UNIVERSITY OF AMSTERDAM
GRADUATE SCHOOL OF SOCIAL SCIENCES
THE INVESTMENT BEHAVIOR OF CHINESE NATIONAL OIL COMPANIES IN KAZAKHSTAN
AN ANALYSIS OF ENERGY ELITES AND THE GEOPOLITICAL AND GEOECONOMIC
CONSEQUENCES OF TRANSNATIONAL ENERGY INVESTMENTS BETWEEN (1997-2015)
MSc Thesis Political Science: International Relations Research Project: The Political Economy of Energy
June 26th, 2015
Author: Supervisor: G.P. (Guido) van Linschoten Dr. M.P. (Mehdi) Amineh 5870852 Dr. N. (Nana) de Graaff
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2 TABLE OF CONTENTS
ABSTRACT 5
ACKNOWLEDGEMENT 6
MAPS 7
LIST OF TABLES AND FIGURES 9
LIST OF ABBREVIATIONS 10
CHAPTER I: RESEARCH PROPOSAL 13
1.1 INTRODUCTION 13
1.2 LITERATURE REVIEW 15
1.3 THEORETICAL AND CONCEPTUAL FRAMEWORK 18
1.4 OUTLINE OF THE ARGUMENT AND HYPOTHESES 22
1.5 RESEARCH METHOD AND OPERATIONALIZATION 23
1.6 STRUCTURE OF THE WORK 24
CHAPTER II: CHINESE NOCS AND THE GOVERNMENT 27
2.1 INTRODUCTION 27
2.2 THE EMERGENCE OF NOCS AND INSTITUTIONAL REFORMS 27
2.3 CORPORATE GOVERNANCE OF CHINESE NOCS 31
2.4 OWNERSHIP AND CONTROL OF CHINESE NOCS 34
2.5 ASSESSING THE RELATIONSHIP BETWEEN THE CHINESE 37
GOVERNMENT AND NOCS: THE DEBATE
2.6 THE GOING ABROAD POLICY AND THE TRANSNATIONALIZATION 38
OF NOCS
2.7 CONCLUSIONS 40
3 CHAPTER III: KAZAKHSTAN: POWER STRUCTURES, SOCIETY AND 43
CHINESE INVESTMENTS IN THE ENERGY SECTOR
3.1 INTRODUCTION 43
3.2 KAZAKHSTAN: STATE, SOCIETY AND RESOURCE NATIONALISM 44
3.3 POLITICS AND MARKET IN KAZAKHSTAN: ELITE ANALYSIS 47
3.4 THE EMERGENCE OF ENERGY COOPERATION BETWEEN CHINA 53
AND KAZAKHSTAN: TRADE, INVESTMENT AND FINANCE
3.5 CONCLUSIONS 59
CHAPTER IV: THE TRANSNATIONALIZATION OF CHINA’S NATIONAL 61
OIL COMPANIES AND THE ROLE OF DOMESTIC ENERGY ELITES
4.1 INTRODUCTION 61
4.2 THE TRANSNATIONALIZATION OF CHINESE NATIONAL OIL COMPANIES 61
4.3 CHINA’S ENERGY ELITE NETWORK 64
4.4 THE CHINA DEVELOPMENT BANK, THE CHINA EXPORT-IMPORT 69
BANK AND THE DEVELOPMENT BANK OF KAZAKHSTAN:
LOAN-FOR-OIL AND LOAN-FOR-GAS DEALS
4.5 CONCLUSIONS 77
CHAPTER V: GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES 79
OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN
5.1 INTRODUCTION 79
5.2 GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE FDI 80
5.3 POLITICAL RISK AND CHINESE FDI IN KAZAKHSTAN 86
5.4 CONCLUSIONS 88
CHAPTER VI: CONCLUSIONS 91
BIBLIOGRAPHY 95
BOOKS 95
ARTICLES, REPORTS AND BOOK CHAPTERS 96
INTERNET SOURCES 103
DATABASES 107
4 ABSTRACT
This thesis provides an analysis of Chinese national oil companies’ investment behavior in Kazakhstan, the facilitating role of ‘energy elites’ and the geopolitical and geoeconomic consequences of this investment. China’s economic growth has transformed the country from an energy producer to an energy consumer. The result of this soaring energy demand is growing energy supply vulnerability and caused a possible strategic liability. China has promulgated the strategy to enable its oil companies to increase their cross-border activities in order to gain access to foreign energy resources. This research approaches this process of transnationalization of national oil companies from a geoeconomic perspective. The preliminary findings of this research show that the transnationalization of Chinese national oil companies has increased their autonomy and leverage vis-à-vis the central government when it comes to cross-border activities. Furthermore, the Chinese and Kazakh ruling elites play a crucial role: the former in facilitating the “Going Out” of Chinese companies and the latter in enabling and embedding these companies’ FDI in Kazakhstan’s energy sector. The duality between the companies foreign and domestic operations combined with pivotal role of elites forms the focus of this research.
KEYWORDS
Chinese national oil companies – transnationalization – Kazakhstan – foreign direct investment – energy elite – CNPC – Sinopec – geopolitics – geoeconomics
5 ACKNOWLEDGEMENT
This research is the result of five months of intensive literature and data research on Chinese NOCs’ investments in Kazakhstan. I want to thanks Mehdi Amineh for his support and guidance during this process. His elective course Energy and Geopolitics in Eurasia - the European Union and China has prompted me to continue my research on this topic in his thesis course and his extensive knowledge on energy and geopolitics has provided me with new insights in global politics and energy issues. Furthermore, I want to thank Nana de Graaff for acting as my second reader. Her research on the ‘two faces’ of Chinese NOCs has proven a useful starting point for my research.
