhstan, it is important to consider the country`s widespread corruption and nepotism (Rywking, 2005). Although Nazarbayev is no longer president, he and his family members remain highly influential in the political system. Nazarbayev himself remains the party leader of the ‘Nur Otan’ party. His daughter Dariga Nazarbayev is currently the chairman of the senate, and his nephew, Samat Abish, is head of the National Security Service Human Resource department. This shows that besides the president and his government, Nazarbayev and his family also remain part of Kazakhstan`s state-class.

Economy of energy Kazakhstan`s economy is rapidly developing. This is exemplified by the increase in GDP per capita over the last years. While its GDP per capita only amounted to $1.300 US in 1995, in 2018, this number is expanded to almost $9.800 US (Worldbank, 2020). This is roughly at the same level as the GDP per capita of Turkey and Mexico. Similar to Saudi-Arabia, albeit to a lesser extent, the economy in Kazakhstan is highly dependent on the revenues originating from their oil export. Table 3.3 provides an overview of the percentage of oil export compared to total export in Kazakhstan as well as the oil revenue compared to the countries GDP and total revenue. The table contains data for every five years from 2000 until 2019. 2019 was the latest year for which data on the financial situation of Kazakhstan was available. It shows that, for the last 15 years, oil export has made up roughly 60% of all export in Kazakhstan. On top of that, oil revenue has accounted for approximately 5-10% of the countries GDP, and between 30-50% of total government revenue. The numbers for the year 2000 are significantly lower compared to the other years. This is because, between 2000 and 2005, Kazakhstan has almost doubled its oil production (EIA, 2016).

70 Table 3.3: Kazakhstan oil export/total export, oil revenue/GDP & oil revenue/total state revenue (2000-2019) Year Oil export/Total export Oil revenue/GDP Oil revenue/Total revenue 2000 47,80% 3,30% 15,3% 2005 61,50% 10,60% 37,7% 2010 60,30% 11,70% 48,9% 2015 57,60% 6,60% 39,5% 2019 58,50% 6,80% 34,0% Note: Table created by author Source: International Monetary Fund, 2019, Republic of Kazakhstan: 2019 Article IV Consultation-Press Release; and Staff Report, Available from: https://www.imf.org/en/Publications/CR/Issues/2020/01/29/Republic-of-Kazakhstan-2019- Article-IV-Consultation-Press-Release-and-Staff-Report-49002 1

Because of the reliance on oil for its economy, scholars have argued that Kazakhstan can be categorized as a petro-state. These petro-states exhibits what Sabonis-Helf (2004) has called ‘pathological development tendencies’. This includes: “a lack of transparency, lack of separation of powers within the government, a conspicuous lack of equitable distribution of wealth and power, high levels of state debt, and a permanent tendency toward rent seeking by state officials.” (Sabonis-Helf, 2004, p. 159). While this shows that there are definite dangers in Kazakhstan`s reliance on the energy sector, diversification in the country is not as necessary as in Saudi-Arabia. The economy of Kazakhstan is already more diversified compared to Saudi-Arabia, and the Central-Asian country is, therefore, less dependent on the stability of the oil price.

1 Also: International Monetary Fund, 2017, Republic of Kazakhstan : 2017 Article IV Consultation-Press Release; Staff Report for the Republic of Kazakhstan, Available from: https://www.imf.org/en/Publications/CR/Issues/2017/05/09/Republic-of-Kazakhstan-2017- Article-IV-Consultation-Press-Release-and-Staff-Report-44884; International Monetary Fund, 2013, Republic of Kazakhstan : 2013 Article IV Consultation- Press Release; Staff Report for the Republic of Kazakhstan, Available from: https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Republic-of-Kazakhstan-2013- Article-IV-Consultation-40946 International Monetary Fund, 2007, Republic of Kazakhstan : 2007 Article IV Consultation- Press Release; Staff Report for the Republic of Kazakhstan, Available from: https://www.imf.org/en/Publications/CR/Issues/2016/12/31/Republic-of-Kazakhstan-2007- 71 Article-IV-Consultation-Staff-Report-and-Public-Information-21174 International Monetary Fund, 2001, Republic of Kazakhstan : 2001 Article IV Consultation- Press Release; Staff Report for the Republic of Kazakhstan, Available from: https://www.imf.org/en/Publications/CR/Issues/2016/12/30/Republic-of-Kazakhstan-Staff-Report- for-the-2001-Article-IV-Consultation-15730

Energy sector The last section showed the importance of the energy sector for the economy in Kazakhstan. This section will provide more depth on this energy sector and explain how it is regulated. Although the energy sector in Kazakhstan is significantly smaller than in Saudi-Arabia, it is still substantial. Table 3.4 shows an overview of the oil and natural gas reserves, production, consumption, export and import of Kazakhstan for 2016, which is the latest year for which data is available. The country has 30 billion bbl in oil reserves, by which it is ranked 11th in the world. Kazakhstan is also the 12th largest producer of crude oil in the world. Low levels of domestic consumption compared to other resource-rich countries, enables them to export the majority of what it produces. Therefore, the country is ranked 9 in terms of oil export. It exports a little bit less than countries like Venezuela (rank 8th) and Angola (rank 7th), but more than Norway (rank 10th) and the US (rank 12th). While Kazakhstan has developed its oil industry in recent years, the country has only recently started to focus on natural gas, and the production of natural gas is, therefore, still lacking. Kazakhstan only produced 751 bcf in 2016 and consumed most of this. Therefore, Kazakhstan`s natural gas export is only a minor contributor to the whole energy sector.

Table 3.4: Kazakhstan Oil and Natural gas statistics in 2016 Reserves Production Consumption Export Imports Oil 30 billion b (rank 11) 1698 Mb/d (rank 12) 334 Mb/d 1246 Mb/d (rank 9) 0,5 Mb/d Natural gas 85 tcf (rank 14) 751 bcf (rank 30) 512 bcf 461 bcf 202 bcf Note: Table created by author Source: Energy Information Administration. (2020). Kazakhstan Data. Available from: https://www.eia.gov/international/data/country/KAZ

While both Saudi-Arabia and Kazakhstan are examples of authoritarian regimes that exercise full control over their energy sector, the two countries have broadly divergent policies concerning the regulation of their energy. Saudi-Arabia, on the one hand, only allows for a limited inflow of FDI and provides its NOC Saudi Aramco with a monopoly on the operating of its oil fields. On the other hand, the energy policies in Kazakhstan are not as limited for foreign companies. In Kazakhstan, the inflow of FDI is highly incentivized, and the state-class even allows foreign oil companies to become shareholders in Kazakhstan`s NOC`s. One example of this is PetroKazakhstan, which was acquired by the CNPC in 2005. After that, they signed an agreement with Kazakhstan`s energy ministry to transfer 33% of PetroKazakhstan to KazMunayGaz, which is one of the NOC`s in Kazakhstan (CNPC,

72 2020e). These foreign oil companies are also allowed to operate jointly in Kazakhstan`s oil fields with local NOC`s (Schatz, 2008). This arguably stems from the pessimistic view on state-led development after the Soviet disintegration and the ‘victory’ of capitalism over communism (Sabonis-Helf, 2004). Subsequently, the state-class in Kazakhstan in the 1990s initiated market reforms which stimulated privatization and the influence of international companies in the energy sector. Due to the privatization of the energy sector, almost all significant oil fields in Kazakhstan are jointly operated by a mixture of domestic NOC`s (i.e., KMG), foreign NOC`s (i.e., CNPC, Sinopec) & IOC`s (i.e., Shell, Chevron, Total). The largest of these oil and gas fields are Kashagan, Tengiz, Karachaganak, Aktobe, Uzen & Kumkol. Table 3.5 shows an overview of the size of these fields as well as the amount of shares different companies own of the different fields respectively. While this table shows the diversity among companies that operate in Kazakhstan, it is still notable that Kazakhstan`s NOC KazMunayGaz is involved in all major fields. This shows that, even though the state-class in Kazakhstan has pushed market reforms and privatization, it still wishes to maintain an influential position in its energy sector. Another indicator of this is the demand from Kazakhstan to transfer 33% of PetroKazakhstan from CNPC to KazMunayGaz in 2006. Kazakhstan, arguably, aims for a balance between optimal conditions for foreign investments and preserving the role of the state in the economy.

73 Table 3.5: Major oil and gas fields, operating companies and reserves in Kazakhstan

Field Companies Reserves (bbl) Kashagan KMG (16,81%) 15,0 CNPC (8,33%) Shell (16,81%) ExxonMobil (16,81%) Total (16,81%) ENI (16,81%) Inpex (7,56%) Tengiz KMG (20%) 9,0 Chevron (50%) ExxonMobil (25%) LukArco (5%) Karachaganak KMG (10%) 2,4 BG Group (29,25%) ENI (29,25%) Chevron (18%) Lukoil (13,50%) Aktobe KMG (50%) 1,0 Sinopec (25%) Lukoil (25%) Uzen CNPC 1,0 Kumkol CNPC (50%) 0,6 Lukoil (50%) Others 1,0 Note: Table created by author Source: van Driel, M. (2017). Chinese energy supply security, the cases of Kazakhstan and Turkmenistan; Kazenergy. (2019). The National Energy Report. Available from: https://www.kazenergy.com/upload/document/energy-report/NationalReport19_en.pdf

One of the biggest problems with Kazakhstan`s energy sector is its difficulty in transporting the produced oil to the international energy market. Since Kazakhstan is land- locked, it has no possibilities to transport oil overseas (Sabonis-Helf, 2004). All of the oil Kazakhstan wants to transport, has to be transported through the oil pipelines of the country. However, when Kazakhstan became independent in 1991, all of the existing pipelines ran through Russia, and these pipelines were controlled by the Russian company Transneft (Najman et al., 2008, p. 2). They discriminated against Kazakh oil and thereby increased the dependence of Kazakhstan on Russia. The first initiative to overcome this problem was the Caspian Pipeline Consortium (CPC). While this pipeline also runs through Russia, it is not owned by Russia. The second initiative is the Trans-Caspian oil transport system. Here oil is

74 transported from Kazakhstan to Azerbaijan via oil tankers. In Azerbaijan, the ‘Baku-Tbilisi- Ceyhan’ (BTC) pipeline transports oil further to Turkey. Finally, the first pipeline of Kazakhstan that does not cross Russian territory is the Kazakhstan-China crude pipeline. This pipeline was jointly built by the CNPC and KazMunayGaz and opened in 2009 (CNPC, 2020e).

3.6 China-Kazakhstan relationship: diplomacy, trade, investments & energy Diplomacy In terms of diplomacy, there have been a number of visits between state officials of China and Kazakhstan in which they have signed deals, agreements, MoU`s and declared support for each other`s projects. Kazakhstan is arguably the most important country in Central-Asia for China and also the only country in this region with which China has signed an ‘all-round strategic partnership’ (Dave, 2018). During Nazarbayev’s visit to Beijing in August 2015, for example, the countries agreed on connecting the BRI with Kazakhstan`s own development program ‘Nurly Zhol’ (Bright Pad) (Xuanli, 2019, p.16). This program entails the realization of Kazakhstan as the largest transportation hub in Central-Asia and could, therefore, fit smoothly in the extension of the BRI (Vakulchuk & Overland, 2019, p. 18). After that, in June 2017, Xi Jinping visited Kazakhstan, during which the two leaders agreed on 24 agreements with regards to infrastructure, energy & agriculture with a total value of $8 billion (Xuanli, 2019, p. 17). On top of that, during his visit, Xi expressed his ambition to further align his BRI with Kazakhstan`s ‘Nurly Zhol’ (Indeo, 2018, p. 144). Finally, the deputy prime minister of Kazakhstan visited Beijing in September 2018. During this visit, they agreed on the development of 11 new projects worth $1.8 billion (Xuanli, 2019). In total, 70 agreements with a value of $33 billion have been signed by Beijing and Astana between March 2015 and September 2018 (Xuanli, 2019, p. 2).

Trade & Investments The enhancing relationship between China and Kazakhstan can also be witnessed by analyzing the trade and FDI flows between the two countries. For example, in 2018, the bilateral trade between these two countries amounted to almost $100 billion, which was the highest it has ever been (Xuanli, 2019). The European Union was the only trading partner of Kazakhstan with a higher value (Xuanli, 2019). The same trend of increasing economic ties is visible for the FDI flow from China to Kazakhstan. According to the UNCTAD (2020), the inflow of Chinese FDI in the economy of the Central-Asian country has risen from $212

75 million in 2001 to $2.4 billion in 2012. This is an increase of more than ten times in just 12 years, which shows the developing interest of China`s state-class in their economic relationship with Kazakhstan.

Energy relation China`s interest in Kazakhstan stems mostly from the country`s large oil and gas reserves. The country is ranked 11th in oil reserves and 9th in oil exports (CIA, 2020). China`s first activities in Kazakhstan were also in its energy sector. Shortly after the independence of Kazakhstan in 1991, China did not yet worry about its energy supply security. According to Xuanli (2019), it used the energy sector in order to secure political ties with Kazakhstan. The aim of this was to secure security at its western borders and prevent similar border disputes to the ones it had with the USSR (Xuanli, 2019). This was the beginning of the energy relationship between the two countries that would develop over time to current levels (Indeo, 2018). As previously discussed, Kazakhstan has opened up its energy sector for investments, joint ventures and M&A`s with both IOC`s and foreign NOC`s. This provides opportunities for China to actively participate in the energy sector of Kazakhstan and enhance its domestic energy supply security through its imports from this Central-Asian country (Misiągiewicz, 2019). China is capitalizing on the opportunities provided by Kazakhstan. This becomes clear when analyzing Chinese investments in Kazakhstan. In 2019, a list of 55 Chinese investments in Kazakhstan was published by the Kazakh government. This list showed that half of these investments, with a total value of $27.6 billion, were in the energy sector (Simonov, 2019). On top of that, Chinese NOC`s have been highly dominated in the oil sector of Kazakhstan in recent years. Nowadays, these NOC`s combined control approximately 25% of the oil production in Kazakhstan (Duarte, 2018, p. 176). To show the increasing influence of China in the oil sector of Kazakhstan in recent years, figure 3.5 provides an overview of the total value of Kazakhstan`s crude petroleum exports to China in comparison with other global energy importing powers. Most of the crude petroleum from Kazakhstan flows towards countries in West-Europe, such as France, Italy, Germany & the Netherlands (OEC, 2017). Crude petroleum exports to Europe amount to roughly 70% of total exports (OEC, 2017). While this shows that Europe is still the largest export market for Kazakhstan, there is also a visible trend for the increasing petroleum exports towards China. From 2000 until 2015, the total value of petroleum exports increased by a factor of 19 from $107 million in 2000 to $2040 million in 2015 (OEC, 2017).

76 Figure 3.5: Kazakhstan petroleum exports to major importers (1995-2017)

Note: Figure created by author Source: Observatory for Economic Complexity. (2017). Where does Kazakhstan export Crude Petroleum to?. Available from: https://oec.world/en/visualize/tree_map/hs92/export/kaz/show/2709/2017/

While China is still importing significantly less energy from Kazakhstan compared to some European countries, the significant increase in the value of crude petroleum trade is, arguably, big enough to influence the energy security of both countries. Figure 3.6 shows the total value of China`s crude petroleum imports from Kazakhstan as China`s ranking in Kazakhstan`s petroleum exports and the other way around. For Astana, the percentage of petroleum exports to Beijing increased from 1.9% in 2000 to 10% in 2015, making China the fourth largest export market for Kazakhstan`s crude petroleum (OEC, 2017). The other way around, China`s percentage of petroleum imports from Kazakhstan increased from 0.8% in 2000 to 1.7% in 2015. Thereby, Kazakhstan was ranked as the twelfth largest import destination of China (OEC, 2017). While the amount of crude petroleum import from Kazakhstan is significantly lower compared to Saudi-Arabia, the country can arguably still play a substantial role in the energy supply security of China. The PRC aims to diversify its energy imports to become less reliant on the Middle-East, which increases the importance of Kazakhstan. On top of that, oil imports from Kazakhstan are transported through oil pipelines. It is not, as most of China`s oil

77 imports, imported through the ‘strait of Malacca’. Kazakhstan is, therefore, an essential partner in the diversification process of China`s oil imports.