Guido van Linschoten June 25th 2015
6 MAPS
Map 1 Central Asian Oil and Gas Pipeline Network
Source: IEA (2010) World Energy Outlook. OECD/IEA
7 Map 2 Kazakhstan
Source: Nations Online Project (2015)
8 LIST OF TABLES AND FIGURES
TABLES
Table 2.1 Major share ownership of Chinese NOCs 34 Table 2.2 Chinese NOCs in numbers 40 Table 3.1 Kazakhstan’s main oil fields 56 Table 3.2 Chinese energy-related acquisitions in Kazakhstan 1997-2014 58 Table 4.1 Loan-for-oil and loan-for-gas deals since 2009 70 Table 4.2 Comparison of CITIC and the Sovereign Wealth Fund 75 Samruk-Kazyna 2013 Table 4.3 Comparison of CDB, the China Export-Import Bank and 77 DBK 2013 Table 5.1 Indicators of China’s energy security 82
FIGURES
Figure 2.1 The evolution of the Chinese energy industry 28 Figure 2.2 Current governance structure of Chinese NOCs 30 Figure 2.3 Sample NOC governance system as part of a principal-agent 33 framework Figure 3.1 The composition of Kazakhstan’s exports in 2014 45 Figure 3.2 Kazakhstan elite analysis 52 Figure 3.3 Foreign direct investment in Kazakhstan, net inflows (% of GDP) 53 Figure 3.4 Kazakhstan-China bilateral trade 2010-2014 54 Figure 3.5 Kazakhstan’s oil exports to China 2010-2014 55 Figure 4.1 Foreign direct investments in Kazakhstan 2005-2014 62 Figure 4.2 China elite analysis 68 Figure 4.3 Sino-Kazakhstan loan-for-oil deal structure 73 Figure 5.1 Forecast of China’s oil production and consumption 2014-2040 80
9 LIST OF ABBREVIATIONS
ABC Agricultural Bank of China AMG AktobeMunaiGas ATF Almaty Trade-Finance Bank BC Bank of China bcm Billion cubic meter b/d Barrels per day BG British Gas BITs Bilateral Investment Treaties BOCOM Ban of Communications BTAs Bilateral Trade Agreements CAIC Central Asian Investment Company CBL Commercial Banking Law CCB China Construction Bank CDB China Development Bank CEIB China Export-Import Bank CEO Chief Executive Officer CIC China Investment Corporation CITIC China International Trust and Investment Corporation CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation COD Central Organization Department CPC Communist Party of China CPK Communist Party of Kazakhstan DBK Development Bank of Kazakhstan EIA Energy Information Administration ENI Ente Nazionale Idrocarburi E&P Exploration and Production ESPO East Siberia-Pacific Ocean Pipeline FDI Foreign Direct Investment GDP Gross Domestic Product GNPC Ghana National Petroleum Corporation HKSE Hong Kong Stock Exchange
10 IBC Interbank Consortium ICBC Industrial and Commercial Bank of China IEA International Energy Agency IOCs International Oil Companies IPE International Political Economy JSC Joint Stock Company KBM Karazhanbasmunai KDB Kazakhstan Development Bank KMG KazMunaiGas KNB Kazakhstan National Security Committee MLR Ministry of Land and Resources MMG MangistauMunaiGas MNCs Multinational Corporations MOF Ministry of Finance MOFA Minstry of Foreign Affairs MPI Ministry of Petroleum Industry mtoe Million tonnes of oil equivalent NDRC National Development and Reform Commission NEA National Energy Administration NEC National Energy Commission NOCs National Oil Companies NPL Non-Performing Loans NYSE New York Stock Exchange OECD Organization for Economic Cooperation and Development P-A Principal-Agent PBC People’s Bank of China PDVSA Petróleos de Venezuela PSAs Production Sharing Agreements RMB Renminbi SAFE State Administration of Foreign Exchange SASAC State-owned Assets Supervision and Administration Commission SCO Shanghai Cooperation Organization SETC State Economic and Trade Commission Sinopec China Petroleum and Chemical Corporation
11 SK Sovereign Wealth Fund Samruk-Kazyna SNA Social Network Analysis SOEs State-Owned Enterprises SPC State Planning Commission SPR Strategic Petroleum Reserve SSE Shanghai Stock Exchange SSTC State Science and Technology Commission TBM Tarbagatay Munay TCC Transnational Capitalist Class TNCs Transnational Companies UMG UzenMunaiGas USD United States Dollar XGI Xinjang Guanghui Investment
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CHAPTER I: RESEARCH PROPOSAL
1.1 INTRODUCTION
Kazakhstan’s vast amount of oil and gas resources makes it one of the key players in the Caspian Region. 1 The country is landlocked by Russia, Uzbekistan, Kyrgyzstan, Turkmenistan and China. Kazakhstan has had a good political, strategic and economic relationship with Russia, based on a shared cultural and historic background. However, president Nazarbayev declared in 1997 that the country would pursue a more open stance towards the region, well aware of Kazakhstan’s pivotal role in the regional energy market.2 This autonomous course has led to multiple energy related agreements being signed with all the important geopolitical actors active in the Caspian region: Russia, China, the United States, the European Union and the Middle Eastern countries. “Newcomer” China has become a top priority for Kazakhstan to cooperate with, and economic cooperation between the two countries is well underway. China’s ongoing economic growth causes a growing dependency on the import of energy. One of Beijing’s means to safeguard a stable and secure supply of energy is to diversify the origin and sources of this energy. A logical consequence is China’s wish to develop several land-based oil and gas pipelines which run from both the Caspian Region and Russia to China. Due to this great dependency China has become a major importer of oil and gas from Azerbaijan, Tajikistan, Uzbekistan, Turkmenistan and particularly Kazakhstan. Beijing has already invested vast amounts of capital in the Caspian region and has with its national oil companies (NOCs) a strong economic and political presence in the region. The estimated share of Chinese NOCs’ equity in Kazakhstan in 2010 was approximately 23% (Jiang & Sinton 2011: 81). This huge number is a clear example of China’s ambitions in the region, the investment behavior of the NOCs and the economic clout these actors already have in the region. The focus of this research lies on the energy relations between China and Kazakhstan and especially on the Chinese national oil companies CNPC and Sinopec and their transnational activities, the role of the Chinese and Kazakh government, the transnational Kazakh energy sector, the investments of Chinese NOCs in Kazakhstan
1 The geographical term ‘Caspian Region’ refers to the five littoral states around the Caspian Sea: Russia, Azerbaijan, Iran, Turkmenistan and Kazakhstan. 2 “Address of the President of the Republic of Kazakhstan, Nursultan Nazarbayev, to the People of Kazakhstan, January 28, 2011”. Via www.akorda.kz
13
and the ‘energy elite’ in both China and Kazakhstan. A crucial factor in this research is the intertwinement between the Chinese government and the NOCs. Before we can understand the FDI of NOCs in Kazakhstan, we need to assess and map the ties that exist between the Chinese government and CNPC and Sinopec. This research makes use of the concept of an ‘energy elite’ to denote this relationship and to understand the business of Chinese NOCs in Kazakhstan. It examines China’s foreign energy policy towards Kazakhstan and focuses on the investment behavior of Chinese national oil companies (e.g. CNPC and Sinopec) in Kazakhstan in the period between 1997 and 2015. This delineation supports this research in the best way, because it covers the period from the outset of energy relations between the two countries to the current developments. The main social entities and actors that will be examined in this research are: the Chinese and Kazakh government; Chinese and Kazakh NOCs and the energy elite in both countries. Both social forces and societal pressure might be relevant for this research, but will be discussed to a lesser extent (though not ignored). In order to research the objectives mentioned above, this work focuses on the question:
“What are the geopolitical and geoeconomic consequences of Chinese NOCs’ investments in Kazakhstan’s energy sector and how can we assess the role of both the Kazakh and Chinese ruling elite in enabling these investments?”
Three sub-questions support the answering of the main research question:
1. How can we understand the origin and nature of Chinese NOCs? 2. How can we assess the trade and investment interactions between China and Kazakhstan? 3. How can we assess and map the concept of a Chinese ‘energy elite’ and how can we understand the role of Chinese and Kazakh energy elites in enabling Chinese NOCs transnationalization and transnational investments? 4. What are the geopolitical and/or geoeconomic consequences of Chinese investments in Kazakhstan? 5. To what extent does the political instability in Kazakhstan pose a risk to Chinese investments and the country’s energy supply?
14 I RESEARCH PROPOSAL
The relevance of this research lies in the fact that it contributes to our understanding of the energy relations between China and Kazakhstan by not only assessing this relationship on the governmental level, but predominantly on the corporate level. This research aims to make us understand the forces that are in play in this relation between China and Kazakhstan, supported by an inquiry of the transnational elites that have ties with both the national oil companies and the government. Furthermore, this research contributes to the existing literature on the transnationalization of Chinese national oil companies. This research will complement the literature by filling the gap that currently exists in the assessments of the NOCs. It will give a specific corporate analysis of the Chinese NOCs and focuses on the NOCs FDI behavior in Kazakhstan. By focusing on both their ties with the Chinese government and their growing autonomy from this same governmental structure this research complements the existing literature on Chinese NOCs. Using the case-study of the Kazakh-Chinese energy relations and linking the NOCs investments to the (geo)political and economic risks of an unstable political situation in Kazakhstan, this research also adds to a better understanding of the relativity of Chinese energy security and provides new insights in the concept of the transnationalization of Chinese NOCs. Besides the scientific relevance of this research, it contributes to our understanding of the current energy related developments in the Caspian Region and between China and Kazakhstan. Furthermore, it places the current events in a larger framework of growing global interdependence and contributes to the debate on the challenges of energy security.
1.2 LITERATURE REVIEW
The increasing investments of Chinese national oil companies (NOCs) in Kazakhstan are the result of the countries soaring energy demand and its wish to diversify in its energy sources. The Chinese government sees China’s growing dependence on the import of foreign oil as a potential area of strategic vulnerability. The importance of China’s energy security has therefore been highlighted by several scholars. Yergin (2006) has given an overview of global energy security and its geopolitical consequences and argues that these consequences are highly dependent on bilateral and multilateral cooperation between countries. China’s soaring energy demand has shifted the focus of the energy security debate from a more global perspective to China. Several studies have examined
15 the geopolitical consequences of China’s energy quest and take a more political and strategic rather than an economic approach to the energy security debate (Lee 2012; Chen 2011; Xuetang 2006; Leung 2011). Meanwhile, others take a more international political economy (IPE) approach to the problem of energy security (Matutinovic 2009; Jaffe & Lewis 2002) or a mainly political (i.e. policy) approach (Kong 2010; Andrews- Speed 2004). This distinction between the geopolitical and geostrategic approach to China’s energy security on the one hand, and a more economic approach on the other hand is due to the role of the Chinese government and its state-owned enterprises (SOEs) that conduct their business abroad. The nature and goals of Chinese national oil companies is one of the main controversies in this debate. Numerous studies have paid attention to the complex interaction between the government and the NOCs (Jiang & Sinton 2011; Zhang 2012; Liao 2015; De Graaff 2014). However, the emphasis of these studies lies predominantly on the government-business relationship in China’s overseas energy quest and the majority of these studies takes a one-dimensional approach to the issue and overlooks the growing autonomy of both the government and the NOCs (Xu 1999). Both Jiang & Sinton (2011) and Chen (2008) take a more multidimensional approach to China’s energy security by examining and arguing the more autonomous path the NOCs are taking in the last decade. The loosening relationship between the NOCs and the Chinese government has also been examined by Andrews-Speed et al. (2000), which assesses the state reforms in the Chinese energy sector that led to more autonomy of the NOCs. This transformation of Chinese SOEs in what is often called the transnationalization of Chinese NOCs, is the result of several institutional reforms and causes the NOCs to increasingly behave as ‘regular’ international oil companies (IOCs) as Amineh and Guang (2014) and Cutler (2014) among others have shown. China’s search for overseas energy in order to achieve a more secure energy supply has shifted its focus westwards to Central Eurasia. The Caspian Region is now one of China’s main points of interest to where it aims to direct its foreign direct investments (FDI). Several studies have examined the tightened energy relationship between China and this region and its challenges and opportunities (Cutler 2004; Cutler 2012; Cutler 2014; Andrews-Speed 2000). Cutler (1999) addresses the multilateral cooperation between interdependent energy actors in order to secure energy supplies and Xuetang (2006) too, has linked the problem of energy security to the Caspian Region.
16 I RESEARCH PROPOSAL
More relevant for this research and one of China’s major foci of its ‘Going Out’ Strategy (see Cheng Gong 2012) is China’s involvement in Kazakhstan. Rousseau (2013) examines the Kazakh-Chinese energy relationship and the opportunities and challenges for both parties and assesses the development of this relation over time. Saurbek (2008) questions the nature of this relationship in his article “Kazakh-Chinese Energy Relations: Economic Pragmatism or Political Cooperation?”. An analysis of Kazakhstan is also been made in several other studies, whether it addresses the country’s energy relations with Russia (Domjan 2010), its economic and political history (Guo 2013), its policy on resource nationalism (Sarsenbayev 2011; Cutler 2012), or its energy exports to the region (Guliyev & Akhrarkhodjaeva 2009). Many scholars have identified the Chinese government and the NOCs on the one hand and the Kazakh government (governmental elite) and its institutions on the other hand as the main actors when examining the energy relations between the two countries. Yemelianova (2014) analyses Kazakhstan’s governmental elite and its political clout. Kendall-Taylor (2011) links this elite analysis to oil and the Caspian Region. In the case of China, several scholars have made such government analyses. Specific research on Chinese SOEs and ownership control has been done by Mattlin (2008) and an overarching view on oil and governance has been given by Victor et al. (2012) in their book Oil and Governance: State-Owned Enterprises and the World Energy Supply (Cambridge: Cambridge University Press). De Graaff (2012) too, has published an important work on corporate elites, state-owned oil companies and governance. Both Provaggi (2013) and Gallagher et al. (2012) analyzed the Chinese state banks and their finance methods that play an important role in China’s energy relationship with Kazakhstan. These state- backed financial deals have also been assessed by Evans (2006). However, many - and for this research more relevant - studies linked the Chinese government and its SOEs to the national oil companies (Downs 2008; Downs 2010; Jaffe & Chen 2007; Jiang & Sinton 2011; Leis et al. 2012) and their investment behavior in Kazakhstan (Cutler 2014; Deng 2007; O’Neill 2014; Xu 1999; Zhu 2013). This research contributes to the existing literature on the transnationalization of Chinese national oil companies. This research will complement the literature by filling the gap that currently exists in the assessments of the NOCs. This research will give a specific corporate analysis of the Chinese NOCs and focuses on the NOCs FDI behavior in Kazakhstan. By focusing on both their ties with the Chinese government and their growing autonomy from this same governmental structure this research
17 complements the existing literature on Chinese NOCs. Using the case-study of the Kazakh-Chinese energy relations and linking the NOCs investments to the (geo)political and economic risks of an unstable political situation in Kazakhstan, this research also adds to a better understanding of the relativity of Chinese energy security and provides new insights in the concept of the transnationalization of Chinese NOCs.
1.3 THEORETICAL AND CONCEPTUAL FRAMEWORK
This research makes use of several theoretical and conceptual frameworks to add to a better understanding of the topic. This section outlines these theories and concepts and distinguishes the links between them. For each theory and concept, a short overview of the current debate is given. Besides an outline of the current debate, this part identifies the most important indicators for each theory and concept.