Figure 3.6: Rank and value of China`s crude petroleum imports from Kazakhstan (1995- 2017)

25 10000 9000 20 8000 7000 15 6000 5000 Rank 10 4000 3000 Value(M$) 5 2000 1000 0 0

Astitel

Value (M$) Rank

Note: Figure created by author Source: Observatory for Economic Complexity. (2017). Where does China import Crude Petroleum from. Available from: https://oec.world/en/visualize/tree_map/hs92/import/chn/show/2709/2017/

3.7 The role and position of Kazakhstan in the BRI In the last section of Chapter 2, this thesis discussed the role of Central-Asia in the Belt and Road initiative of China. While CA plays a pivotal role, Kazakhstan is arguably the most important country for the BRI in CA. Similar to the other countries in Central-Asia, Kazakhstan is only partially integrated into the regional and world economy (Etheshami, 2018, p. 390). This means that there are a lot of opportunities for both Kazakhstan and China to increase this integration and develop the country. Kazakhstan is the only country in the region with which China has signed an ‘all-round strategic partnership’ (Dave, 2018). This means that cooperation between both countries takes place in all sectors (i.e., economy, security, cultural). During his visit to Astana in 2013, this was also the first place in which Xi Jinping announced and presented his initiative. This thesis would argue that, similar to Saudi-Arabia, the main objective of the BRI in Kazakhstan is gaining access to the resources in the country. The country`s high energy reserves, provide it with the potential to develop into a large ally for Chinese energy imports

78 (Chen & Fazilov, 2018). Most of the investments that are made by China in Kazakhstan connected to the BRI are in the energy sector of this country (Vakulchuk et al., 2019). Although some projects are launched before the initiation of the BRI and scholars have argued that it is hard to distinguish between bilateral agreements and projects that fall under the BRI, there are now twenty projects in the energy sector of Kazakhstan funded by China or other institutions connected to the BRI (Vakulchuk et al., 2019). Another characteristic of Kazakhstan that increases the interest of the country for the BRI is its strategic position. Kazakhstan is located at the Western border of China and, thereby, occupies an important area for China`s security issues as well as its land bridge to Europe (Liao, 2019). Therefore, Kazakhstan is a necessary asset to reach Europe over land through, for example, the use of railroads. The state-class in Kazakhstan actively supports its role as a crossing between world regions and aims to develop the country into a transport hub (Xuanli, 2019). One of the ways in which Kazakhstan`s state-class does so is with the implementation of the ‘Nurly Zhol’ development program. This program, which aims to build 7.000 km of roads and 4.000 km of train tracks across the country, was established shortly after the BRI in November 2014 (Xuanli, 2019, p. 16). Both former president of Kazakhstan Nazarbayev and Xi Jinping have supported each other`s development programs and called for increased integration among them (Xuanli, 20190. One specifically important project that increases the position of Kazakhstan as a logistical hub and enables China to reach Europe is that at Korghos, which lies close to Kazakhstan`s border with China. This project is registered as a BRI project and falls under the ‘Nurly Zhol’ development program as well. According to experts, this project is one of the three ‘crown jewels’ of the BRI, together with the ‘China Pakistan Economic Corridor’ and the Hambantota port in Sri Lanka (Dave, 2018, p. 99; Vakulchuk & Overland, 2019, p. 119). The project involves the construction of the largest dry port in the world, which will make it easier for Chinese goods to be transported to Europe, Africa & the Middle-East (Dave & Kobayashi, 2018, p. 270). According to Liao (2019, p. 18), the dry port in Khorgos enables China to transport products to Europe in 14 days, which is 40 days faster than transporting overseas. This shows that the massive port with a capacity of 18.000 containers plays a large role in the integration of both China and Kazakhstan in the world economy (Liao, 2019). While it seems as if the BRI is received with mere joy and happiness in Kazakhstan, experts on the role of the BRI in Central-Asia and Kazakhstan have pointed to the dichotomy between the attitude of both the Chinese and the state-class of Kazakhstan towards the BRI on the one hand, and that of a substantial part of the population in the country on the other hand

79 (Dave, 2018). The former has frequently indicated the opportunities Kazakhstan could derive from the BRI and the mutual benefits that are to be gained from the intensification of economic relations between the countries (Vakulchuk & Overland, 2019). Therefore, Astana should use this initiative as an opportunity to enhance its relations with China for its own goods. On the other hand, the opposition in Kazakhstan and a large part of the population are wary of Chinese influence in both the region and Kazakhstan (Dave, 2018). This shows that despite the opportunities of the BRI, there are still some challenges that need to be overcome for the initiative to become a success in Kazakhstan.

3.8 Conclusion The first aim of chapter 3 was to answer the following question: How are the energy sectors in Kazakhstan & Saudi-Arabia regulated, and what is the role of energy in the economies of these countries?. Interestingly, even though the leadership in both of these countries is classified as authoritarian, and both leaderships have full control over their energy sectors, Saudi-Arabia and Kazakhstan have completely different ways of managing these sectors. Saudi-Arabia, which has the second-largest oil reserves in the world and is the largest exporter, is categorized by the monopoly of Saudi Aramco to operate in its giant oil fields. No other foreign nor domestic company is allowed to initiate operations within Saudi-Arabia. At the same time, given that Riyadh is the largest exporter, the country is completely dependent on its oil sector. In 2018, 67% of total government revenue originated from oil exports, which similarly accounted for over 20% of the countries GDP (SAMA, 2019). Albeit smaller than Saudi-Arabia, Kazakhstan also has substantial oil and gas reserves. However, due to anti-Soviet sentiment and privatization, investments, joint ventures and M&A`s in Kazakhstan are very much incentivized by the government. Therefore, a number of IOC`s and foreign NOC`s have gained access to the energy sector in Kazakhstan. Compared to Saudi-Arabia, Kazakhstan`s economy is less dependent on its energy sector. However, energy revenues still account for 20% of total government revenue and for 10% of the country`s GDP (Najman et al.,2008, p. 4; WorldBank 2017). The second question that this chapter aimed to answer was: How has the relationship between China and Saudi-Arabia & Kazakhstan in terms of diplomacy, trade, investments and energy developed?. Sino-Saudi relations have started in the 1990s and mainly developed further in the early 2000s. Both trade and investment flows have increased by roughly twenty times between 2000 and 2015 (Chen & Han 2019, p. 12). On top of that, there have been a number of diplomatic visits, arrangements, deals and MoU between Saudi-Arabia and China.

80 This has even further intensified after the implementation of the BRI. Saudi-Arabia endorses and supports this initiative and has linked it to its own SV2030 (Fulton, 2017) In terms of energy, Saudi-Arabia is nowadays the second-largest (behind Russia) exporter of oil to China and amounted to 15% of Chinese oil imports in 2015 (OEC, 2017). The other way around, China is also the second-largest (behind Japan) export destination for Saudi-Arabia`s crude petroleum, which was 18% of total petroleum exports in 2015 (OEC, 2017). This shows the importance of the energy relationship between these two countries. China offers Saudi-Arabia a large export market that will potentially grow in the future. While Saudi-Arabia, on the other hand, offers China the potential to satisfy domestic energy consumption. This can enhance the countries energy supply security. The relationship between Kazakhstan and China also started in the 1990s, since this was the year in which Kazakhstan became independent. This relationship focusses mostly on oil export from Kazakhstan to China. Similarly, Kazakhstan plays an important role in the succession of the BRI, which is shown by the intensification of the bilateral relations since the start of this initiative. Astana is supportive of the BRI and has argued that it is a big opportunity for Kazakhstan`s regional and global integration (Xuanli, 2019). In 2015, China accounted for 10% of the crude petroleum exports of Kazakhstan. For Beijing, oil imports from the Central-Asian country amounted to 1.7% of total oil imports (OEC, 2017). While this shows that the energy relationship between Kazakhstan and China is less substantial compared to Sino-Saudi energy relations, it can be argued that the oil trade between Beijing and Astana still has the possibility to influence the energy supply security of China. This is because it can decrease the country`s reliance on energy imports from the Middle-East and oil transportation through the ‘strait of Malacca’ (Misiągiewicz, 2019).

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82 Chapter IV The activities of Sinopec and the CNPC in Saudi-Arabia and Kazakhstan

4.1 Introduction In the previous chapters, this thesis discussed the current problems China is facing regarding its energy supply security, the institutions and policies established to deal with these problems, and the energy relationship between China and Saudi-Arabia & Kazakhstan. As is shown in chapter 2, a considerable role in the energy supply security of the PRC is reserved for the Chinese NOC`s. Therefore, this chapter will look at the activities of two of the largest of these NOC`s, Sinopec & CNPC, in Kazakhstan & Saudi-Arabia. These activities include investments, joint projects, M&A`s, joint ventures and trade. The aim is to analyze how these activities have increased the access of Sinopec and CNPC to the energy resources in Kazakhstan & Saudi-Arabia, as well as show how these actions have developed in recent years. One such element that invoked a change in these activities is the BRI. This initiative arguably created new opportunities for Sinopec and CNPC to do business in Saudi-Arabia and Kazakhstan. Another factor that could impact the activities of the Chinese NOC`s in these countries is the management of the energy sector by the governments of Saudi-Arabia and Kazakhstan. Saudi-Arabia has constructed a monopoly for Saudi Aramco in its upstream production process. Therefore, the activities of Sinopec and CNPC in this country, arguably, focus mainly on the downstream production. In Kazakhstan, on the other hand, the government has opened up the upstream production process for other oil companies. Therefore, Chinese NOC`s also involve themselves in the upstream production of energy in Kazakhstan. The character of the investments in Saudi-Arabia can be shown by investigating the ‘Yanbu Aramco Sinopec Refining Company’ (YASREF) for Saudi-Arabia. This is a joint venture operation between Sinopec and Saudi Aramco that controls a downstream refinery in Yanbu Saudi-Arabia. For Kazakhstan, this chapter will pay specific interest to the acquirement of a share of the Kashagan oil field for the CNPC, as well as the construction of the new China-Kazakhstan oil pipeline. The aim of this chapter is to analyze the activities of Sinopec and CNPC in Saudi- Arabia and Kazakhstan. To do so, this chapter will try to answer the following sub-question: What are the activities, concerning trade, finance and investments, of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and how have these changed over time and between these countries? In order to answer this question, this chapter will follow the following structure. First, it will discuss the historical endeavors of Sinopec and the CNPC in both Saudi-Arabia

83 and Kazakhstan. It will analyze the volume of trade between China and Saudi-Arabia & Kazakhstan. After that, it will investigate the investments that have been made by Sinopec and the CNPC in the energy sectors of these countries, as well as possible cooperation’s between the Chinese NOC`s and other Chinese financial institutions in Saudi-Arabia & Kazakhstan. After that, this chapter will discuss the motivations behind, and the establishment of the ‘Yanbu Aramco Sinopec Refining Company’ (YASREF) in Saudi-Arabia. This shows the preference of Chinese NOC`s for cooperation in downstream productions in this country. The final section of this chapter will look at the involvement of the CNPC in both the Kashagan oil field in Kazakhstan and the construction of the China-Kazakhstan oil pipeline. These two activities display the recently increased role of Chinese NOC`s in the upstream production of oil in Kazakhstan.

4.2 Trade, Investment & Finance in Saudi-Arabia Trade First, this chapter will analyze the trade between Chinese NOC`s and Saudi-Arabia. While company-specific data on trade with China is non-available, this thesis utilizes the comprehensive value of the crude petroleum imports to the PRC. Figure 4.1 shows the overall value of the total imports from Saudi-Arabia to China and how much of this total value is made up of crude petroleum. The first thing that can be noticed in this figure is the importance of crude petroleum imports for the overall trade relation between Saudi-Arabia and China. The percentage of petroleum imports has been roughly 65-75% of total imports that originate from Saudi-Arabia in the last 15 years (OEC, 2017). This shows the role of petroleum in the trade relationship between the two countries. Besides crude petroleum, examples of other products that China is importing from Saudi-Arabia are acyclic alcohol, refined petroleum, ethylene polymers and cyclic hydrocarbons (OEC, 2017). All of which are oil-based as well. This shows that the trade relationship between Saudi-Arabia and China is primarily based on the import of oil and oil- based products. Interestingly, figure 4.1 also shows a significant drop in the overall value of import and value of petroleum imports in 2016 and a smaller drop in 2008. The latter drop is arguably caused by the financial crisis of 2008. This crisis had a severe impact on the global demand for oil. The drop in 2016 was much larger compared to that in 2008. While the petroleum import in 2012 had a value of over $38 billion USD, this rapidly declined from 2014 onwards, until it reached a value of $14 billion USD in 2016. This decrease originates

84 from the massive declining oil prices around 2015, which have previously been explained in chapter 3. First, the oil price increased substantially between 2009 and 2011 to over $100 USD (IMF, 2019). This generated an overall growth in the value of petroleum imports, as is visible in figure 4.1. After that, in 2015, there was an extensive drop in oil price until it eventually reached a level of less than $50 USD. This also lowered the value of petroleum imports from Saudi-Arabia. Thus, the price of oil significantly influences the overall value of trade between the Kingdom and China.

Figure 4.1: Total value of imports from Saudi-Arabia to China, compared with crude petroleum imports (1995-2017)

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Note: Figure created by author Source: Observatory for Economic Complexity. (2017). What does China import from Saudi Arabia?. Available from: https://oec.world/en/visualize/tree_map/hs92/import/chn/sau/show/2017/

Investments Data on the investments of Chinese companies all over the world is very scarce and hard to find. One of the only sources on worldwide investments by Chinese companies in the energy sector is the ‘China Global Investment Tracker’ by the ‘American Enterprise Institute’ (AEI). This institute started to track the investment activities of China in 2005 and has made this information available in a public dataset. This section is dedicated to analyzing this data on the OFDI flow from China to Saudi-Arabia.

85 One of the primary interest of this thesis is in the investments of Chinese companies in the energy sector of Saudi-Arabia. Figure 4.2 shows the value of these investments compared to investments made in other sectors of the Saudi-Arabian economy. It shows that 37% of the total value of Chinese investments has been in the energy sector. It is, therefore, by far the sector with the largest Chinese investments in Saudi-Arabia. However, the section on the Saudi-Arabian economy in Chapter 3 showed that 90% of all export from Saudi-Arabia is energy. Considering the interest of China in the energy resources of Saudi-Arabia, one might expect a higher percentage for the Chinese investments in the energy sector. The reason for this is outside the scope of this thesis. It, arguably, has to do with the recent diversification program of Saudi-Arabia in the Saudi Vision 2030. This program incentivizes foreign companies to invest in other sectors as well, which may have caused a decline in the percentage of investments in energy.

Figure 4.2: Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019)

Agriculture; 1% Utilities; 7% Chemicals; 6%

Transport; 17%

Energy; 37%

Real estate; 14%

Other; 3% Logistics; 0,60% Metals; 15%

Note: Figure created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

As previously explained, one of the aims of this chapter is to analyze the investments made by both Sinopec and CNPC in the energy sectors of Saudi-Arabia & Kazakhstan. To do so, a broad picture of the number, value and type of these investments must first be provided. Table 4.1 presents this overview by showing all investments made by Sinopec and CNPC in

86 Saudi-Arabia. In total, these companies have invested $9.680 Million USD in the kingdom. This has been done through 24 different investments with an average value of $403 Million USD. It is noteworthy to highlight that table 4.1 shows that Sinopec has a significantly larger number of investments in the kingdom. Out of the 24 investments that show up in the database, 19 originate from Sinopec, while CNPC only invested five times. This shows that Sinopec`s presence in Saudi-Arabia is much larger than that of CNPC. Chen, Shu & Wen (2018) have already argued that Sinopec and Saudi Aramco have historically had an outstanding relationship and that Sinopec is the largest buyer of the kingdoms crude oil. The second interesting point from this table is the type of investments of these Chinese NOC`s in Saudi-Arabia. The far majority (87%) of all investments have been in construction contracts, while there only has only been one investment type and two troubled transactions. This arguably originates from the manner in which Saudi-Arabia is managing its energy sector. As previously discussed, Saudi-Arabia has one NOC (Saudi Aramco), which has a monopoly on the extraction of resources from the oil & gas fields. This monopoly prevents Chinese NOC`s such as Sinopec and CNPC to acquire direct access to these resources. In order to control the direction of energy exports from Saudi-Arabia and increase their potential trade with the kingdom, these NOC`s are forced to focus on the downstream production process. This is mainly done through the construction of refineries, oil platforms and other facilities. Therefore, most investments made by Sinopec and the CNPC have been in the construction sector. The third element that stands out of table 4.1 is the significant increase in investments after the implementation of the BRI in 2013. Between 2005 and 2013, the AEI has recorded seven investments by Sinopec and CNPC in Saudi-Arabia, which averages roughly one investment per year. After the implementation of the initiative, between 2014 and 2019, there have been 17 investments, which is an average of more than three per year. Both the BRI and the Saudi Vision 2030 aim to increase the number of investments by China, in the economy of Saudi-Arabia. Therefore, these development programs supplement each other very well. Table 4.1 shows that this number of investments is increasing over recent years, which arguably displays the effect of the BRI on the activities of Chinese NOC`s in Saudi-Arabia.

87 Table 4.1: Investments by Sinopec and CNPC in Saudi-Arabia (2005-2019) Year Chinese Value Share Transaction Sector Type BRI Entity (Million) size Party

2005 Sinopec $350 45% Aker Chemicals Construction Kvaerner

2008 CNPC $560 Ma'aden Chemicals Construction

2011 Sinopec $100 Aramco Oil Construction

2011 Sinopec $200 Agriculture Construction

2011 Sinopec $130 SABIC Chemicals Construction

2011 Sinopec $3710 38% SABIC Oil Investment refinery

2012 Sinopec $150 Aramco Oil Construction

2014 Sinopec $190 Aramco Oil Construction 

2015 Sinopec $450 Chemicals Construction 

2015 Sinopec $140 Oil Construction 

2015 Sinopec $430 Utilities Construction 

2015 Sinopec $200 Agriculture Construction 

2016 CNPC $330 Aramco Oil Construction 

2017 CNPC $190 Aramco Gas Construction 

2017 CNPC $100 Aramco Oil Construction 

2017 Sinopec $190 Utilities Troubled  transaction

2017 Sinopec $120 Agriculture Troubled  transaction

2017 Sinopec $250 Aramco Gas Construction 

2018 CNPC $560 Aramco Oil Construction 

2018 Sinopec $270 SABIC Gas Construction 

2018 Sinopec $100 Chemicals Construction 

2018 Sinopec $290 Aramco Oil Construction 

2019 Sinopec $270 Aramco Oil Construction 

2019 Sinopec $400 Aramco Gas Construction 

Total $9,680 Value (M)

88 Note: Table created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

Sinopec The most active and influential Chinese oil company in Saudi-Arabia is Sinopec. This company is also the largest trading partner of crude oil and the largest drilling partner for Saudi Aramco (Chen, Shu & Wen, 2018). The value of investments of Sinopec in the energy sector of Saudi-Arabia shows the involvement of the company in the kingdom. Figure 4.3 shows the value of investments of Sinopec compared to those made by CNPC in Saudi- Arabia. In 2019, almost 80% of these investments were made by Sinopec (AEI, 2020). This section will take a closer look at the investments made by this company in Saudi-Arabia.

Figure 4.3: Value of investments by Sinopec and CNPC in Saudi-Arabia (2005-2019)

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Note: Figure created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

According to Dai Houliang, the former chairman of the board of Sinopec, “Sinopec has…taken the countries along the Belt and Road as the priority of our overseas business expansion” (Sinopec, 2019, p. 2). The cooperation with these countries focusses mainly on petroleum trade, refining capacity, engineering services & equipment manufacturing (Sinopec, 2019, p. 2). One of these countries along the BRI, in which Sinopec is highly active,

89 is Saudi-Arabia. Here, the country targets the development of oil and gas production, international trade and refining projects (Sinopec, 2019, p. 2). Figure 4.4 provides a timeline of some of the first, as well as the largest investments of Sinopec in Saudi-Arabia. The first investment of Sinopec in Saudi-Arabia was in 2000 and involved an agreement for an onshore drilling contract. This concerned the installment of a drilling rig, with which Saudi Aramco is able to produce oil. Nowadays, Sinopec has constructed 55 of those drilling rigs in the Kingdom (Sinopec, 2019, p. 6). Four years later, Sinopec and Saudi Aramco established their first joint venture, which focused on the development and production of natural gas. This joint venture acquired the rights for development and exploration of the ‘block B’ gas field in the desert of Southern Saudi-Arabia (Sinopec, 2019, p. 6). Besides this, Sinopec is also an active participant in three other energy-related sectors, which are: chemical-integration projects, infrastructure projects and geophysical prospect projects. While its first chemical-integration project dates back to 2005, nowadays, it has contracted 64 projects within the kingdom (Sinopec, 2019, p. 6). These chemical-integration projects are mainly meant for the conversion of crude oil into ethylene and propylene from which plastic is being made (WoodMackenzie, 2019). This shows, once more, the involvement of Sinopec in the upstream production process of oil in Saudi-Arabia. Interestingly, Sinopec is also investing in infrastructure projects in the Kingdom. Since its first contract in 2008, Sinopec has acquired 35 road and bridge projects (Sinopec, 2019). According to Sinopec, these infrastructure businesses are heavily stimulated by the Saudi government. They argue that transportation is vital for economic development as well as attracting OFDI (Sinopec, 2019, p. 64). Finally, another area in which Sinopec has specialized itself in Saudi-Arabia is geophysical prospect projects. Geophysical prospecting in mining aims to find unexpected elements in the ground that could hinder the production of oil and gas (Hustrulid & Mero, 2017). Therefore, these projects help Saudi Aramco to develop knowledge of the products in the ground and what the best ways are to drill the resources up. In total, these chemical-integration, infrastructure and geophysical prospect projects display the various forms of investment made by Sinopec in Saudi-Arabia. It shows that, in order to increase their energy relationship with the Kingdom, Sinopec is cooperating with the country on every possible level. Furthermore, the largest investment of Sinopec in the Kingdom is the establishment of the YASREF joint venture with Saudi Aramco in 2012. This involves the construction of a world-class refinery in Saudi Arabia. It was the first refining project of Sinopec overseas. This

90 thesis will later go more in-depth on the YASREF joint venture and its impact on the Sino- Saudi energy relationship. Four years after the YASREF joint venture, Sinopec began the construction of a new Middle-East R&D center in Saudi-Arabia. This center focusses on “the research and development of fundamental, forward-looking and applied technology” (Sinopec, 2019, p. 11). The construction of this R&D center, furthermore, shows the many different investments of Sinopec in Saudi-Arabia. Energy cooperation ventures beyond mere trade and involves projects for the production of energy, infrastructure, technological development and refining capacities.

Figure 4.4: Timeline of major investments by Sinopec in Saudi-Arabia

Note: Timeline created by author Source:Sinopec. (2019). Sinopec in Saudi-Arabia. Available from: http://www.sinopecgroup.com/group/en/Resource/Pdf/SinopecinSaudiArabia2019en.pdf

4.3 Trade, Investment & Finance in Kazakhstan Trade The previous section of this chapter has looked at the trade and investments of the Chinese NOC`s in Saudi-Arabia. This section will do the same for Kazakhstan and identify some similarities and differences between the two. The first thing to analyze is the energy trade between the countries, that will be done on the basis of the imports to China that originate from Kazakhstan. Figure 4.5 shows both the overall value of these imports and how much of this is made up of crude petroleum between 1995 and 2017. In general, the two lines follow a fairly similar development. The value of petroleum imports first increased to over $4 billion USD in 2008, while decreasing to $2.3 billion in 2009. After that, the value increased

91 extensively to $8.7 billion USD in 2012. Finally, it dropped back to a value of $530 million (OEC, 2017). Overall the value of petroleum imports from Kazakhstan is only a fraction compared to the imports from Saudi-Arabia. At the height of both countries in 2012, the value from Saudi-Arabia amounted to over $38 billion USD, while being only $8.7 billion for Kazakhstan (OEC, 2017). After that, in 2017, crude petroleum imports from Saudi-Arabia were $18.5 billion, and from Kazakhstan $850 million (OEC, 2017). This shows that the energy trade relation between China and Saudi-Arabia is significantly larger than that of China and Kazakhstan.

Figure 4.5:Total value of imports from Kazakhstan to China compared with crude petroleum imports (1995-2017)

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Note: Figure created by author Source: Observatory for Economic Complexity. (2017). What does China import from Kazakhstan. Available from: https://oec.world/en/visualize/tree_map/hs92/import/chn/kaz/show/2017/

Due to the increasing demand and import dependency of oil in the PRC, as discussed in chapter 2, we would expect to see the overall value of oil import from Kazakhstan to be increasing. However, figure 4.6 shows that there are two drops in this value. The first drop in 2008 is similar to the one in Saudi-Arabia and can, arguably, be explained by the economic crisis in that year. Because of this crisis, global oil demands decreased, which had a negative influence on the price of oil (IMF, 2019). Therefore, the value of petroleum exports also declined. The second drop in value started in 2013 and was much larger than the one in 2008.

92 This thesis has identified two developments that might have contributed to this drop. The first development is the declining oil prices in 2015 and 2016. Similar to 2008, a decline in the oil price will cause the overall value of petroleum exports to decline as well (IMF, 2019). While this might have caused the export value to drop even further, the declining value of petroleum imports already started before the fall of the oil price in 2015. Therefore, another explanation is necessary to resolve why the value started to decline. According to the deputy energy minister of Kazakhstan, Aset Magauov, the explanation can be found in the declining production of oil in oilfields in northwest and southern Kazakhstan (Reuters, 2019). A large number of these fields are being operated by Chinese NOC`s such as CNPC. While oil from these fields was previously exported to China, this was no longer possible due to declining output (Reuters, 2019). Combined with the decreasing oil price, this might explain the drop in petroleum imports from 2013 to 2016. For China, the value of petroleum imports compared to total imports from Kazakhstan is significant. At its height in 2013, crude petroleum amounted to 60% of total imports from the Central-Asian country. Due to previously mentioned reasons, this number finally decreased to 17% in 2017 (OEC, 2017). Next to that, China also imports many other valuable minerals and raw materials from Kazakhstan. These are products such as copper ore, refined copper, ferroalloys and radioactive materials (OEC, 2017).

Investments This section will, as is previously done for Saudi-Arabia, analyze the data from the ‘China Global Investment Tracker’ for the OFDI flows in the energy sector of Kazakhstan. Before we go in-depth on the investments by Sinopec and CNPC in the energy sector, it is useful to first compare the investments in the energy sector with those in other sectors. Figure 4.6 shows the percentage of investment value per sector for all Chinese investments in Kazakhstan combined. This figure shows that energy is by far the most important sector for Chinese investors, as 70% of all investments have been made in this sector. As is previously discussed in chapter 3, energy is the foundation and essence of all relations between the PRC and Kazakhstan.

93 Figure 4.6: Value of OFDI flow from China to Saudi-Arabia per sector (2005-2019)

Transport; 10% Utilities; 0,30% Chemicals; 11% Real estate; 1% Other; 1%

Metals; 7%

Finance; 0,30%

Energy; 70%

Note: Figure created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

Table 4.2 provides an overview of all investments made by Sinopec and CNPC in Kazakhstan between 2005 and 2019. In total, the AEI has recorded 12 investments by these NOC`s, with an average value of $1.783 Million USD and a total value of $21.400 Million USD. When comparing these investments with those made by Sinopec and CNPC in Saudi- Arabia, it is interesting to see that there are significantly fewer investments made in Kazakhstan. However, the investments made in Kazakhstan had a lot higher value. While the average value of investments in the kingdom was $403 Million USD, this number is more than four times higher in Kazakhstan. Overall, the total value of investments is $9.680 Million USD in Saudi-Arabia compared to $21.400 in Kazakhstan. Thus, while the previous section has shown that the trade numbers between the Kingdom and China are much greater compared to those between China and Kazakhstan, Chinese companies invest significantly larger amounts of money in the energy sector of Kazakhstan compared to the energy sector of Saudi-Arabia. There are arguably two differences between these countries that could explain this distinction.

94 The first difference is that the government in Kazakhstan has, since its establishment in 1991, incentivized and supported foreign investments in its economy. Due to the disintegration of the Soviet Union, the government in Kazakhstan became pessimistic about the idea of state-led development (Sabonis-Helf, 2004). Therefore, to create an inflow of capital and boost the economy, the state-class in Astana stimulated the influx of OFDI. Saudi- Arabia, on the other hand, has only recently expressed the aim to become a major destination for foreign investments. This is one of their pillars for the Saudi Vision 2030 and a tool to achieve a more diversified economy. The difference between Saudi-Arabia and Kazakhstan in their stimulation of OFDI is one of the reasons why the amount of Chinese investments is larger in Kazakhstan compared to Saudi-Arabia. The second reason, arguably, is the difference in the management of the energy sector of these two countries. As previously discussed in this chapter, investments by Sinopec and CNCP in Saudi-Arabia have mainly been in construction contracts. It has been argued that this is because of the monopoly that is held by Saudi Aramco in the upstream production process. This has forced these Chinese NOC`s in the downstream production process, which is generally characterized by relatively smaller sized investments. In Kazakhstan, on the other hand, the government has allowed foreign companies in the production of energy resources. As a consequence, many of these oil and gas fields are being operated by a mixture of IOC`s, foreign NOC`s and local Kazakhstani NOC`s. To acquire production rights within these fields requires large sums of investments, which drives up the total value of investments. Next to that, the total value of investments is also increased by the takeover of oil companies in Kazakhstan, such as PetroKazakhstan. Therefore, the absence of monopolies and market freedom within the Central-Asian country has allowed for a greater influx of Chinese OFDI compared to Chinese investments in Saudi-Arabia. While this thesis has argued that the BRI had a positive effect on the number of investments by Sinopec and CNPC in Saudi-Arabia, this is not the case for Kazakhstan. Since the introduction of the BRI, there have been only two investments made by Sinopec, and the latest investments date back to 2014. Furthermore, CNPC`s latest investment is the acquirement of a share in the Kashagan oil field, which was signed on the same trip as the first mentioning of the BRI by Xi Jinping. One possible explanation for this might be that the energy sector in Kazakhstan in recent years has been saturated. When the country gained its independence in 1991, this invoked a rivalry among oil companies in the international energy market for the production rights of the oil and gas fields within Kazakhstan. Nowadays, almost three decades later, this rivalry might have been settled, and the distribution of

95 resources finalized. This might have caused the decreasing number of investments in the energy sector Kazakhstan in recent years.

Table 4.2: Investments by Sinopec and CNPC in Kazakhstan (2005-2019) Year NOC Value Share Transaction Party sector Type BRI (Million) size

2005 CNPC $4200 67% PetroKazakhstan Oil Investment

2006 CNPC $1390 KazMunaiGaz Gas troubled transaction

2007 CNPC $1310 Gas Construction

2009 CNPC $2600 MangistauMunaiGas Gas Investment

2010 Sinopec $1260 Kazakhstan Chemicals Construction Petrochemical

2011 Sinopec $850 Marubeni Oil Construction

2012 CNPC $150 Gas Construction

2012 CNPC $500 KazMunaiGas Gas Investment

2012 CNPC $900 50% KazMunaiGas Gas Construction

2013 CNPC $5300 8% KazMunaiGas Oil Investment National

2014 Sinopec $1.850 Kazakhstan Chemicals Troubled  Petrochemical transaction 2014 Sinopec $1090 50% Caspian Investment Oil Investment  Resources

Total Value $ 21.400 (M) Note: Table created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

CNPC The first Chinese NOC to do business in Kazakhstan was CNPC in 1997 and has, since then, been the most active NOC in the Central-Asian country (Liao, 2019). This is also clear when analyzing the investments of both Sinopec and CNPC in Kazakhstan and compare the values of these investments. Figure 4.7 shows the total value of investments from 2005 and 2019, as

96 well as the portion that belongs to either Chinese NOC. It shows that CNPC has invested significantly more in Kazakhstan than Sinopec. Therefore, this section will look more closely at the activities that CNPC undertook in this country.