Energy Scarcity Model
The energy scarcity model, as proposed by Amineh and Houweling (2007), contributes to a better understanding of the growing interdependence between energy producing and energy consuming countries. The model distinguishes three types of scarcity. Demand-induced scarcity originates as the result of three factors (population growth, rising per capita income and technological change). All three factors lead to an increase in per capita energy demand causing a decreased availability of natural resources (Amineh & Houweling 2007: 374-375). Supply-induced scarcity is caused by ‘the dwindling of stock’. This form of scarcity interacts with demand-induced scarcity in the way that the growing demand for natural resources might lead to an increase in price volatility as ‘awareness spreads that stocks are dwindling’ (Amineh & Houweling 2007: 375). The third type of scarcity is structural scarcity. It is supply-induced and caused by a major power withholding natural resources from the market. China suffers from demand-induced scarcity. The energy scarcity model forms a starting point for this research from which China’s foreign energy quest can be understood and through which Chinese NOCs’ investment behavior in Kazakhstan can be understood. Important variables that can explain this type of energy scarcity are GDP growth, population growth and technological change. Furthermore, the transnational activities of Chinese NOCs and the scope of Chinese NOCs’ FDI in the Kazakh energy
18 I RESEARCH PROPOSAL
sector are useful indicators for the energy scarcity model and especially fit to examine and assess the energy relations between China and Kazakhstan.
Social Network Analysis (SNA)
In order to understand the relationship between the Chinese NOCs, the Chinese government, the Kazakh NOCs and the Kazakh government, we have to examine the corporate and political elites involved. Yemelianova (2014) analyses Kazakhstan’s governmental elite and its political clout. Kendall-Taylor (2011) links this elite analysis to oil and the Caspian Region. In the case of China, several scholars have made such government analyses. Specific research on Chinese SOEs and ownership control has been done by Mattlin (2008) and an overarching view on oil and governance has been given by Victor et al. (2012) in their book Oil and Governance: State-Owned Enterprises and the World Energy Supply (Cambridge: Cambridge University Press). De Graaff (2012) has published an important work on corporate elites, state-owned oil companies and governance and further expands on the topic of political and corporate elites in her 2014 article “Global Networks and the Two Faces of Chinese National Oil Companies”. In this case, she has used the social network analysis (SNA) (see Scott 2012; Carrington, Scott & Wasserman 2005) in order to assess the links that exist between the Chinese elite and the national oil companies. The author argues that “the basic premise of SNA is that it looks at the relations between actors instead of comparing their individual attributes (De Graaff 2014: 547). For this research, the conceptual framework of SNA is very useful to examine and estimate the interaction and interdependence between the political and corporate spheres in both China and Kazakhstan and to make an assessment of the state and corporate affiliations of the Chinese and Kazakh elites associated with the energy industry and Chinese and Kazakh NOCs. Indicators used in this model are the people that are part of Chinese and Kazakh energy elites and the transnational corporate network they have established. This research expands on the work of De Graaff (2014) by investigating and mapping the transnational ties between energy elites with a specific focus on the interaction between China and Kazakhstan.
19 The Transnationalization of National Oil Companies
Transnational actors have increasingly left their mark on global (geo)politics. The debate on the impact of multinational (MNCs) and transnational corporations (TNCs) has predominantly taken place in the context of the discussions about globalization and internationalization (Risse 2013: 431). The concept of globalization is highly contested in the literature, but there exists some form of agreement on the influence of TNCs on global politics (Risse 2013: 432). Zürn (2013: 410) states that the ‘transnationalization of governance refers to a process in which transnational nonstate actors develop political regulations and activities without being formally authorized by states’ (see also Djelic & Sahlin-Andersson 2009). This is certainly the case for Chinese national oil companies. The increasing influence of national oil companies can be understood in a period of what scholars have called transnationalization. This phenomenon implies an increase in cross-border activities and partnerships of NOCs and a loosening relationship with the national government. De Graaff (2014: 547) defines the concept of transnationalization with regard to national oil companies as ‘the extent to which they (NOCs) engage in cross-border alliances and/or involving private partners’. This transnationalization or internationalization connects to Mercille’s (2008) ‘logics of power’ and the work of David Harvey on the Geopolitics of Capitalism (Harvey 1985) and on The Spaces of Capital (Harvey 2001a). Both authors state that capitalism’s tendency of overaccumulation of capital results in the geographical expansion of capital (Mercille 2008: 576; Harvey 2005: 25-30). The geographical expansion of capital poses new challenges and opportunities to the logics of capitalism and is referred to by Mercille (2008) as the geoeconomic logic. The transnationalization of national oil companies is can be understood in the same tradition of capital overaccumulation. The ‘spatial fix’ (Harvey 2005) resolves some of the problems concerned with this geographical expansion. A clear consequence of this geographical expansion can be seen in the vast increase of foreign direct investment (see O’Brien & Williams 2010: 187-189). De Graaff (2011: 263) understands this concept as being a process that cuts through the divide that exists between the public and private spheres and where there is at least one non-state actor involved. The loosening relationship between the NOCs and the Chinese government has also been examined in an article by Andrews-Speed et al. (2000), which assesses the state reforms in the Chinese energy sector that led to more autonomy of the NOCs. The transformation of Chinese state-owned enterprises (SOEs)
20 I RESEARCH PROPOSAL
in what is often called the transnationalization of Chinese NOCs, is the result of several institutional reforms and causes the NOCs to increasingly behave as ‘regular’ international oil companies (IOCs) as Amineh and Guang (2014) and Cutler (2014) among others have shown. In this research, the concept of transnationalization will be used as a theoretical framework through which we can understand and assess the characteristics of the Chinese NOCs and their relationship with the Chinese government.
Critical Geopolitics
‘Critical geopolitics intends to understand world politics in terms of the ways in which elites and publics actively construct the spaces of political action that are then the medium for the policies of states and other actors’ (Agnew 2010: 569). In this article, the author critically assesses geopolitics and the way we consider the ‘rise of China’ in the global order and argues that China’s rise is far different from the geopolitical rise of other nations in the way that it doesn’t follow a linear narrative. It ‘cannot be seen as just a process of “regular” hegemonic succession or as bringing a totally new script to the table’ (Agnew 2010: 570). Critical geopolitics doesn’t start from a fixed normative position like realism or liberalism does. Instead, critical geopolitics tries to delegitimize classic geopolitics by placing it in a more historical framework and demonstrates the contradictory nature of classic geopolitics. Critical geopolitics is one of the postmodern theories of international relations and is rooted in the poststructuralist tradition. It rejects the causality classic geopolitics sees between geography and global politics and questions the borders this theory draws between both territories and identities. By rejecting the supposed objectivity of classic geopolitics, critical geopolitics shows the intertwinement between geopolitics, the state structure and conflict. Agnew argues in this article that the rise of China is not comparable to the rise of other hegemons in the past. Furthermore, the concept of a ‘rise’ of China, is predominantly created by (mostly Western) outsiders. The country does not follow the steps of the classic linear narrative as Agnew points out in his article. He identifies four elements of the linear narrative. The first element is the ‘vision that the world exists for powerful actors to survey and subdue. A second element is the representation of different parts of the world as following a linear path from backwardness to modernity.
21 Third, the singular map of the world is the political map of a world divided into putative nation-states. And finally, states are in unremitting competition with one another for primacy. China is not following this linear path. This is what Agnew calls ‘Chinese particularity’. He argues that China’s rapid economic development is predominantly the result of globalization instead of being the product of national development. The linkage of export-oriented sectors to the global economy fueled the national economy and attracted huge amounts of FDI (Agnew 2010: 578). Another proponent of the school of radical geopolitics is Mercille. In his 2008 article, he expands on the work of Harvey (2001a; 2003) on the ‘logics of power’ and adds the new concept of ‘geoeconomic logic’. This logic can bee understood as overaccumulation leading to capital devaluation and “for this reason, capitalism has a tendency to expand geographically, through opening up new markets, expanded trade, or investment of surplus capital to build production facilities in new places” (Mercille 2008: 576). This geoeconomic logic is but one focus of radical or critical geopolitics, though can function as a relevant framework through which we can understand the Chinese NOCs overseas expansion and activities in Kazakhstan. This research will mainly make us of the theoretical framework shaped by Mercille (2008) and makes use of the work of Agnew (2010) to introduce the theory of critical geopolitics.