Figure 4.7: Value of investments by Sinopec and CNPC in Kazakhstan (2005-2019)

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Note: Figure created by author Source: American Enterprise Institute. (2020). China Global Investment Tracker. https://www.aei.org/china-global-investment-tracker/

Figure 4.8 shows a timeline of all the major and most important activities of CNPC in Kazakhstan. The first of these investments of CNPC in the oil sector of Kazakhstan originates from 1997. In that year, CNPC acquired 60.3% of AktobeMunaiGas (AMG) for $4.3 billion USD (Liao, 2019). This price was believed to be significantly over market price, and the only reason for CNPC to pay this much was because of the financial support they received from the Chinese state to establish this deal (Liao, 2019). It shows the effort of the Chinese state- class to stimulate the acquirement of overseas resources by its NOC`s. Finally, in 2003, CNPC bought an additional 25.1% share in AMG. That same year, the company further increased its equity in the oil sector of Kazakhstan by obtaining 100% of the Texaco-North Bazuchi oil field. Part of the 1997 deal to acquire a large share of AMG was the payment of $320 million USD to the government of Kazakhstan and an agreement to look at the possibility of building a pipeline between China and Kazakhstan (Meidan, 2016, p. 6). While this thesis will

97 analyze the importance of this pipeline more in-depth later, it marked the beginning of increasing energy relations between Kazakhstan and China (Orazgaliyev, 2019, p. 67). One year later, in 2005, CNPC acquired 100% of the shares of PetroKazakhstan. Liao (2019, p. 6) has called this acquisition “the key action that enhanced CNPC’s position in Kazakhstan’s oil sector”. PetroKazakhstan is one of the largest oil companies in Kazakhstan and is involved in the production of energy in thirteen different oil and gas fields (PetroKazakhstan, 2020). While this company was listed in Canada, all its operations were in Kazakhstan. ONGC, which is the Indian NOC, was also interested in the $3.5 billion deal, but finally it was CNPC who won (Liao, 2019, p. 7). This deal included a transfer of a 33% share of PetroKazakhstan from CNPC to KMG to increase the control of the Kazakh government over its own energy sector (Liao, 2019). Three years after the acquisition of PetroKazakhstan, CNPC returned to the market and combined forces with KMG to take over MangistauMunaiGas (MMG) (Meidan, 2016, p. 6). The government of Kazakhstan was required to pay $1.3 billion for a 50% share in MMG. This was made possible by a $5 billion loan of CNCP to KMG (Meidan, 2016, p. 6). During this process, the Chinese EximBank also offered the government of Kazakhstan a loan of $5 billion. It has also been argued that this loan was used as collateral for this deal (Meidan, 2016, p. 6). This would further show the support that the Chinese NOC`s received from the Chinese government. However, the details of this deal remain unclear. After that, in February of 2011, CNPC established another joint venture with KMG to jointly operate the Urikhtau gas field (CNPC, 2020). The Urikhtau field is a large field in North West Kazakhstan. The resources produced in this field are planned to be transported to China through the Kazakhstan- pipeline (OGJ, 2011). Finally, in 2013, CNPC closed the arguably most important deal in Kazakhstan, which involves the acquisition of 8.33% of the shares in the Kashagan oil and gas field (Meidan, 2016, p. 6). The development, importance and specifics of this deal will be discussed more in-depth later.

98 Figure 4.8: Timeline of major investments of CNPC in Kazakhstan

Note: Timeline created by author Source: China National Petroleum Company. (2020). CNPC in Kazakhstan. Available from: http://www.cnpc.com.cn/en/Kazakhstan/country_index.shtml

While CNPC, through the above-mentioned investments, owns a large share of the equity oil production in Kazakhstan, this oil is not all transported through the Kazakhstan- China crude oil pipeline (Meidan, 2016). According to Meidan (2016, p. 6), the final destination of CNPC`s share of the production in Kazakhstan is determined by its subsidiaries. Since these subsidiaries might decide to sell this oil on the global energy market, it is not guaranteed that a higher share in equity oil will increase the energy supply security of China. However, in times of oil scarcity in China, CNPC might be able to apply pressure to its subsidiaries and force them to sell the oil on the Chinese market. Therefore, a higher share of equity oil can, arguably, increase the security of energy supplies.

4.4 Yanbu Aramco Sinopec Refining Company In the previous section on the trade, investments and finance activities of Sinopec and CNPC in Saudi-Arabia, this thesis has argued that, nowadays, a large share of these actions focus on the downstream production process. Since the upstream production process in the kingdom is monopolized by Saudi-Aramco, Chinese NOC`s are forces to focus on downstream activities if they want to increase their access to these resources. One example of this is the ‘Yanbu Aramco Sinopec Refining Company’ (YASREF). This is a joint venture between Saudi

99 Aramco and Sinopec, which includes a new petrochemical refinery in Saudi-Arabia (Yasref, 2020). These two NOC`s have a good relationship with each other. Sinopec is Aramco`s largest trading partner and drilling contractor for Saudi crude oil (Chen, Shu & Wen, 2018). According to Chen, Shu & Wen (2018, p. 372), the first step to the realization of the Yanbu refinery was made by the joint venture for a petrochemical refinery in China`s Fujian. This refinery is a collaboration between ‘Fujian Petrochemical Company Limited (FPCL)’ (in which both Sinopec and the Fujian provincial government hold 50%), Exxon Mobil and Saudi Aramco. Exxon Mobil and Saudi Aramco each have 25% shares in this project while Sinopec 50% (FREP, 2020). The deal between these oil companies was signed in 2007, and the refinery in Fujian became operational in 2009 (Menachery, 2017; Reuters, 2007). This refinery processes almost 300.000 bpd of Saudi crude oil and is the first petrochemical project in China that included foreign companies (Chemicals-technology, 2020). This refinery was arguably the first step towards further cooperation between Saudi Aramco and Sinopec. After the partnership for the Fujian refinery, Sinopec and Saudi Aramco established a new joint venture in 2010 with the aim of building a new petrochemical refinery in Yanbu. Within this joint venture, Saudi Aramco holds 63.5% of the shares and Sinopec the remaining 37.5%. This refinery characterizes the shift in Sinopec`s international operations towards a more active approach since this is the first overseas refinery that it is involved in (Chen, 2017, p. 170). On top of that, the initial investment of $10 billion USD makes it the largest Chinese investments in not just Saudi-Arabia, but even the whole Middle-East (Rakhmat, 2019). The refinery became operational in 2015 and was officially opened on Jan. 10th 2016. The opening ceremony was attended by both President Xi Jinping as well as King Salman (Xinhua, 2018). This shows the importance of this new downstream refinery for the energy relation between China and Saudi-Arabia. The YASREF company is located along the red-sea near Medina. According to the company, it “uses 400.000 barrels per day (bpd) of Arabian crude oil to produce premium transportation fuels, as well as high-value refined products for both international and domestic markets” (Yasref, 2020). This crude oil mostly originates from the Manifa oil field (Al- Sudairi, 2012, p. 12). YASREF mainly produces diesel, gasoline, petroleum coke, pelletized sulfur and benzene (Yasref, 2020). The refinery is one out of the eight refineries and thereby disposes of 14% of the total refinery capacity of Saudi Aramco in Saudi-Arabia (Saudi Aramco, 2017). Financially, the company had a turnover of 75.940 million RMB in 2019, which equals to over $10 billion USD (Sinopec, 2020). This is the largest turnover of any of Sinopec`s joint ventures.

100 The joint venture in Yanbu also shows the importance of the BRI in China`s external energy relations. According to Li Xihong, the representative of Sinopec in Saudi-Arabia, “YASREF corresponds with both countries' development strategies, which is one of the major reasons for its success” (Xinhua, 2018). Similarly, he also said that the Yanbu refinery is a good example of energy cooperation under the BRI (Xinhua, 2018). In chapter 2, this thesis has argued that one of the objectives of the BRI in the Middle-East is to increase Chinese access to the resources in this region. One of the biggest tools to achieve this aim is through investments in the energy sectors of these countries. This also corresponds to the ‘1+2+3 framework model’ of Xi Jinping with Arab states in which the first priority is an increase in energy cooperation. Therefore, this refinery in Yanbu is an excellent example of the kind of investments that are stimulated in foreign energy sectors under the BRI. This joint venture also shows the willingness of both Sinopec and Saudi Aramco to invest in new downstream production facilities. For Saudi Aramco, there are arguably two reasons for building this refinery. First, focusing on downstream production increases the profit of domestic oil production and export. Second, as China`s domestic oil consumption is rising, Saudi Aramco benefits from access to the Chinese market as this will provide for a large export destination for years to come (Reuters, 2018). For Sinopec, on the other hand, the refineries in Fujian and Yanbu provides good opportunities to increase its access to oil from Saudi-Arabia. Both refineries use oil that originates from the kingdom. Sinopec`s control over these facilities also allows it to control the final destination of these products. The quality of the products produced in these refineries is high enough to sell them on European and American markets. However, when the current energy supply to China can no longer satisfy demand, the Chinese state-class might be able to pressure Sinopec and its joint ventures in selling these products on the Chinese market.

4. 5 Development of Kashagan oil field Previously in this chapter, it has been argued that the influx of OFDI in the energy sector of Kazakhstan is highly stimulated and that, therefore, a large number of these oil and gas fields are jointly operated by a mixture of oil companies. A prime example of such an oil field is the Kashagan field. The Kashagan oil field was discovered in 2000 and is considered to be one of the largest discoveries of natural resources in the last 40 years (NCOC, 2020). It is an offshore field that lies 80km from the coast of Atyrau and is estimated to have approximately 9-13 billion barrels of recoverable oil. The field is being operated by the ‘North Caspian Operating

101 Company’ (NCOC), which is a joint venture between a number of oil companies. These are KazMunayGaz (16.9%), Shell (16.8%), Total (16.8%), Eni (16.8%), ExxonMobil (16.8%), CNPC (8.3%), and Inpex (7.6%) (NSEnergy, 2020). While this field holds a large number of recoverable reserves, there have been a number of challenges and setbacks that have delayed the production of oil and increased the costs of development (NCOC, 2020). These challenges are mostly due to the harsh environmental conditions that occur in the North-Caspian region. Temperatures can reach 40°C in the summer and -35°C in the winter. Therefore, the water in this part of the Caspian sea is frozen for roughly five months a year (NCOC, 2020). On top of that, the oil is located at a depth of 4.200 meters and is mixed with high levels of both sour gas and carbon dioxide (NCOC, 2020). These challenges have significantly increased the cost of this program. Therefore, the investment risk for the members of the consortium has increased as well. The case of Kashagan is arguably well suited to describe the energy relationship between China and Kazakhstan. One of the reasons for this is the geopolitical game over the shares of the consortium and the subsequent influence of the governments of China and Kazakhstan in this struggle. In 2003, BG wanted to sell its 16.33% share in the consortium and reached a deal with CNOOC and Sinopec. However, the other members of the consortium used their pre-emptive rights to pre-buy the shares and blocked the deal with the Chinese NOC`s (Campaner, & Yenikeyeff, 2008, p. 8). Arguably, they wanted to prevent China from becoming an extra export destination for Kashagan oil (Liao, 2019). Eventually, half of BG`s shares went to the other members of the consortium, and half went to the Kazakh government. Ten years after that, ConocoPhillips also announced that it wanted to sell its shares of the Kashagan consortium. ONGC, the Indian NOC, showed interest and reached a deal to buy the shares for $5 billion USD. However, the government of Kazakhstan blocked the deal and used its pre-emptive rights (Gordeyeva, 2013). After that, during his visit to Kazakhstan, Xi Jinping struck a deal with Astana to sell the 8.33% of the consortium, that ConocoPhillips eventually sold to KMG, to CNPC for $5 billion USD. Under this deal, CNPC would also pay for the development of the second phase of the oil field, the cost of which is estimated at around $3 billion USD. This deal has been the biggest and most consequential deal of CNPC in Kazakhstan (Meidan, 2016, p. 6). As a consequence, CNPC is now a shareholder in a large project that will likely produce high quantities of natural resources in the future (Meidan, 2016, p. 6). It has, therefore, significantly increased the access of CNPC to the oil and gas in Kazakhstan.

102 There are three main reasons why this deal is worth highlighting and arguably characterizes both China`s broader search for energy supply security and the energy relationship between Kazakhstan and China. First of all, it shows that, despite the privatization and free-market mechanism in the energy sector of Kazakhstan, the state-class still has significant influence over the sector. The government used its rights to block the deal with the Indian NOC and bought the shares in the consortium for Kazakhstan. This shows that when geopolitical interests are involved, the Kazakh government is willing to increase its control over the energy sector. Second, the involvement of the Chinese government in the deal shows the support that the Chinese NOC`s receive in their overseas activities. Similar to the argument made in chapter 2, this displays the while the autonomy of these NOC`s has slightly increased in recent years, they are still heavily backed by the Chinese government. This deal shows that the is willing to put pressure on foreign governments in order to support the overseas activities of their NOC`s. Finally, the theoretical framework of geo-political economy, which is used in this thesis, is also interested in analyzing the interaction between the government and market forces within both libertarian and authoritarian societies. This deal is, arguably, an excellent example of how market forces like companies are transformed into tools that operate in the interest of the state in authoritarian societies. The Chinese state-class supports NOC`s like CNPC because they operate in the interest of the state. The acquirement of overseas resources as in the Kashagan oil field benefits the national energy supply security of the PRC. The resources within Kazakhstan are better accessible in times when oil supplies can no longer meet demand in China.

4.6 Kazakhstan-China oil pipeline As is previously discussed, a large share of about 20% of the energy resources in Kazakhstan is owned and controlled by Chinese NOC`s. CNPC, with ownership in a number of oil and gas fields in Kazakhstan, is the most influential foreign NOC within the country. However, the difficulty in the energy relation with Kazakhstan lies, arguably, not in the access to the resources, but in the transportation of these resources to the PRC. Kazakhstan is a land-locked country, which makes it impossible to transport oil and gas via ships and requires the use of pipelines. To overcome this problem, CNPC and KMG established a joint venture in 2004 with the aim of building a new crude-petroleum pipeline between Kazakhstan and China (KCP, 2020).

103 The objective of this pipeline was to transport crude petroleum from Western Kazakhstan, near the Caspian Sea, towards the Dushanzi oil refinery in the province of China, which is owned by CNPC (Hydrocarbons-Technology, 2020). The construction of the pipeline was divided into two different phases to cover this large area. The first phase was the building of a 448 km pipeline from Atyrau, in the west of Kazakhstan, to Kenkiyak. This phase was completed at the end of 2003. The second phase included the joint venture between CNPC and KMG and comprised of the construction of two parts of the oil pipeline (KCP, 2020). The first section is the pipeline from Atasu in Kazakhstan to Alashankou in China. This section of the pipeline is 965 km long and was completed at the end of 2005 (Hydrocarbons-Technology, 2020). Finally, the last section involved the construction of a 761 km long pipeline from Kenkiyak to Kumkol. Construction of this pipeline began in 2007 and was finished in 2009 (Hydrocarbons-Technology, 2020). Together, these three sections of oil pipeline connect the oil and gas fields in the West of Kazakhstan with the energy market in China. The Kazakhstan-China crude oil pipeline has an estimated capacity of 10 million tons of crude petroleum per year (KCP, 2020). According to CNPC (2020), the annual oil imports originating from this pipeline has exceeded the estimated capacity for the past five years. In total, the pipeline has transported more than 75 million tons of oil (CNPC, 2020). The construction of the pipeline has cost approximately $3 billion USD (Hydrocarbons- Technology, 2020). The required capital for this pipeline has been paid by a mixture of both the CNPC and KMG, combined with a $600 million loan by CNPC from JP Morgan (Rakmetova, 2006). Under the rules of the joint venture between the two NOC`s, they both have priority in operating the pipeline. However, the CNPC has the responsibility to deliver the oil to the oil pipeline (Rakmetova, 2006). For both China and Kazakhstan, the development of the Kazakhstan-China crude oil pipeline was of strategic and geopolitical importance. For Kazakhstan, this was the first outgoing pipeline that did not pass a third country and could deliver directly to the market (CNPC, 2020). When the country first gained its independence, all of the pipelines running through Kazakhstan were controlled by Russia. Because Kazakhstan is a land-locked country, this limited the possibilities of the Central-Asian country to export its energy (Kennedy, 2010, p. 119). Therefore, the only options Kazakhstan had were to transport through these Russian controlled pipelines, by train or over the Caspian sea towards the BTC pipeline that connects Azerbaijan with Europe (O`Neill, 2014, p. 153). The Kazakhstan-China pipeline offered Kazakhstan a new transportation route for its oil as well as a new export market to trade with.

104 Similarly, for China, this pipeline has also been of significance. The Kazakhstan- China crude oil pipeline was the first transnational pipeline of the PRC (Blinick, 2007). Although the pipeline can only satisfy a fraction of the total Chinese energy demand and has a limited direct influence on the energy supply security of China, Blinick (2007) has argued that the pipeline characterizes two features of China`s current quest for energy security. First, it shows the Chinese effort to acquire as many overseas resources as possible and create transport routes to direct these resources towards the PRC. Second, it is one of the attempts of China to decrease its import dependence on the Middle-East and overcome the ‘Malacca Dilemma’ (Kumar & Chatnani, 2018). The largest share of oil imports to China is transported through the ‘Strait of Malacca’. This makes the strait a strategically weak point for the energy supply of China. It can be easily blocked, for example, in the case of a military conflict. To ensure its energy supply security in the case of such a blockade, China has to look for ways to diversify its energy import routes. The Kazakhstan-China crude oil pipeline is an excellent example of such a route (O`Neill, 2014, p. 153). Therefore, this pipeline is arguably a good example of activities by Chinese NOC`s in Kazakhstan that aim at increasing the energy supply security of China (Orazgaliyev, 2019, p. 67).

4.7 Conclusion The objective of this chapter was to analyze the trade and investment activities of both Sinopec and CNPC in Saudi-Arabia and Kazakhstan and investigate how these activities contribute to the energy supply security of China. It aimed to answer the following question: What are the activities, concerning trade, finance and investments, of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and how have these changed over time and between these countries?. In order to answer this question, the chapter first analyzed the amount of trade between China and Saudi-Arabia & Kazakhstan. For both countries, the value of crude petroleum imports went up until 2008 and slightly declined in 2009 due to the global economic crisis. After that, imports from both countries reached their top in 2012 with $38.6 billion for Saudi- Arabia and $8.7 billion for Kazakhstan. The value of imports from Kazakhstan started to drop in 2013 and 2014. This was arguably due to decreasing oil output from the Chinese owned oil fields in Kazakhstan and falling global oil prices in 2015 and 2016. In the case of Saudi- Arabia, the value of petroleum imports dropped drastically in 2016, also due to the rapidly declining oil price at that time.

105 Investments in Saudi-Arabia are mostly made by Sinopec. Sinopec is the largest trading partner and drilling contractor of Saudi-Arabia. The majority of these investments are construction contracts that enable the construction of new facilities and refineries. One such refinery is the YASREF refinery, which is a joint venture between Sinopec and Saudi- Aramco. This refinery, that processes Saudi oil which can be transported to China, arguably characterizes the investments of Sinopec in the Kingdom. Through these forms of downstream investments, the Chinese NOC`s, despite the monopoly of Saudi Aramco, can still increase their access to the resources in Saudi-Arabia. In Kazakhstan, on the other hand, most of the trading and investment activities of Chinese NOC`s are done by CNPC. Examples of these investments are the shares in the Uzen and Kumkol energy fields, the takeover of PetroKazakhstan and the large deal for the shares in Kashagan. This oil field is one of the largest discoveries in the past 30 years and has 9-13 billion barrels of recoverable oil. The deal, which included $5 billion USD for 8.33% of shares, was made possible by Xi Jinping. This shows the support Chinese NOC`s still receive from their government in the overseas activities. Furthermore, to transport this oil, CNPC has established a joint venture with KMG to construct a new oil pipeline between Kazakhstan and China. The Kazakhstan-China crude oil pipeline provides land-locked Kazakhstan with a new export possibility for their oil. The pipeline also characterizes China`s efforts to decrease its import dependency on the Middle-East and the strait of Malacca and thereby enhances the energy supply security of the PRC. Finally, when we compare the activities of Sinopec and CNPC in Saudi-Arabia to the activities in Kazakhstan, it is interesting to observe the differences between them. These differences arguably originate from both the size of the energy sector in each respective country as well as the management of the sector by the government. The trade relation between Saudi-Arabia and China is, for example, much larger than the trade relation between Kazakhstan and China. In 2012, the value of crude petroleum imports from Saudi-Arabia was eight times larger than the imports from Kazakhstan (OEC, 2017). However, when we look at investments, the total value of investments from CNPC and Sinopec in Kazakhstan between 2005 and 2019 is twice as high in Kazakhstan compared to Saudi-Arabia. On top of that, while investments in Saudi-Arabia focus mainly on the downstream production process, in Kazakhstan, they target the upstream production. Arguably, this is because of the monopoly of Saudi Aramco to operate in the oil fields in Saudi Arabia, while investments in Kazakhstan are highly supported and stimulated.

106 Overall, this shows that the Chinese NOC`s adapt and transform their activities in accordance with the country in which they operate. Increasing their access to overseas resources through which they enhance China`s energy supply security remains the aim of these NOC`s. However, the actions that they take to do so differs greatly per country.

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108 Chapter V Geopolitics and Geo-economics in the Middle-East and Central-Asia

5.1 Introduction In the previous chapters, this thesis has discussed the increasing energy demand of China, and the institutions and policies of the PRC to satisfy this demand. It has also analyzed the energy relationship of China with Saudi-Arabia and Kazakhstan, with a focus on the investment and trade activities of Sinopec and CNPC in these countries. So far, this thesis has mainly emphasized the increasing energy relations with these resource-rich countries and highlighted the opportunities these countries can provide for the energy supply security of China. However, there are also a number of challenges that can undermine and impede these energy relations. These challenges will be subdivided into two parts. The first part will discuss the domestic challenges within these countries. These domestic challenges can be classified as either socio-economic, social responses and developments in the energy sector. The socio- economic challenge refers to the authoritarian state-market complex in both Saudi-Arabia and Kazakhstan. The heavy dependence on oil export for these states is a cause for instability as it invokes corruption and nepotism, as well as causing problems in cases of declining oil prices. Challenges among the social responses refer to the popular opinion among Kazakhs of the growing influence of China in their country. A large part fears the so-called ‘neo- imperialistic’ activities of China and perceives the PRC as a threat to the sovereignty of Kazakhstan. On top of that, Kazakhs disagree with the Chinese way of dealing with the Uyghurs problem in Xinjiang. Finally, it will shortly analyze challenges in the energy sectors of Saudi-Arabia and Kazakhstan. For Saudi-Arabia, this mostly refers to the increasing domestic consumption of energy, which might damage its energy exports. In the case of Kazakhstan, as is discussed in chapter 4, some oil fields in Kazakhstan that are owned by Chinese NOC`s are decreasing in their oil output. This has decreased the energy export towards China in recent years and damages the energy supply security of the PRC. Whereas the first part will analyze domestic challenges, the second part of this chapter will investigate the geo-economic and geopolitical dynamics that influence the energy relationship between China and Saudi-Arabia & Kazakhstan. Interestingly, the establishment and implementation of the BRI has changed traditional geo-economic and geopolitical power relations in both these countries. As China has increased its activities in Central Asia and the

109 Middle-East as part of the BRI, the increased influence of China has affected the projection of power of other nations in these regions. In Central-Asia, the rivalry over influence and access to the resources among the US, Russia, China and the EU has been called the ‘new great game’. The BRI is, arguably, increasing China`s access to the region, at the cost of the influence of the other major actors. Similarly, for the ME, the BRI provides large opportunities to attract OFDI and develop & diversify the economies in the ME. Together with the vastly increasing energy market in China, this has caused Saudi-Arabia to reorient its energy exports eastwards. However, Saudi-Arabia`s biggest rival, Iran, also plays a crucial role in the BRI. As both countries are necessary to achieve maximum benefits from the BRI, this might force China to play a more active role in the rivalry between Saudi-Arabia and Iran. Together, the objective of these two parts is to identify and capture the main domestic, geo-economic and geopolitical challenges that can influence the energy relations between China and Saudi-Arabia & Kazakhstan. To do so, this chapter will first answer the following question: What are the domestic challenges for the energy relationship between China and Saudi-Arabia & Kazakhstan?. After that, the second question that will be answered is: What are the geopolitical and geo-economic dynamics within the Middle-East and Central-Asia, and how do these affect the power projection of China in these regions? To answer these questions, this chapter will first shortly describe and analyze the above mentioned domestic challenges. It will, for both Saudi-Arabia and Kazakhstan, investigate the risks and threats and discuss to what extent they might endanger the energy supply security of China. After that, the second part of this chapter will look at the geo-economic and geopolitical power dynamics in the Middle-East and Central Asia. It will analyze how these dynamics have changed after the implementation of the BRI and the increased activities of China in these regions.

5.2 Domestic challenges for the Sino-Saudi & Sino-Kazakhstan energy relations Saudi-Arabia The first domestic threat for the energy interest of China in Saudi-Arabia is the organization of leadership in the Arab country. The kingdom can be characterized as a patrimonial rentier- state. Patrimonialism refers to a political system that is characterized by 1) the existence of a network of patron-client relations, 2) in which rule is based on a personal basis and 3) in which the authority of the leadership is based on their traditional status (Amineh & Crijns- Graus, 2018, p. 169). It is this form of leadership that invokes nepotism and corruption. This combination of a centralized power structure and corruption is detrimental to the domestic economy of the country. Poor economic development, in turn, can act as a catalysator of

110 social unrest, which threatens the stability of the country (Amineh & Crijns-Graus, 2018, p. 170). Overall the structure of leadership and the configuration of power between the state, society and market creates instability, which could threaten the energy export towards China. Another challenge for the energy relationship between China and Saud-Arabia, and the energy export of the kingdom as a whole, is the rapidly increasing energy consumption of the kingdom. From 2000 until 2016, the consumption has more than doubled from 5.100 quad btu to 10.465 quad btu (EIA, 2020). This is also noticed by Partrick (2016, p. 32), who argues that the increasing domestic demand is the key weakness of Saudi`s hydrocarbon sector. According to him, consumption in the kingdom will outpace the increase in renewable energy and gas production and therefore harm the oil export of the country (Partrick, 2016, p. 32). This has the possibility to endanger Saudi`s position as the largest oil-exporting country. Finally, one of the biggest issues for the stability of the kingdom is its dependence on the oil price. As discussed in chapter 3, the oil revenue of the country constitutes 70% of total state revenue and 20% of the GDP. This makes the country extremely reliant on its energy exports. When oil prices drop, such as in 2016, Saudi-Arabia is no longer able to pay for its expenses, which forces it to lend money. While oil-exporting countries benefit from high oil prices, oil-importing countries, such as China, favor low oil prices. This allows China to pay less for its oil imports. However, the PRC also benefits from stability in the kingdom and, therefore, from balanced oil prices. If oil prices drop too low, this endangers the financial stability of Saudi-Arabia, which would also have a negative impact on the energy exports to China. Thus, volatile oil prices can definitely be considered a threat to the energy relationship between China and Saudi-Arabia.

Kazakhstan One of the large problems China is facing in its (energy) relationship with Kazakhstan is the social responses that emerge among its population. While the elites in the Central-Asian country are deeply pro-China, support further economic integration with China and endorse the implementation of the BRI in the region, this optimistic sentiment is not shared among its citizens (Le Corre, 2019). A large share of the population in Kazakhstan fears the neo- imperialistic character of the PRC. They argue that, through the economic activities, China is gaining ground and influence in Kazakhstan. This goes against the independence and sovereignty of Kazakhstan that the people so deeply desires to maintain. Examples of how these activities can constitute a danger for Kazakhstan are the migration of Chinese workers to Kazakhstan and the import of Chinese products. The influx of migrants is taking away jobs

111 for the local population, and the products replace and endanger the local industries in Kazakhstan (Burkhanov & Chen, 2016, p. 2132). Therefore, popular sentiment in the country is in favor of deepening relations with the West at the cost of China (Le Corre, 2019, p. 5). According to Le Corre (2019, p. 5), only around 20% of the population in Kazakhstan is positive about the BRI program, 30% remains neutral, and almost 50% is negative to very negative. This goes to show the negative opinions of Kazakhs towards the increased relations with China. Besides the fear for neo-imperialistic tendencies, another development that invokes anxiety among Kazakhstan`s citizens is the violent repression of Uyghur Muslims in the Xinjiang province, at the border with Kazakhstan. A large share of these Uyghurs nowadays are detained in, what China calls, ‘re-education camps’. There are two main reasons for China to step up against the Uyghur minority in the region. First, a small number of Uyghurs have expressed their wish to establish an autonomous state in Xinjiang, independent of China (Davis, 2008). Second, the Uyghurs are suspected of having carried out terrorist attacks in the Xinjiang province, at the cost of Chinese lives (Davis, 2008). In the last couple of years, the international critique against these re-education camps has increased. Nowadays, this critique is expressed by both Muslim countries as well as Western countries. However, the government of Kazakhstan has remained fairly silent about the activities of China and only occasionally expressed its concerns about the situation, even though the majority of the Kazakhs is Muslim, and the country also has a small minority group of Uyghurs (Ludwig, 2019). On the other hand, the population of Kazakhstan is increasingly upset about the treatment of their fellow Muslims and Uyghurs in China. There have been protests in Kazakhstan that have expressed this feeling and called for the release of the detained Uyghurs (Ludwig, 2019). This further displays the aversion of the population in the Central-Asian country against China, and Chinese involvement in the region. Although it is hard in authoritarian countries, such as Kazakhstan, for this aversion to reach the state- class, it is not impossible. A good example of this is the proposed changes to the land law in Kazakhstan. Heavy protest emerged as a result of this amendment since it was considered a pro-China change. Because of these protests, the changes were revoked by the government (Le Corre, 2019, p. 3). This shows that even in authoritarian societies, there are certain limits to the power of the government, and the beliefs of the population have a serious impact on policies. Therefore, the negative attitude of Kazakhstan`s citizens against China is a genuine issue that could endanger further economic ties.

112 While the social responses of the Kazakhs is a possible challenge for the (energy) relationship in the future, another challenge has already had its impact on the energy relationship. As is previously discussed in chapter 4, since the peak in 2013, the oil export towards China has decreased from 11.8 million tons to just 1.3 million in 2018. According to Deputy Energy Minister Aset Magauov, in an interview with Reuters, this is due to the oil production of some of the oil and gas fields in Kazakhstan (Reuters, 2019). These oilfields, that are largely operated by Chinese NOC`s, are declining in their output (Reuters, 2019). Therefore, these NOC`s produce less oil and can also export less oil back to the PRC. Although the declining oil production has definitely proved itself to be a challenge for Kazakhstan`s oil exports to China, Magauov also mentioned that the country is determined to change this trend in the second half of 2020 (Reuters, 2019). From then on, they are determined to export at least 6-7 million tons to China.