1.4 OUTLINE OF THE ARGUMENT AND HYPOTHESES
This work argues that the FDI of Chinese NOCs, facilitated by a transnational energy elite, has far-reaching geopolitical, and mainly geoeconomic consequences for both China and Kazakhstan and that these Chinese cross-border investments in the Kazakh energy industry have a high risk factor. The research question “What are the geopolitical and geoeconomic consequences of Chinese NOCs’ investments in Kazakhstan’s energy sector and how can we assess the role of both the Kazakh and Chinese ruling elite in enabling these investments” contains two variables. The independent variable in this case is the Chinese NOCs’ energy investments in Kazakhstan. The dependent variable is the geopolitical and geoeconomic consequences of these investments. It is expected that the scope of the consequences is dependent on the investments due to the transnationalization of the Chinese NOCs. Therefore:
22 I RESEARCH PROPOSAL
Hypothesis 1: The increased transnational activities of Chinese NOCs have transformed these companies into IOCs that are increasingly autonomous of, though still backed by the Chinese government.
Then, the transnationalization of Chinese NOCs, understood through the geoeconomic logic, has created a transnational network of political and corporate elites –energy elites- that facilitates the flows of FDI running from China to Kazakhstan in order to gain geoeconomic and geopolitical influence. Thus:
Hypothesis 2: The emergence of a transnational network of energy elites has facilitated a rapid expansion of Chinese NOCs direct investments in Kazakhstan.
Then, the Chinese investment strategy and its quest for foreign equity oil in Kazakhstan actively challenges other players in the region and therefore has created a new reality in the region. Thus:
Hypothesis 3: Chinese NOCs’ investments in Kazakhstan have created a new geopolitical and geoeconomic reality in the Caspian Region
The last step assesses the relationship between Chinese and Kazakh corporate and political elites and examines to what extent the incumbent regime in Kazakhstan poses a political and economic risk for the energy relations between the two countries. This can have negative consequences for China’s energy security and therefore for its NOCs in Kazakhstan. Following:
Hypothesis 4: Political and economic risks are a result of the unstable situation in Kazakhstan and therefore negatively affect both China’s energy supply from and its investments in Kazakhstan.
1.5 RESEARCH METHOD AND OPERATIONALIZATION
This research is partly based on secondary data to examine the Chinese energy relation with Kazakhstan. The most important scholarly contributions to relevant debates are being used to make the argument. At the moment, I have already collected approximately 90 sources through Google Scholar, UvA Digital Library, Amazon.com and other
23 sources. I also have made use of some primary sources from the Chinese government (White Papers) and the Kazakh government. For the quantitative analysis of this research I have found a few datasets containing both energy data in general as specific energy data for Kazakhstan and China. A short outline of the sources I have found: UN Comtrade Database (2015), World Heritage Foundation (2014), Kazakhstan Statistical Report (IEA 2014), Report on China (EIA 2014), Report on Kazakhstan (EIA 2014a). I also make use of specific company data from the annual reports of CNPC, CNOOC and Sinopec: “CNOOC Annual Report 2013” (CNOOC 2013). “CNPC Annual Report 2013”(CNPC 2013), “CNPC in Kazakhstan” (CNPC 2014). “Sinopec Annual Report 2013” (Sinopec 2013) and “Sinopec Corporation Q3 2014 Results Announcement” (Sinopec 2014).
In my research I want to analyze the geopolitical and geoeconomic consequences of the investment activities of CNPC and Sinopec in Kazakhstan. To assess these consequences I make use of a variety of concepts and examine different statistics, agreements and policy documents. This research begins with assessing the diplomatic ties between China and Kazakhstan. Official and unofficial cooperation, membership in international organizations (e.g. Shanghai Cooperation Organization) and bilateral treaties are the key aspects under study. Next, this research assesses and maps the energy elite of both China and Kazakhstan and tries to examine the intertwinement between those elites. Making use of policy documents of the Chinese and Kazakh government and information directly from CNPC, Sinopec and KazMunaiGaz, this work tries to map this energy elite. Having done this, this research turns to analyzing the risks of NOCs investments in Kazakhstan. Making use of contracts, FDI data from both countries and other statistics, this research aims at giving a solid risk analysis of these investments.
1.6 STRUCTURE OF THE WORK
This research will examine China’s energy policy relation with Kazakhstan and the investment behavior of Chinese national oil companies in Kazakhstan in the period between 1997 and 2015. The outline of this research is as follows: chapter II focuses on the relation between the Chinese NOCs and the central government. This chapter assesses the governance structures of national oil companies, examines their ownership
24 I RESEARCH PROPOSAL
and control structures and gives an insight in the current academic debate on the intertwinement between NOCs and the Chinese government. It also analyzes upon the development of China’s foreign energy policy, often called “energy diplomacy” (see Cheng 2008: 314), and the emergence and “transnationalization” of the national oil companies. Chapter III examines the political regime and energy elite in Kazakhstan and touches upon the country’s resource nationalism. Further, it elaborates on the emergence of the ties between China and Kazakhstan and the role that the NOCs’ foreign direct investment (FDI) plays in securing natural resources and gaining geoeconomic influence in the region. Chapter IV focuses on the political and economic elites in China and analyzes the loan-for-oil and loan-for-gas deals signed with Kazakhstan. This section maps the role of these elites and analyzes in what way they facilitated the current investments in Kazakhstan. In chapter V, this research tries to link the transnationalization of Chinese NOCs and the emergence of a transnational energy elite network to a political risk analysis of Chinese investment in Kazakhstan and assesses the geopolitical and geoeconomic consequences of Chinese NOCs’ investments in Kazakhstan. Finally, the concluding chapter VI reverts to the hypotheses and provides the reader with a short summary of the main arguments and findings.
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CHAPTER II: CHINESE NOCS AND THE GOVERNMENT
2.1 INTRODUCTION
In 1993, China became a net importer of oil (Jiang & Sinton 2011: 10; Chen 2008: 80). Since then, the country faces the challenge of maintaining its security of energy supply for both the short and long term. In order to maintain the country’s security of energy supply and facilitate the exploration and production of new and alternative energy sources, China has implemented several institutional and administrative reforms that radically changed both the Chinese government and its petroleum governance. These institutional and economic reforms have facilitated the growth and predominance of Chinese NOCs in the last decade and serve as a clear example of the country’s ability, motivation and strategy to seek a more active role in the global energy industry. The central questions in this chapter are: In what way can we understand the relationship between NOCs and the Chinese government, what is China’s energy policy direction, and how can we explain the importance of the Kazakh energy industry for China? This chapter’s first part aims at assessing China’s institutional reforms and its policy response to the challenge of maintaining the security of energy supply. The first part focuses on the institutional reforms in China that have shaped the current governance structure of NOCs. Next, it analyzes the ownership and control structures of these corporations. The debate on the intertwinement between NOCs and the government and the NOCs transnationalization are touched upon in parts five and six.