5.3 Geopolitics and Geo-economics in the Middle-East This section will analyze the geopolitical and geo-economic actions of the large powers within the Middle-East and the external powers that exert influence over the region. Arguably, the main actors within the ME are Israel, Saudi-Arabia, Turkey, Iran, and, to some extent Egypt. The external actors in the ME are the US, the EU, Russia and China. Entire books can and have been written about the geopolitical dynamics of these actors in the Middle-East. While the Middle-East is such a complicated region with many diverging interests, it is outside the scope of this thesis to provide an exhaustive overview of the geopolitics and geo- economics in the region. This thesis will focus on those dynamics that arguably have a large impact on the energy relationship between China and Saudi-Arabia. These are: the inherent instability of the region and its protracted conflict, the involvement of the above mentioned external actors in the region, the rivalry between Saudi-Arabia and Iran, and the historical alliance between the US and Saudi-Arabia. While this section looks at the geopolitical and geo-economic actions of the actors present in the ME, it is important to first provide a clear definition of these concepts. Geopolitics refers to the competition among countries for their security and the struggle for influence in other regions of the world. Traditionally, scholars that are concerned with the security of the state were realists. Their notion of security was small and included almost exclusively the military confrontations between countries. However, an increasing number of scholars nowadays are handling a much broader range of what is covered by the term security. This includes subjects as poverty, inequality, environment degradation & health (Amineh &

113 Yang, 2018, p. 24). As is discussed in the theoretical framework of this thesis, energy supply is also included as a security issue. The presence of a sufficient amount of energy supply is a prerequisite for economic development. In the global capitalist society of today, states can`t survive without economic development. Thus, the sufficient supply of energy is crucial for the durability and the welfare of the state and thereby can be defined as a security issue. The second concept of geo-economy refers to the trade, finance and investment activities of nations in other regions around the world. These economic activities are being pursued for political benefits. For example, this thesis discusses the activities of China`s NOC`s in Saudi- Arabia and Kazakhstan. While one objective of these companies is to make as much profit as possible, arguably, the most important aim for these state-owned businesses is to acquire access to the energy resources in these countries. In doing so, they enhance the energy supply security of China, which enables the countries economic development. This is a clear example of the use of geo-economic tools as the PRC is using the economic power of these NOC`s in service of national security issues. The theoretical framework of geo-political economy considers both geopolitics and geo-economics to be closely linked to each other and inseparable. Both are tools of the state to project their power in other regions in the world and enhance their control, access and security in these places. Most of the time, this is done by a combination of geopolitics and geo- economics. While some experts would argue that geopolitical and geo-economic tools are deployed for either political or economic motives, in reality, it is nearly impossible to separate these two. Geopolitics can have an impact on the economic opportunities of a country and vice versa. Increasing diplomatic relations, for example, can enhance the possibility of controlling capital flows in these countries. The other way around, large volumes of trade invoke trade dependence, which boosts the political position of one country over the other. In essence, both geopolitical and geo-economic tools are meant to increase the projection of power of one state over the other. A relevant and clear example of how geopolitics and geo-economics are inseparable and supplement each other is the implementation of the BRI by the PRC. This project stimulates economic activities of SOE`s towards countries along the BRI. This enhances the control of Beijing over the capital flows to these countries and increases its influence over them. This is done for a number of political and economic reasons. It, for example, boosts the access to foreign energy resources, creates new export markets for China and shows the ambition of the PRC for a new regional order. Thereby, the BRI is both a geopolitical as well as a geo-economic tool for the power projection of China in other regions in the world.

114

Instability in the region The Middle-East is an inherently unstable region, with several weak or failed states and a number of different conflicts. These conflicts are case-specific and require contextual analysis to fully understand and comprehend. However, this section will focus on two elements that are, arguably, very influential for the instability of the region and play a big part in all of the conflicts. These are the Western interest and actions in the region and the lack of a regional order in the Middle-East. The first factor that will be discussed as a driver of instability in the region has been the historical and contemporary interference of Western powers in the region. This already started in the nineteenth century when Western Europe started to expand its capitalistic and imperialistic tendencies to the Middle-East (Hinnebush, 2003, p. 14). They developed a core- periphery relationship with the Middle-East and suppressed the political order of the region. While most Middle-Eastern countries gained independence in the first half of the twentieth century, the peripheralization by the West did not stop. A combination of the strategic location, the presence of oil resources and the establishment of Israel has provided the West, as well as the USSR, with enough interest to remain involved in the region. Recently, Kamrava (2017, p. 5) has argued that the US and Britain are becoming less active in the Middle-East. While they still have a large military presence, they seem less determinant to influence the outcome of these conflicts. Similarly, Kamrava (2017, p. 11) argues that the Russian activities in the Middle-East have also not been influential in shaping the political outcomes of the conflicts in this region. They are mostly concerned with preserving the status quo in the region and thereby prevent the spread of international terrorism to its borders (Kamrava, 2017, p. 11). On the other hand, the developing economic relations and commercial interest of China with the region have increased China`s presence in the Middle-East. This has even further intensified after the establishment of the BRI in the region, which has expanded Chinese interest even further. Since China is mostly concerned about its economic relations, the country benefits from stability in the region. However, the PRC is reluctant to deploy both political or military capabilities in the region and only wishes to mediate in conflicts through its diplomatic relations (Kamrava, 2017, p. 10). The second factor that has arguably contributed to the instability is the lack of a regional order. There are a number of actors in the region that aim at exerting their dominance and establishing a new order in the Middle-East (Kamrava, 2017). These countries are Saudi- Arabia, Turkey, Israel, Iran, and, to a lesser extent Egypt. However, none of these actors have

115 been able to dominate in the region, which resulted in a number of rivalries and conflicts between them. These conflicts are often being fought in so-called proxy wars within the failed states of the ME. These states are Yemen, Syria, Libya, Lebanon and Iraq (Kamrava, 2017, p. 12). In all of these countries, the powerful regional countries, as well as external countries, are actively involved and support different sides in the conflict through military or economic support. Thereby, they are exploiting already existing domestic cleavages and conflicts in order to gain influence in the region. This furthermore facilitates the instability of the Middle- East.

Saudi-US alliance One of the most important and influential alliances that have existed in the Middle-East is that between Saudi-Arabia and the US. As discussed, Saudi-Arabia is arguably the most stable and powerful regime within the region, while the US is still the most dominant country in the world, as well as an active actor in the Middle-East. This makes the strategic alliance between these countries so influential for the geopolitics in the Middle-East. The warm bilateral relationship between the two countries has been the result of the shared interest between the states (Long, 2019). After WWII, the US realized that their economic and military capabilities were reliant on access to oil resources. Saudi-Arabia was one of the countries that could provide them with sufficient energy resources in the future. On top of that, the USA benefits from a strong ally in the Middle-East. An ally, such as Saudi- Arabia, makes it easier to project power onto the region and assert their dominance. Furthermore, after WWII, Saudi-Arabia was worried about the increasing influence of the Soviet Union in the region. During the Cold War, countries around the world were forced to choose between the capitalist in the United States and the communists in the USSR. The Saudi`s recognized that they had more shared interest with Washington, compared to Moscow, and chose to cooperate with the US (Gause, 2016, p. 116). However, since a number of years, some of these foundations for mutual interest have disappeared. The first example of this is the Cold War. This rivalry between the US and the Soviet Union brought the US closer to a number of unlikely allies such as Saudi-Arabia. The kingdom also wanted to contain the communist tendencies of the USSR and joint forces with America to do so (Gause, 2016, p. 115). However, the end of the Cold War and the disintegration of the USSR has removed the communist threat. Similarly, the threat of Saddam Hussein also disappeared after the start of the Iraq war in 2003. Before that, Saudi- Arabia had to be prepared for a possible military confrontation with Iraq. Finally, and crucial

116 for the relationship between Saudi-Arabia and America, the US is no longer dependent on oil from Saudi-Arabia to fuel its domestic demand. In recent years, the US has deployed a strategy that includes the massive production of domestic shale oil and gas. Therefore, the country became the largest producer of natural resources in the world and is no longer dependent on imports for its energy supply security. This has damaged the relationship of the US with Saudi-Arabia since the entire American energy market disappeared (Gause, 2016, p. 115). Next to these developments, there have also been a number of new issues, in which Saudi-Arabia and the US have diverging interests. An example of this is the difference in opinion between the US and the kingdom on the war in Yemen. While the US wants to establish peace in the war-torn country, Riyadh demands the total disarmament of the Houthi rebels (Aghamohammadi, 2018, p. 607). Similarly, while the US wants to mediate in the conflict between Saudi-Arabia and Qatar, Bin Salman refuses to cooperate with Qatar and resolve the conflict (Aghamohammadi, 2018, p. 607). Another shift in the relations between Saudi and the US has been the murder of the journalist Khashoggi. Whereas China seemingly does not care about this murder, Washington has clearly stated its discontent and aversion towards this murder (Aghamohammadi, 2018). While the US senate has declared that it founds Bin Salman responsible for the murder, he himself replied that the US should not interfere in the domestic matters of the kingdom (Hubbard, 2018). A final point of contention between Riyadh and Washington is the rapprochement of the latter with Tehran. While this chapter will discuss the rivalry between Iran and Saudi-Arabia more in-depth later, the establishment of the Iran deal and alleviation of sanctions on Iran by the US damaged its relationship with Saudi-Arabia (Mabon, 2018). To conclude, whereas their relationship was initially built on mutual interest and interdependence, it seems like the US dependence on Saudi-Arabia has significantly declined in recent years. It no longer needs Saudi-Arabia for its energy imports due to its own production of oil and gas, and they nowadays share less common goals. Decreasing US-Saudi relations have, arguably, a possible impact on the relationship between Saudi-Arabia and China. With its increasing energy demand, China provides a good alternative for the American energy market. The PRC is already the largest energy export country for oil from Saudi-Arabia. On top of that, China is intensifying its economic and diplomatic relations with the Middle-East through the BRI. Saudi-Arabia was previously highly dependent on the West, and mainly the US for its political support as well as its economic relations. However, China, because of its rising import dependence and enhanced overseas activities exemplified by the

117 BRI, is providing the kingdom with an alternative and decreases the dependence of Saudi- Arabia on the United States.

Saudi-Iranian rivalry As is argued before, the lack of a regional order in the Middle-East is a cause for conflict among the powerful actors in the region. Two actors that fight out such a rivalry are Iran and Saudi-Arabia. On the surface, this clash seems to be a sectarian conflict, since, in most instances, Saudi-Arabia supports Sunni Muslims while Iran supports Shia Muslims. This Sunni/Shia divide is visible in Iraq, Yemen and Syria. However, it has been argued that such a description of the conflict is an oversimplification since there are a lot more sides to this conflict (Cooper, 2012). Rather than a sectarian conflict, the rivalry is arguably caused by regional instability and the goal of both countries to establish a new order in the Middle-East (Keynoush, 2016). As China`s objective is to maintain good relations with both Saudi-Arabia as well as Iran, this section will analyze how China`s ties with Iran are influencing its relationship with Saudi-Arabia. Iran and China are historically close allies, as well as good trading partners. China is one of the largest traders with Iran (MacGillivray, 2019, p. 15). The diplomatic relations between the two countries already date back to 1971 when Iran recognized the PRC as the legitimate government of China (Zavarah & Barzoki, 2018, p. 709). Both Iran and Saudi- Arabia play a crucial role in the success of the BRI. Saudi-Arabia is, after Russia, the largest oil exporter to China. On top of that, the country is in a key location as it can provide China easier access to the European and African markets (Valentin, 2019). Iran is also an important country for the export of energy to China. In 2017, the country was the sixth-largest oil exporter of China (OEC, 2017). On top of that, Iran has the fourth-largest oil reserves in the world and the second-largest gas reserves (Kamel, 2018, p. 85). Iran also has a strategically important location in the BRI (Conduit & Akbarzadeh, 2019). The country lies at an intersection of the Middle-East, Central Asia and South-Asia, while also being connected to the BRI by both the ‘Silk Road Economic Belt’ and the ‘Maritime Silk Road’ (Kamel, 2018, p. 85). Overall, to make the BRI a success, China has to maintain good diplomatic and energy relations with both Saudi-Arabia and Iran (Ehteshami, 2018, pp. 393-394). To do so, the PRC, arguably, is forced to play an increasingly large role in the conflict between Saudi-Arabia and Iran, and contain and reduce the rivalry between these nations (Ehteshami, 2018, pp. 393- 394). To prevent antagonizing the other party and endangering its energy relationship with

118 one or the other, China has to find and uphold a balance between the two countries. In recent years, multiple experts have discussed whether this balance is shifting in favor of Sino-Saudi or Sino-Iranian relations. On the one hand, Zavareh & Barzoki (2018, p. 709), argue that Iran is winning the competition over the Chinese market. China is aiming to enhance its energy supply security by diversifying its energy import origins, and this will benefit Iran over Saudi- Arabia. Energy imports from countries like Iran are used to balance import destinations and transportation routes (Zavareh & Barzoki, 2018, p. 715). This prevents overdependency on the energy imports of one country, such as Saudi-Arabia. Similarly, Kamel (2018, p. 86), argues that Iran is benefiting more from the BRI, compared with other Middle-Eastern countries like Saudi-Arabia. As an energy-exporting country along the BRI`s CCAWA economic corridor, Iran is subject to a lot of new infrastructure projects. The development of new high-tech infrastructure is causing Iran to be integrated with the regional markets in Eurasia (Kamel, 2018, p. 86). While other countries in the Middle-East are also trying to benefit from the BRI, their success has been smaller compared to Iran. However, there are also a number of experts who argue that the increasing relationship between China and Saudi-Arabia is harmful to the relationship between Iran and China (Al Sudairi, 2016). According to MacGillivray: “It is becoming evident, that China is distancing itself from its relationship with Iran and is moving towards a steadier partner in Saudi Arabia” (2019, p. 16). The cooperation between China and Saudi-Arabia is no longer mere economic, but also expresses itself in other areas such as politics and security. This growing partnership is a challenge for the traditional friendship between China and Iran. Furthermore, as China`s dependence on the Kingdom of Saudi-Arabia increases, this enables Saudi-Arabia to put pressure on the PRC to contain Iran (MacGillivray, 2019, p. 19). The increasing pressure from Riyadh limits the possibility of Beijing to act according to its foreign policy plan of non- interference and a focus on economic relations (MacGillivray, 2019, p. 19). Similarly, Yang (2020) also argues that the Sino-Saudi relations have grown at the dispense of Sino-Iranian economic relations. He grounds his argument in the increasing trade between China and Saudi-Arabia and the role of the kingdom in the energy supply security of the PRC. Overall, this thesis argues that China is perfectly capable of balancing its relationship with both Iran and Saudi-Arabia. China has gained a significant amount of influence in both these countries. On top of that, the BRI has provided opportunities for Iran and Saudi-Arabia to further develop their economies and industries. China thus has a positive influence in both countries. Because of this, Iran and Saudi-Arabia cannot easily demand China to pick a side in their regional conflict. Since this might endanger their relationship with China.

119 Therefore, China will, arguably, be able to balance its relationship with both Iran and Saudi- Arabia.

5.4 Geopolitics and Geo-economics in Central Asia Whereas the previous sections has analyzed the geopolitical and geo-economic dynamics in the ME, this section will do the same for CA. In 1991, the Soviet Union collapsed, which resulted in the independence of a number of former soviet countries. Among these are Turkmenistan, Kyrgyzstan, Uzbekistan, Tajikistan and Kazakhstan, who together form Central-Asia. This region is particularly rich in its energy resources and other valuable minerals. Therefore, the independence of these countries provided an opportunity for other global powers to acquire access to these resources. This resulted in a struggle between countries for access to, and influence over, these Central-Asian countries, which is commonly referred to as the ‘new great game’ (Smith Stegen & Kusznir, 2015). This struggle is named after the rivalry between Great Britain and Russia over control over Central-Asia in the nineteenth century, which was called ‘the great game’ (Chen & Fazilov, 2018). As was previously discussed in this chapter, as well as in the theoretical framework, major countries and actors employ geopolitical and geo-economic tools to project their power in other regions in the world. The ‘new great game’ is basically a competition among states for who can best use their geopolitical and geo-economic tools in Central-Asia to gain influence and power. While other countries like India and Pakistan are also trying to gain influence in this region, Smith Stegen & Kusznir (2015, p. 91) have argued that the most powerful actors in the ‘new great game’ were initially Russia and the US, the EU and China joint the competition at a later stage. This section will for each of these actors discuss 1) what their aims and incentives are in the region, 2) what their policies are towards the region, and 3) the development of their economic relations with the region. Finally, this section will argue that the impact of the BRI on the ‘new great game’ can hardly be understated and that the BRI has opened a new chapter for the power projection of states in Central-Asia.