2.2 THE EMERGENCE OF NOCS AND INSTITUTIONAL REFORMS
The connection between Chinese national oil companies and the government is a complex one. Although these companies seem highly successful in the way they conduct business, the NOCs have experienced a lot of controversy over the years. Critics argue that as internationally listed companies (like other IOCs) they ought to be commercial enterprises with a focus on profitability, though both inside and outside China the NOCs face the critic of enjoying a privileged position in the energy market, because the Chinese government supports them. These privileges can be traced back to the emergence and nature of the NOCs in China.
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CNOOC was the first Chinese NOC to emerge and was incorporated in 1982 as a company under the Ministry of Petroleum Industry (MPI). This NOC was authorized by the State Council to take control over all exploitation of oil and gas offshore China and is primarily an upstream (exploration and production) company. Sinopec followed in 1983 and was established from the downstream (refining and marketing) assets of the MPI and the Ministry of Chemical Industry. In 1988, The Ministry of Energy was established and all the industries that previously fell under the jurisdiction of the former Ministries of Coal, Petroleum, and Nuclear Energy and the Ministry of Water Resources and Power became SOEs, including CNPC (Liao 2015: 48). CNPC was formed from the upstream assets of the MPI (Downs 2010: 74).
Figure 2.1 The evolution of the Chinese energy industry
Souurce: Based on Jiang (2012: 381). Graph made by author.
In the mid-1990s, the State Planning Commission (SPC) was the most important government institution and responsible for energy policy. The SPC reported directly to the State Council and stood well above the two other (relatively subordinate) institutions:
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the State Science and Technology Commission (SSTC) and the State Economic and Trade Commission (SETC). The main energy industries each had their own major institution. CNPC stood at the head of the petroleum exploration and production (E&P); Sinopec dominated oil refining and distribution and there were the Ministry of Electric Power and the Ministry of Coal Industries. The 1998 reforms envisaged three major adjustments to the structure of China’s energy institutions. The first change was that the management of the NOCs was no longer the hands of the government, but was assigned to the oil companies themselves. Second, the SETC evolved from an unimportant and inept government institution to a significant player in the energy industry and the former CEO of Sinopec became its new chairman. The third adjustment was the creation of the Ministry of Land and Resources (MLR) of which CNPC’s former CEO became chairman (Andrews-Speed et al. 2000: 11- 13). Here we can already see the intertwinement between business and politics in China. China’s successful economic and institutional reforms economy and its institutions were made possible. An oligopolistic structure was created in 1998. In this structure, CNPC, Sinopec and CNOOC would partake in limited competition in order to prepare the NOCs for the international oil market and improve the companies’ efficiency without losing any of the sector’s profitability (Taylor 2014). The 2003 reforms reassured the government’s control over the NOCs. There were no longer separate Ministries with their own jurisdiction and responsibilities and the authority of the State-Council increased (Mattlin 2008: 6-12). Liao (2015: 51) agrees by stating that there is no separation at all between the State Council and the NOCs: ‘as the majority of their shares was owned by the Chinese government, the NOCs did not become commercial companies through international listing. The NOCs were asked to share a responsibility to ensure China’s stable oil supply, and in return, the government provided protection to NOCs from facing competitions from private companies via laws and regulations (…).’ Also in 2003, just after the public listings of CNPC, Sinopec and CNOOC on the stock exchanges, the State Assets Supervision and Administration Commission (SASAC) and the National Development and Reform Commission (NDRC) were established to unify the state’s ownership representation.3
3 PetroChina was listed on the New York and Hong Kong stock exchanges in April 2000; Sinopec Ltd. was listed on the New York, Hong Kong and London exchanges in October 2000; CNOOC Ltd. was listed on the New York and Hong Kong exchanges in February 2001.
29 The NDRC was from that time responsible for the approval of both foreign and domestic investments made by NOCs.4 SASAC would from that moment be handling and supervising all the SOEs’ assets and would be reporting directly to the State- Council.5 SASAC is the formal owner of all NOCs (Jiang & Sinton 2011: 25).
Figure 2.2 Current Governance structure of Chinese NOCs
Notes: NEC = National Energy Commission; SASAC = State Assets Supervision and Administration Commission; MOF = Ministry of Finance; MOFA = Ministry of Foreign Affairs; NDRC = National Development and Reform Commission; NEA = National Energy Administration; CBRC = China Banking Regulatory Commission; Chinese Banks = CDB and CEIB. Sources: IEA, (Jiang & Sinton 2011: 25).
SASAC ‘indicates that the assets of SOEs amount to over 66 percent of all assets in the country, up from 60 percent in 2003’ (Lee 2012: 80). This increase in assets underlines the Chinese government’s ambition to reassure its grip on the SOEs and the NOCs in particular. After SASAC, the National Energy Commission (NEC) and the National Energy Administration were established in 2008 and 2010 respectively. The former would function as a high-level discussion and coordination body without any specific functions. The latter would function as a vice-ministerial component of the NDRC. This administration has more capability than its predecessor, but it still lacks the
4 “Main Functions of the NDRC”. Via www.ndrc.gov.cn. 5 SASAC (2014). “Main Functions and Responsibilities of SASAC”. Via www.sasac.gov.cn.
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authority for ultimate decision-making (Jiang 2012: 400). The Chinese government established these institutions to ‘provide a favorable environment for foreign investment and protect the legitimate rights and interests of investors (…).’ Their main responsibilities are the development of energy strategies, reform advice, management of the energy sector and putting forward strategies that promote international cooperation and the exploration of new energy (Zhu 2013: 4).
2.3 CORPORATE GOVERNANCE OF CHINESE NOCS
The period after 1993 has been crucial for the development of the Chinese NOCs CNPC, Sinopec and CNOOC. The Chinese government, not wanting a competitive domestic energy industry and having the ambition to overcome both the risk of market and regulatory failure, aimed at developing a co-governance structure for its energy industry. In this way, the petroleum policymaking process in China became not only more decentralized but also progressively pluralized (Kong 2009: 2). Several rounds of reforms enabled these national oil companies to evolve into autonomous and fully integrated oil companies with a growing independence from the Chinese government and an increasingly autonomous corporate structure. The NOCs were given the responsibility to regulate their own market. Nevertheless, there still exist strong ties between the NOCs’ corporate elite and China’s political elite. This interdependence between the NOCs and the government has caused the situation that the NOCs became both market participant and market regulator. A co-governance structure of China’s energy industry emerged that involved ‘the participation of both the central governments and the NOCs in the era of reform and globalization’ (Kong 2009: 2-6). This co-governance structure is the result of a decade-long reform process that took place in Chinese politics. This process resulted in the decentralization of energy production, pricing and administration and seems to be based on an agreement between the NOCs and the government that entails two components. On the one hand, the NOCs agree to deliver a stable amount of oil at a price level set by the government. In return, the government grants subsidies to the NOCs to cover possible losses. On the other hand, the executives of the NOCs agree to implement policies that enhance the value of these SOEs and guarantee a stable flow of oil in order to maintain the country’s security of energy supply. In return, these executives are being promoted both along the corporate and political ladder (Kong 2009: 27; Jiang 2012: 395-401).
31 The interdependence and interaction between the Chinese government in Beijing and the NOCs decide the effectiveness of the country’s energy governance. However, there are three factors that impede these interactions. First, the government and the NOCs have different embedded priorities and interests, and Beijing is not always fully aware of the NOCs interests and the role they should have in the Chinese energy industry. Second, the Chinese government is not able to actively monitor the NOCs’ behavior or hold them fully accountable for their actions. Finally, the government in Beijing often gives the national oil companies too much or too little distinction (Kong 2009: 6). It was only since the early 2000s that the Chinese government envisaged a increasing gap between supply and demand and has since that moment taken the lead in supporting state firms like the national oil companies to find more energy resources and expand their share of foreign equity oil (Chen 2008: 81).6 All Chinese NOCs use this tactic of state-backed “oil diplomacy” and have rapidly expanded their business abroad. Oil diplomacy refers to a state-backed strategy to gain more secure national control over overseas oil and gas supplies and a diversification of imports. CNPC recorded a 12.9% increase in its share of overseas equity oil and gas production in 2013. Its equity share of overseas oil and gas output amounted to 59.2 million tonnes of oil equivalent (mtoe). That is 1.18 mb/d (Reuters 2014). Sinopec’s share of overseas equity oil for the year 2013 amounted to 21.7 million tonnes and increased investments resulted in a production of 36.36 million tonnes by the third quarter of 2014, a growth of 107.3 % compared with 2013.7 China National Offshore Oil Corporation (CNOOC) recorded an overseas oil production of 27.46 in 2013.8 These increased investments and the on going procurement of foreign equity oil is made possible by the Chinese government’s oil diplomacy and could be facilitated due to structural reforms of both the Chinese economy and its institutions. After China had become a net importer of oil in 1993, the country started a second phase of economic and institutional reforms in order to open up their economy to the world (Jiang & Sinton 2011: 10). This ‘Going Out’ strategy resulted in fundamental changes in the institutions that were concerned with the supervision of NOCs, the appointment of its executives and oil pricing mechanisms. The energy ministries
6 The term “equity oil” refers to ‘a practice used by petroleum firms to participate in foreign oil or gas projects in the form of share of stocks or investments; in return, they can annually obtain a certain portion of oil and gas produced from those projects’ (Chen 2008: 83). 7 Sinopec Corporation Q3 2014 Results Announcement, Oct 31, 2014. Via www.sinopecgroup.com 8 CNOOC (2013). “CNOOC Annual Report 2013”. Via www.cnooc.com.cn
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disappeared and several independent government bodies were installed to facilitate the growth and autonomy of some of its most important enterprises. To understand the relationship between the Chinese government and its NOCs, the principal-agent (P-A) framework or theory is a useful starting point. This framework refers to the arrangement between an agent -in this case NOCs- and a principal –in this case the Chinese government. The agent is legally appointed by the principal and performs the tasks given to him (Liao 2015: 46-47).
Figure 2.3 Sample NOC governance system as part of a principal-agent framework
Source: Hults (2012: 69)
Figure 2.3 shows a simplistic model of the principal-agent relationship. Despite the fact that this model suggests a clear separation between the NOC and the state, which is clearly not the case in China, it can function as a framework to understand the interaction between the state and the NOCs. As both figure 2.1. and figure 2.2 show us, we can identify multiple principals that are part of NOC governance in China. In general, these principals often have different incentives and objectives, though this is not the case for China, where there is a vertical governance structure in which different principals are subordinate to the State Council (see figure 2.2). All the NOC governance bodies thus advocate the state objectives of making profit, creating employment and maintaining energy security (Hults 2012: 67; Leung 2011: 1332). The NOCs, in turn, have somewhat
33 different incentives than the state. They do want to make profit, but have slightly different views on employment and energy security. This discrepancy will increase when NOCs become more autonomous from the state. The Chinese government uses different tools in order to keep control over the oil companies. The state uses ex ante procedures to influence or mandate the NOCs’ decision-making process (contracts with partners, employee salaries, appointment of directors, etc.) and ex post procedures to monitor these decisions (mandatory annual reports, audits, investigations, etc.). These procedures are necessary to overcome the discrepancy between state and NOC incentives. (Hults 2012: 66-68). Despite the fact that the analytical framework of P-A is not able to fully explain the relationship between the Chinese government and NOCs, it partly explains this complex relation. The next section will elaborate on the ownership and control of Chinese NOCs to add to the understanding of this relation.
2.4 OWNERSHIP AND CONTROL OF CHINESE NOCS
To further examine the relationship between the NOCs and the government, it is important to assess the ownership structure of the oil companies and to address the question: who actually controls these NOCs? Like IOCs, the Chinese NOCs all have publicly listed subsidiaries, but a majority of the shares are still in hands of the state. As table 2.1 shows us, the majority of the shares of the three Chinese NOCs’ listed companies are in the hands of the NOCs, which are then owned by SASAC and thus the Chinese government. However, ownership does not per se translate into control. In the case of Chinese NOCs, with majority ownership does come the ability to appoint members of the board of directors and the management. The control of these companies thus goes beyond ownership and has to be examined from a slightly different angle.
Table 2.1 Major share ownership of Chinese NOCs
Company Major Shareholder Percentage of Shares Share Type Owned Sinopec Corp. Sinopec Group 75.84 State-owned
PetroChina CNPC Group 86.35 State-owned
CNOOC Ltd CNOOC 64.41 State-owned
Sources: Table derived from Taylor (2014), with updated figures from company annual reports: CNOOC (2013). “CNOOC Annual Report 2013”; CNPC (2013). “CNPC Annual Report 2013”; Sinopec (2014). “Sinopec Annual Report 2014”.