Russia Despite almost 30 years of independence, the economic, social and cultural links between Russia and the Central-Asian states are still highly visible. Russia is, for example, the primary origin of import for Central-Asia. On top of that, in a number of these countries, Russian is still spoken by the majority of the people. In Kazakhstan, for example, Russian is an official language that is spoken by over 90% of the population (Griffin, 2018, p. 11). Furthermore,

120 there are still a large number of native Russians living in Central-Asia. Because of this, combined with their shared history and close proximity, Russia still has a large interest in the region and would prefer Central-Asia to return to Russia`s sphere of influence (Smith Stegen & Kusznir, 2018). The main objectives of Russia in Central-Asia, as identified by Collins & Bekenova (2016, p. 7), are: protecting Russian territory, supporting native Russians in the region, increasing its access to the energy resources and constraining the influence of other powers in the region. Russia`s main policy tool for reaching these objectives has been the creation of multiple multilateral region organizations. It has, for example, created the ‘Eurasian Economic Community’ (EurAsEC), which consists of Kazakhstan, Belarus, Kyrgyzstan, Tajikistan and Russia (Smith Stegen & Kusznir, 2018, p. 94). This organization, which was established in 2000, is committed to forming a single market among the above-mentioned countries. After that, in 2010, the Customs Union (CU) was formed between Kazakhstan, Belarus and Russia. This union was established to further increase economic integration by creating a single economic space. The economic cooperation between these three countries was even further scaled up with the creation of the Eurasian Economic Union (EEU) in 2014. Through this union, Kazakhstan, Belarus and Russia agreed upon the free movement of goods, capital, services and labor between them by 2025 (Smith Stegen & Kusznir, 2018). Besides these economic alliances, Russia was also involved in the establishment of two security organizations with Central Asia. The first is the ‘Collective Security Treaty Organization’ (CSTO) that was created in 2002 among six former Soviet Union states. This organization has a similar structure to NATO, in that it promotes military cooperation and obliges countries to help each other in times of conflict (Collins & Bekenova, 2016). The second security organization was founded in 2001 and is the ‘Shanghai Cooperation Organization’ (SCO). The SCO is created by China, and consists of China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. This organization focusses on issues like border disputes, organized international crime, drug trafficking, terrorism and confidence- building measures (Rogers, 2020, p. 96). Therefore the objective of the SCO has been to create a collective identity and increase the bilateral and regional ties between these countries. Together, these economic and security organizations established by Russia show its interest in influence and power in the Central-Asian region. The establishment of regional organizations is an example of a geopolitical tool that is being employed for the projection of power in Central-Asia. Similarly, geo-economic tools such as trade and investments are also used by Russia. The country still has large trade

121 relations with a number of Central-Asian nations including Kazakhstan. In 2018, according to ‘World Integrated Trade Solution’ (WITS), Kazakhstan exported $5.2 Billion USD to Russia and imported $13.2 Billion from the country. Thereby, Russia is the third-largest export market for Kazakhstan, behind China and the EU, and the second-largest origin of import after the EU. Similar to trade relations, Kazakhstan is also one of the largest recipients of FDI from Russia. According to Kuznetzov (2016, p. 79), Russian multinational corporations have invested over $9 billion USD in Kazakhstan. However, he also notes that these businesses nowadays have to deal with large competition from mainly Chinese multinationals (Kuznetzov, 2016, p. 83). This exemplifies the struggle for influence over the economic resources in Kazakhstan and Central-Asia. The regional organizations and economic and cultural relations between Russia and Central-Asia show that the Russian Federation is still a significant power in the region. However, multiple Central-Asian countries have expressed their concerns about Russian influence in the region and perceive Russia as a threat to their independence. The war in Georgia in 2008 and the annexation of Crimea in 2014 have displayed the Russian disinterest for the sovereignty of former Soviet States. While the Central-Asian countries have expressed their interest in a multi-vector policy among major powers multiple times, they fear that this policy is being threatened by enlarging Russian influence in the region. Therefore, they increasingly seek to decrease this influence and diversify their foreign relations (Smith Stegen, & Kusznir, 2018).

United States As a major opponent of the Soviet Union, the US was one of the first states to recognize the independence of the Central-Asian states. Early US interest in the region was twofold. First, the country stimulated privatization, democratization and market reforms in Central-Asia, with the hope of transforming these countries into liberal democracies (Iqbal & Afridi, 2017, p. 244; Rogers, 2020, p. 95). To establish this, America offered economic aid to the newly formed countries. This was done through, for example, the Central Asian-American Enterprise Fund, which was founded in 1994 with the objective of encouraging small and medium-sized businesses in the region (Rogers, 2020, p. 95). The second interest of the US is in the large energy reserves of the region. American international oil companies have been very active in Central-Asia and invested a significant amount in the energy sectors of these countries.

122 In 1999, parliament in the US implemented the ‘Silk Road Strategy Act’. This act included assistance to Central Asia for 1) promoting sovereignty, democratic institutions and human rights, 2) resolution of regional conflict and remove impediments for commerce, 3) promoting economic cooperation, 4) develop infrastructure, and 5) supporting US business interest (Congress.gv, 1999). The main objective of this policy was to stimulate the economic integration of Central-Asia with the West and thereby encourage economic cooperation and trade. According to Iqbal & Afridi (2017, p. 242), this would simultaneously help to combat nuclear arsenals, terrorism, drug trafficking and corruption in these countries. The interest of the US in Central-Asia shifted from mainly economic to security after the terrorist attacks on 9/11. After these attacks, America cooperated with the Central-Asian countries both to combat domestic Islamic extremism in these countries as well as to help America in the war against Afghanistan. The US, for example, established military bases in Uzbekistan and Kyrgyzstan, used airfields in Tajikistan for its military forces, has trained military personnel in Uzbekistan and has increased its military cooperation with Kazakhstan, Kyrgyzstan and Uzbekistan (Rogers, 2020, p. 95). Despite the common interest of Russia, China and the United States to combat extremism in Central Asia, Russia and China are worried about the military presence of the US in the region (Rogers, 2020, p. 96). While both in China and in Russia the state has ultimate control over the market, this is not the case in the US. The US is a liberal state in which the economic activities are largely disconnected from the national security interest. Analyzing these activities as a geo-economic tool for the power projection of the US in Central-Asia is, therefore, not as clear as it is in the case of Russia and China. Although the market and the state are separated in the US, its trade relations with Central-Asia are still a viable indicator of the influence and power of the US in this region. The United States will still protect the interest of its private-owned companies overseas and, therefore, strive for good bilateral relations with countries in which its businesses are active. However, the trade and investment statistics between the US and Kazakhstan show the minor economic interest of America in Kazakhstan compared to the other major powers. According to the ‘World Integrated Trade Solution’ (WITS, 2018), in 2018, exports from Kazakhstan to the US amounted to $955 million USD and imports $1.3 billion. This is significantly less than the amount of trade between Kazakhstan and the EU, China and Russia. While the trade of the US with Kazakhstan is only marginal, it still invests a fair share in the Central-Asian country. According to the US Department of State, total investments in Kazakhstan between its independence and 2019 have been $160.4 billion USD, of which $31.2 originate from the US (US Department of State, 2019). While it is hard

123 to compare this number to that of other powers, the total number of investments of the US is, arguably, lower compared to those of the EU and China. As is shown in chapter four, Chinese investments in the energy sector between 2005 and 2019 were already higher than $20 billion USD. To conclude, the US has a strategic, security as well as an economic interest in the Central-Asian region. It perceives these countries as a breeding place for Islamic radicalism, uses them to contain the influence of Russia and benefits from the access to the energy resources by American private owned oil companies. However, multiple scholars have argued that the preoccupation of the US with democratization has deterred the generally authoritarian rulers in this region (Iqbal & Afridi, 2017; Smith Stegen & Kusznir, 2015). In combination with the rising power projection of China in the region, which will be discussed later, this has arguably decreased the influence of the US in Central-Asia.

European Union The interest of the European Union in Central-Asia lies mostly in the vast energy reserves of the latter. In the early days after the Soviet disintegration, bilateral ties and trade with the EU were still only marginal. This changed through a combination of rising gas demands and supply disruptions from Russia because of its conflict with Ukraine. This made the EU worry about its energy supply security, which invoked extra interest for the Central-Asian region. From then on, the EU started to formalize its relations with the region through the implementation of ‘Partnership and Cooperation Agreements’ (PCAs), ‘Memorandum of Understanding’ (MoU) and ‘associations agreements’ (Smith Stegen & Kusznir, 2015). Due to its fragmented nature, the EU does not excel in its geopolitical measures and strategies. The strength of the EU as a major power originates from its large economic influence around the world. Similar to the United States, the EU is also a liberal actor that is characterized by a separation between the state and the market. Market forces in the EU are dominant and do not adhere to the interests of national security. Therefore, the trade and investment activities of European companies do not directly resemble a form of power projection through geo-economic tools. However, as has been argued for the US, access to the resources in Central-Asia for multinational corporations is still beneficial for the energy supply security of Europe. Thus, the economic activities by these businesses remain a good indication of the interest of the Central-Asian region for the EU as a whole. In the case of Kazakhstan, Europe is its largest export market, import market and the biggest origin of investments (Griffin, 2018). Total exports to Europe & Central Asia

124 amounted to $44.7 billion USD in 2018, while Kazakhstan imported $23.6 billion from these regions (WITS, 2018). In total, over 40% of the country`s external trade is with the European Union (EC, 2020). Of the total export to the EU, oil and gas exports account for over 80% (EC, 2020). Within the EU, the largest trading partners of Kazakhstan are Italy, the Netherlands, France, Switzerland and Spain. Similar to trade, according to the European Commission, almost half of all OFDI inflow in Kazakhstan originates from the EU. In 2018, total outward FDI stock amounted to $63.5 billion USD, while the inward FDI stock was only $7.7 billion. This shows the major importance of European businesses for investments in Kazakhstan. Similar to the US, the EU officially also promotes liberalization and democratization in Central-Asia. However, the member states of the EU have been wary not to let their economic relations and energy imports from Central-Asia be endangered by its democratization agenda (Collins & Bekenova, 2016, p. 14). Democratization is not a top priority as they do not want to antagonize the authoritarian leaders. Business interest and energy imports remain the most important aspect of EU-Central Asia relations. However, according to Smith Stegen & Kusznir (2015, p. 99), there are two reasons that prevent the EU from gaining similar levels of influence as China in the region. First, the EU consists of 27 member states that all have their own interest in the region. Therefore, it is hard to balance these interests and establish a clear policy towards the region. Second, due to the liberal character of the EU, it is unable to provide similar investments and support to Central-Asian countries like Kazakhstan. Chinese NOC`s receive support from their state through which they can offer other forms of investments and financial aid. Smith Stegen & Kusznir (2015, p. 99) argue that this is especially important in the authoritarian states of Central-Asia, who are accustomed to dealing with SOE`s rather than multinational organizations.

Impact of the BRI on ‘new great game’ In chapter 2 and chapter 3, this thesis has analyzed the geopolitical and geo-economic policies of China towards Central-Asia and especially Kazakhstan. The main argument is that China is projecting its power in Kazakhstan so that its NOC`s can increase their access to the resources and increase the domestic energy supply security of the PRC. Furthermore, in chapter 2, this thesis has discussed the role of Central-Asia in the BRI. This section will be related to that and discuss the BRI as a geopolitical and geo-economic tool for the Chinese power projection in Central-Asia, and its implications for the influence of the other powers in the region. Arguably, the BRI has significantly changed the dynamics of the ‘new great game’ and

125 opened up a new chapter of power projection in the region. It has done so mainly through the intensification of economic and diplomatic relations between China and Kazakhstan. The BRI stimulates trade, investments and financial relations with the Central-Asian region. It redirects investment flows from other countries towards countries along the BRI and thereby provides large economic opportunities for Central-Asia to develop their infrastructure and economy. While Central-Asia is one of the least integrated regions in the world, this initiative will help them integrate into the global economy. Since it is a Chinese initiative that does so, this also provides the PRC with opportunities to increase its power projection in the region. On top of that, the establishment of the AIIB, which is one of the institutions that operate in accordance with the BRI, even further increases the influence of China over Central-Asia. The AIIB is a China-led, multilateral development bank that mainly invests in infrastructure in developing countries. As China decides which projects, in which countries this bank will invest in, it gives the PRC an edge over the other major powers. The AIIB is a large spill in the BRI, and its aid can be used in a large number of Central-Asian countries. Because there is no other multilateral organization that provides the same amount of opportunities for these countries, this further increases China`s political power and economic power in the region. As the BRI is increasing Chinese influence in Central-Asia, this is becoming a danger for the interest of the other major powers and especially for the US. Even though both the EU and Russia also have to worry about too much influence for China in the region, both benefit from the initiative as well. For Russia, Yilmaz & Changming (2019) have argued that the BRI thrives under Russian-China cooperation in Eurasia. According to them, Russia plays a large part in the optimization of the BRI in this region and is therefore not left out. Similarly, the EU is also part of the BRI. The economic corridors that run through Central-Asia have Europe as the final destination. Thus, increasing economic integration benefits the EU, since it becomes easier for both China and the Central-Asian countries to reach Europe and enhance trade relations. While Russia and the EU wish to maintain their influence over the region, despite increased competition with Chinese forces, the BRI is received well by both Russia and the EU. They perceive it as an opportunity to increase their economic relations with China and Central-Asia. However, this is not the case for the US. They see their influence decreasing while also not being part of the BRI. Therefore, the US has tried to contain the BRI by focusing on the neo-imperialistic character of the BRI as well as downplaying the initiative (Cavanna, 2018; Khanna, 2019).

126 Interestingly, together with the interest of the major power, the BRI might also endanger the interest of the Central-Asian states. These states have repeatedly expressed their desire to maintain a multi-vector policy. They wish to balance their bilateral relationship with all powers and maintain their autonomy. Historically, this multi-vector policy has benefited China since the PRC has focused on non-interventionist, win-win economic relations. This has resonated very well with the Central-Asian countries who fear that increasing Russian or American influence might damage their sovereignty. However, with the implementation of the BRI, both actors within the Central-Asian states, and the major power projecting actors, have pointed to the neo-imperialistic character of this initiative and China`s foreign policy as a whole. As China is investing overseas and expanding its capital, it has massively increased its influence over the region. This will make it hard for the Central-Asian countries to balance China`s interest with that of the other powers (i.e., Russia, EU, US) and maintain its multi- vector policy. Therefore, although China`s emphasis on the mutual benefits of the BRI, it is not unthinkable that the states in Central-Asia will increase their resistance against Chinese influence.

5.5 Conclusion The first question that was central to this chapter was: What are the domestic challenges for the energy relationship between China and Saudi-Arabia & Kazakhstan?. For Saudi-Arabia, the domestic challenges mainly have to do with the characterization of the country as a patrimonial-rentier state. The patron-client relations within Saudi-Arabia are a driver of corruption. The combination of centralized power with corruption is a threat to both economic development and the stability of society. On top of that, the country is a rentier state because it relies mostly on the export of oil for its financial resources. As this prevents the development of other economic sectors, the loss of oil revenue can be detrimental for the countries economy and stability. Therefore, the country heavily relies on the stability of oil prices, but this stability can in no way be guaranteed. In the case of Kazakhstan, the main domestic challenge is the perception of the local population in the country relative to China. They argue that China has neo-imperialistic motives for the increased activities in Central-Asia. The increasing influence of China in the country is understood to be a danger for the autonomy and sovereignty of the country. On top of that, protests among Kazakhs against the re-education camps in Xinjiang have also increased recently. Since the people in Kazakhstan share the same religion and a small part shares the same ethnicity with the Uyghur Muslims that are being detained, these people call

127 for the release of the Uyghurs. Another challenge has been the declining oil output from Chinese owned oil and gas fields in Kazakhstan. While this has seriously damaged the oil export towards China in recent years, Kazakhstan is determined to change this and revive the oil trade with the PRC. The second question for this chapter has been: What are the geopolitical and geo- economic dynamics within the Middle-East and Central-Asia, and how do these affect the power projection of China in these regions?. Geopolitics and geo-economics refer to the tools of states for the power projection in the regions. Both the Middle-East and Central-Asia are characterized by a large influence of the US, Russia, EU and China. The Middle-East is an inherently unstable region with a large number of conflicts and rivalries. The lack of a regional order has created competition among the strongest actors. On top of that, the presence of energy resources, the establishment of Israel and strategic location have made the region of interest to external actors. While historically, the most influential actors have been the EU and US, nowadays, China is rapidly increasing its influence in the region. In Central-Asia, the rivalry among the great powers for influence in the region has been called ‘the new great game’. After the disintegration of the Soviet Union and the independence of the Central-Asian states, the resources located in these countries became available to other actors. For Russia and the US, the main objective in the region has arguably been to deny the other party too much access. China and the EU, on the other hand, are focusing on the economic and commercial relations with these countries. The Central-Asian states themselves favor a multi-vector policy in which they balance the influence of external actors. In this way, they can ensure their autonomy and sovereignty while maintaining good relations with all powers. In both regions, the implementation of the BRI has significantly altered power relations and increased the possibility of China to projects its power. For the Middle-East, the BRI has increased the stakes in the region. As China aims to defend its commercial and economic interest, it is forced to take a more active stance in the conflicts of the region and mediate between the actors. In the case of Central-Asia, the BRI provides a large opportunity to integrate the region and connect it to the Chinese economy. Russia and the EU are fairly positive about the initiative and the possibilities it provides for the Central-Asian countries. The US, on the other hand, is fairly negative and emphasizes the neo-imperialistic character of the program. Overall, for both regions, the power projection and related influence of China has increased in recent years due to the BRI.

128 Chapter VI Conclusion

This thesis has looked at the economic activities of both Sinopec and CNPC in Saudi-Arabia and Kazakhstan. These economic activities include trade relations, investments and financial transactions. Due to China`s industrialization and economic development in the past thirty years, energy consumption in the country also rose significantly. The domestic production of energy in China is insufficient to fulfill the increasing energy demands of the country. Therefore, the country is forced to do business with resource-rich countries for their energy supplies. Since the availability of energy is a prerequisite for economic development, and domestic growth is necessary for the CCP to remain in charge of the PRC, the presence of these resources has become a security issue. To acquire overseas resources, the government of China has reformed its NOC`s from small, domestic players into global enterprises that belong among the largest companies in the world. Since these companies are owned by the state, they are used as tools by the government to secure the availability of oil and gas. The main objective of this thesis has been to identify how the economic activities of two of the largest NOC`s in China (Sinopec and CNPC) in two resource-rich countries (Saudi-Arabia and Kazakhstan) support the energy supply security of the PRC. These countries are located within the Middle-East and Central-Asia and therefore fall under the BRI. This initiative has, arguably, further influenced the businesses of the Sinopec and CNPC within these regions and countries. Therefore it will look at the trade, investments and finance of these NOC`s in the context of the BRI. To do so, this study has tried to answer the following research question.

What are the activities of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and to what extent do they contribute to the energy supply security of China?

In order to answer this question, this thesis has first answered the following sub-questions in the previous chapters: 1. How has the energy situation in China developed over the past 20 years and what is the role of the NOC`s in China`s energy supply security policy? 2. How has the ‘Belt and Road’ initiative improved China`s external energy security policy?

129 3. How are the energy sectors in Kazakhstan & Saudi-Arabia regulated and what is the role of energy in the economies of these countries? 4. How has the relationship between China and Saudi-Arabia & Kazakhstan in terms of diplomacy, trade, investments and energy developed? 5. What are the activities, concerning trade, finance and investments, of Sinopec and CNPC in Saudi-Arabia and Kazakhstan, and how have these changed over time and between these countries? 6. What are the domestic challenges for the energy relationship between China and Saudi-Arabia & Kazakhstan? 7. What are the geopolitical and geo-economic dynamics within the Middle-East and Central-Asia and how do these affect the power projection of China in these regions?

This research has applied the theoretical framework of geo-political economy in answering the main question and sub-questions. What matters within this theory is the shape of the configuration between the state and the market forces that differs per country. The control, power and regulation of the government over the economy are country-specific. In the case of China, this theory enables us to better understand the intricate relationship between the state and its NOC`s. China is an authoritarian country in which the state exercises power over the market. While these companies, through their size and technological advantages, have some room for autonomy, their actions are arguably still motivated by the national security interest of the state. Similarly, the framework of geo-political economy also enables us to see the full potential of the BRI. Realism, for example, would focus on the geopolitical perspective and argue that the BRI is China`s policy to gain influence and establish a new (regional) order. Liberalism, on the other hand, emphasizes the geo-economic aspect of the initiative and explain the economic motivations of economic interdependency behind the program. The theoretical framework of geo-political economy, however, combines the two and argues that geopolitics and geo-economics are inseparable and connected to each other. Economic motives could also be achieved through geopolitics and political motives through geo-economics. Therefore, according to this thesis, the BRI can be considered a geo- economic strategy with both political and economic motivations. Domestically, China`s industrialization and state-led development have led to economic growth and rising living standards. However, it has also increased the energy consumption of the PRC. Since domestic energy production is no longer able to satisfy energy demand in China, the country is forced to look abroad for its energy supplies. To do so, the

130 government of China has since the 1990s stimulated its NOC`s to acquire access to overseas energy sources. China is an authoritarian society in which market forces are dominated and regulated by the state. Therefore, the Chinese state-class has full control over the NOC`s and these companies are used to serve the national interest. This means that these companies are tools of the government to increase the national energy supply security of China. The overseas activities by the NOC`s are even further incentivized since the implementation of the BRI. This initiative, which aims at further regional economic integration, is an upgrade and intensification of earlier ‘going out’ policies. Two of the regions in which the BRI is active are the Middle-East and Central-Asia. Within these regions, this thesis has looked specifically at the energy relationship of China with Saudi-Arabia and Kazakhstan. Both Saudi-Arabia and Kazakhstan are authoritarian countries in which the state-class has control over the market. However, there are also differences between the level of regulation. In Saudi-Arabia, the royal family has a profound influence over the market and especially the energy sector. Every decision about the energy sector is taken through consensus among the royal family. In Kazakhstan, the state-class also regulates the market and the energy sector. However, due to the anti-Soviet sentiment, there is a pessimistic view among Kazakhs about state-led development. Therefore, market forces have more power in Kazakhstan compared to Saudi-Arabia. China`s has far developed relationships with both Saudi-Arabia and Kazakhstan, and these relations focus mainly on energy trade. In the case of Saudi-Arabia, the bilateral ties started in the 1990s and were enhanced in the early 2000s. Between 2000 and 2015, the trade and investment flows between Saudi-Arabia and China have increased almost 20 times. Nowadays, the kingdom is the second-largest oil exporter to China. The relationship between China and Kazakhstan also began around the 1990s. These relations further intensified after the implementation of the BRI, and there are a number of BRI related projects in Kazakhstan. Although Kazakhstan exports significantly less oil to China compared with Saudi-Arabia, the country still contributes to the energy supply security of China and has the potential to play a more important role in the future. Given the extensive energy relationship between China and Saudi-Arabia & Kazakhstan, the Chinese NOC`s are also highly active in these resource-rich countries. Sinopec is mostly active in Saudi-Arabia and CNCP in Kazakhstan. In the case of Saudi- Arabia, Sinopec is the largest trading partner and drilling contractor of the country. On top of that, Sinopec has invested over $7 billion USD in the energy sector of Saudi-Arabia. Since Saudi Aramco has a monopoly in operating the oil and gas fields in the kingdom, these

131 investments have mainly focused on the construction of drilling rigs and the establishment of a petrochemical refinery. This refinery is the ‘YASREF’ oil refinery in Yanbu, which is a joint venture between Saudi Aramco and Sinopec. It is one of the biggest refineries in the world and the largest investments of Sinopec in the Middle-East. In the case of Kazakhstan, the trade between the country and the Chinese NOC`s is significantly lower. While the crude petroleum import amounted to over $8 billion USD in 2012, this number has dropped to $850 million USD in 2017. This is arguably the result of dropping oil output of oilfields in Kazakhstan that are operated by Chinese NOC`s. However, the activities of these NOC`s and mainly CNPC in Kazakhstan focus mostly on acquiring equity oil through large investments. One example of this is the involvement of CNPC in the Kashagan oil field. This major field is one of the largest discoveries of the last forty years and has the ability to seriously impact the energy relationship between China and Kazakhstan. On top of that, Kazakhstan has the potential to contribute to the energy supply security of China through the diversification of import routes. In 2004, KMG and CNPC established a joint venture for the construction of a new Kazakhstan-China oil pipeline. This pipeline enables the Chinese NOC`s to transport their oil towards China. Overall, the diversification of import routes through, for example, the Kazakhstan-China oil pipeline, lowers China`s dependence on oil imports from the ME and through the ‘strait of Malacca’. Finally, this thesis has looked at the geopolitical and geo-economic dynamics within the Middle-East and Central-Asia, and how these influence the energy relation of China with Saudi-Arabia & Kazakhstan. The Middle-East is an inherently unstable region. The influence of external actors, such as Russia, the US, EU and China, in combination with a lack of a regional order, has caused conflict and rivalries. This potentially damages the energy relation between China and Saudi-Arabia. However, due to the BRI, China is taking a more active stance in the region. The country aligns its economic interest with that of the Middle-Eastern countries and increases its power projection in these countries. In the case of Central-Asia, the rivalry over the access to the resources between the US, EU, Russia and China has been called ‘the new great game’. This thesis has argued that China is increasingly winning this rivalry. The BRI plays a large part in this since it increases the political and economic activities of China in the region. It also provides opportunities for the Central-Asia countries, which persuades them to redirect their interests towards China. Overall, the BRI arguably enhances China`s position and influence in both Central-Asia and the Middle-East. The scale and character of the program give China an edge over other countries with the same interest in the

132 region. Therefore, it is better able to project power and acquire resources within the countries of Central-Asia and the Middle-East. Through the above-mentioned findings, this research will either reject or accept the hypothesis that has been constructed on the basis of the theoretical framework of geo-political economy as well as previous literature on the energy relationship between China and Saudi- Arabia & Kazakhstan. This hypothesis is as follows:

H1: China is considered as an authoritarian state in which the state has full control over the market. Therefore, the NOC`s in China are tools of the state-class to enhance the domestic energy supply security. These companies are pushed by the state to maximize access to overseas resources in countries such as Saudi-Arabia and Kazakhstan. Therefore, it is to be expected that Sinopec and CNPC are both heavy traders and investors in these resource-rich countries. On top of that, due to its large energy reserves and export towards China, Saudi- Arabia is a big contributor to the energy supply security of China. In the case of Kazakhstan, the efforts of the PRC to reduce its overdependence on Middle-Eastern resources and diversify supply routes enable Kazakhstan to play an active role in the energy supply security of China. Thus, it is to be expected that the trade and investments of Sinopec and CNPC in both cases are highly beneficial for the energy supply security of China.

Based on the above-mentioned findings, this hypothesis will be partly confirmed and partly rejected. In the case of Saudi-Arabia, the kingdom is highly important for the energy supply security of China. In 2017, 15% of all Chinese oil imports came from Saudi-Arabia. Thereby, Saudi-Arabia is, after Russia, the second-largest oil exporter to China. On top of that, China is the second-largest export market for Saudi oil, just behind Japan. Due to the importance of the kingdom for the energy supply of China, it is to be expected that the Chinese NOC`s are very active in Saudi-Arabia. This thesis has found that these activities focus mainly on trade and less on investments. In 2017, China imported products from Saudi- Arabia with a total value of $29.1 billion USD, of which $18.5 billion USD was crude petroleum. Whereas CNCP has outsourced its trading activities to PetroChina, which is one of its subsidiaries, Sinopec is the largest trading partner of Saudi-Arabia. While the trading activities of Sinopec with the kingdom are significant, the investments of CNPC and Sinopec are not as big. Between 2005 and 2019, these two companies have invested 24 times within Saudi-Arabia, with a total value of $9.7 billion USD. Since the upstream production process is

133 monopolized in the kingdom, these investments have mainly focused on other things, such as drilling rigs and petrochemical refineries. Whereas the Chinese NOC`s in Saudi-Arabia focus on the trading activities, in Kazakhstan, the main emphasize lies on large investments in the country`s energy sector. Between 2005 and 2019, Sinopec and CNPC have invested a total of $21.4 billion USD in Kazakhstan, divided over 12 different investments. A large part of these investments have been the purchases of shares in different oil and gas fields. The largest of which is the $5 billion USD investment of CNPC in the Kashagan oil field. Through these large investments, the Chinese NOC`s are increasing their equity oil in Kazakhstan. Concerning trade, the energy relationship between China and Kazakhstan is much lower compared with Saudi-Arabia. In 2017, China imported products from Kazakhstan with a total value of $5.7 billion USD, of which $850 million was crude petroleum. This means that Kazakhstan is only the 21st biggest exporter of oil to China. However, at the height of the oil export from Kazakhstan to China from 2010 to 2012, the Central-Asian country was the seventh-largest oil exporter. This shows the potential of Kazakhstan to contribute to the energy supply security of the PRC. Overall, the hypothesis is partly rejected because it assumed that these NOC`s would be highly active in both trading and investing in Saudi-Arabia and Kazakhstan. This is, thus, not the case since Sinopec and CNPC focus mainly on trade in Saudi-Arabia, and on investments in Kazakhstan. However, these activities do, arguably, contribute to the energy supply security of the PRC. For Saudi-Arabia, the huge energy imports from the kingdom signify its importance for the energy supply in China. For Kazakhstan, the amount of equity oil owned by Chinese NOC`s contribute to the energy supply security. On top of that, the construction of the China-Kazakhstan oil pipeline also contributes to the energy supply security since it enhances the diversification of import routes of the PRC. More diversified import routes mean less dependency on the ‘Strait of Malacca’ and a higher energy supply security. This thesis has also tried to grasp the importance of the BRI project for the external energy policy of the PRC and the energy supply security as a whole. It has argued that this initiative both redirects investments towards countries along the BRI as well as intensify the number and amount of these investments. However, the very nature of this initiative makes it difficult to assess which investments precisely are due to the implementation of this initiative, and which investments would have gone through either way. On top of that, the investments of companies depend on a number of variables, of which the BRI is arguably one. Energy relationships, including energy investments, between China and Saudi-Arabia & Kazakhstan,

134 already existed before the establishment of this program. Therefore, further research is necessary to precisely pinpoint the influence of the BRI on the energy relationship with resource-rich countries and the energy supply security of China. This thesis would like to make three suggestions for such added studies. First, while this research has analyzed the activities of NOC`s in two cases that both fall under the BRI, additional studies could look at different developments in the economic activities of NOC`s between resource-rich countries within the BRI as well as outside the BRI. Second, although data on Chinese investments outside the ‘China Global Investment Tracker’ is scarce, further research could apply a qualitative analysis that investigates in what ways the economic activities have changed since the implementation of the BRI. Finally, more value could be gained by taking a qualitative approach that aims at interviewing high ranking officials, both within the Chinese government as well as within these NOC`s, who have a more practical understanding of how the BRI has changed the behavior of these state-owned companies.

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