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The control of the state over the NOCs can explained through four dynamics. First, there is SASAC, the State Assets Supervision and Administration Commission. This institution has in the past been a relatively passive government body. For example: SASAC did not collect any dividend from the NOCs until 2007, when the government reinstated these dividend collections (Downs 2010: 75). Now, the NOCs are required to pay 15 percent of their profits to the state, up from the current dividend of 10 percent (Downs 2010: 92; Financial Times 2010). Along with this development, SASAC has taken a more active role in controlling the NOCs, for instance with linking the salaries of the managers of the companies to their performances. SASAC does not have the authority to appoint the top leaders of the NOCs, but has the power to choose their top managers. SASAC functions as a watchdog of all the assets belonging to the SOEs, including three NOCs. “It has the final say over any modification to the state assets of any of the three oil companies, their holding subsidiaries, and companies with their equity” (Kong 2009: 26). A second instrument of control of the state over the oil companies is the power to appoint, promote and dismiss the top managers and leaders of the firms. Part of this power lies with SASAC, but the predominant institution in management appointments is the Organization Department of the Communist Party. This body affects not only the states’ internal mechanisms (appointment and dismissal of party committees and party secretaries), but also the NOCs’ personnel management, decision-making and transparency (Yeo 2009: 1021-1022; McNally 2002: 93). This power does not only have national consequences, but can influence the international course of the company, since all three NOCs are listed on international stock exchanges and an appointed manager of one of the parent companies simultaneously serves on the board of directors of one of its internationally listed subsidiaries (Downs 2010: 76). Third, the state has control over companies through the approval of investments. All domestic investments in oil refineries, LNG terminals, oil and gas fields etc. require the approval of the state. Furthermore, the NDRC has to approve all foreign investments exceeding $30 million and all investments above $200 million have to be approved by the State Council. With this authority, the state is able to control and shape the NOCs’ domestic and global strategies (Downs 2010: 74-78 and see Taylor 2014: 13- 14) A final instrument of control of the state over the NOCs is the provision of cheap credit for the oil companies. Through state-owned banks as the China Export and
35 Import Bank (CEIB) and the China Development Bank (CDB), the state can provide cheap loans to the NOCs that can function as leverage (Jiang & Sinton 2014: 20-23). Thanks to the NOCs’ strong financial positions however, this instrument has not been used often. Nevertheless, the Chinese government has provided huge subsidies to some the NOCs in the past to compensate for their losses due to a high degree of inefficiency (Kong 2009: 24) and because they bought oil on the international markets and had to sell petrochemical products made from this same oil for lower, government capped prices in China (Collins & Erickson 2012). Since 2004, Sinopec and CNPC have received nearly 126RMB billion of government subsidies and hence forced some private refineries and retailers out of the market (Xinjing Bao 2014). The Chinese NOCs themselves do have some influence vis-à-vis the state. These companies have some autonomy and are not merely arms of the government. Their first instrument of power is the lack of strong government institutions. The three rounds of reforms have created an institutional situation that is best described as having ‘too many cooks in the kitchen’. The decentralization and liberalization of China’s energy sector have caused a fragmented institutional framework with government bodies that are often politically weaker than the NOCs itself (Taylor 2012: 70-74). The absence of a single Ministry of Energy and the overlap of institutional jurisdictions caused the NOCs to gain leverage vis-à-vis the government and become more autonomous. Although the government’s has tightened its grip on the oil companies since the 2003 reforms, there are still several loopholes for the NOCs. A second instrument of corporate power is the huge profits the NOCs have earned over the years. For example, among SOEs, CNPC, Sinopec and CNOOC accounted for 24.1 percent of total sales revenue, 40 percent of taxes collected and 23.5 percent of profits (Downs 2010: 77). In 2007, CNPC alone contributed RMB 198.5 billion, comprising 51 percent of total profits (Jiang 2012: 406). Their great share in income revenue for the state was mainly due to a rapidly increasing oil price: the international oil price increased from US$28/barrel in 2003 to US$138/barrel in 2008 (BP 2013; Liao 2015: 53). Finally, the NOCs have gained more autonomy and power due to the international listing of its subsidiaries between 2000-2001. With their listings on the international stock exchanges of Hong Kong (HKSE), New York (NYSE), Shanghai (SSE), these companies are compelled to abide by the rules and laws of the host country. Not only the stock exchanges itself, but also other international supervisors exert some
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influence over the NOCs’ listed subsidiaries. A consequence is that Chinese NOCs have to take international shareholders and international laws into account, which puts them in a position that is increasingly more autonomous from the state (Downs 2010: 74-78). In the end, it is a unique combination of majority share ownership, the system of nomenklatura, support from state-owned banks and other factors that enable the Chinese government to let the NOCs follow a path that is for a big part outlined by the government, despite the fact that all three NOCs are publicly listed on international stock exchanges. However, with the decentralization of the NOC governance structure, the state has granted the NOCs more autonomy. Therefore, the debate on how to assess the ownership and character of these companies is still ongoing. The next part will give a short overview of this debate.
2.5 ASSESSING THE RELATIONSHIP BETWEEN THE CHINESE GOVERNMENT AND NOCS:
THE DEBATE
We can roughly distinguish three arguments in this debate. First, there is the argument that Chinese NOCs are both state-owned and state-led: scholars supporting this argument state that there is no such thing as company autonomy for these NOCs and that the Chinese government pulls the strings through institutions as SASAC and via the system of the appointment of members of the board of directors of all three NOCs (see Mattlin 2008; Liao 2015; Taylor 2014; Inkpen & Moffett 2011). A second, more broad-based, argument is that of Chinese NOCs being state- invested, not state-led. Due to the transnationalization or internationalization of the NOCs, their priorities and interests have shifted from serving a predominantly domestic (i.e. government) agenda to a more autonomous and commercial agenda. In this line of thought we can examine and explain the overseas activities of Chinese NOCs, for instance in Kazakhstan. The NOCs zealous expansion overseas, backed-up by the diplomatic efforts of the Chinese government supports the claim that the NOCs are neither completely state-led nor fully autonomous (see Jiang & Sinton 2011; Chen 2008; De Graaff 2014; Jaffe & Lewis 2002) A third, more hypothetical, argument is that of Chinese NOCs being almost entirely autonomous from the government. Obviously, this is not the case today, though some scholars make the argument that Chinese NOCs are clearly moving towards (full) autonomy. Mostly, these scholars are proponents of the argument that NOCs are state-
37 invested, instead of state-led, with the exception that they see a different future for the NOCs. Inkpen & Moffett (2011: 60) also suggest that actual competition in the energy sector and full privatization of oil and gas firms would serve the country better in terms of both the development of oil and gas projects and the allocation of capital and that without the discipline of markets and shareholders, NOCs will never be as efficient, competitive and responsive to the changes in a market as IOCs (Inkpen & Moffett 2011: 66). Jiang (2012) argues, in line with this argument, that without their public listings, Chinese NOCs are highly inefficient companies. Especially when you compare them to other IOCs (Jiang 2012: 398-406). The fact that only 10-20 percent of the NOCs overseas oil production makes it back to China supports the argument that NOCs are not indispensable for China’s energy security (Dirks 2006). Stimulating the NOCs autonomy from the government will therefore lead to higher efficiency and will not significantly endanger the country’s energy security (see Zhang 2012). These three arguments reflect the tensions that exist between the Chinese national oil companies and the government. All three Chinese NOCs are entities of contradictions and inconsistencies as a result from unclear reforms, increasing autonomy of their overseas business, state interests etc. This research does not aim at assessing the exact relationship between the government and the NOCs. Considering the highly technical and complicated Chinese corporate governance structure, this would be an impossible task. However, by assessing the different government agencies involved, this research aims at explaining this difficult relationship and adds to our understanding of the overseas activities of Chinese NOCs in Kazakhstan. With the information at hand, it appears that Chinese NOCs are not merely a tool of China’s foreign policy. Due to their increasing autonomy vis-à-vis the Chinese government, they function more as geoeconomic rather than geopolitical enterprises.
2.6 THE GOING ABROAD POLICY AND THE TRANSNATIONALIZATION OF NOCS
China has promulgated several strategies to diversify its energy supply in order to maintain its security of energy supply for the short and long term. In 2012, the Chinese government released a White Paper that emphasized the importance of the development of renewables, alterations that have to be made in the field of energy policy to enable new initiatives to foster, the establishment of strategic petroleum reserves on Chinese soil and other internal measures to diversify Chinese energy supply. Furthermore, a more
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concrete and external strategy is to vigorously pursue the cooperation with third parties in order to gain access to the international energy markets. China predominantly focuses on Eurasian and Middle-Eastern countries to diversify its energy supply. Other important resource-rich countries that caught China’s attention are Venezuela, Angola, Brazil and Argentina. In 2013, China obtained 51% of its total oil imports from the Middle East, 16% from Angola and Congo, 13% from Russia and Kazakhstan, 8% from Venezuela and Brazil and 12% from other sources (EIA 2014). The objective to increase oil and gas reserves, to expand and increase production and to diversify the sources of supply is fully supported by the Chinese government and carried out by the national oil companies. The State Council states that ‘following the principle of equality, mutual benefits and reciprocity, Chinese energy enterprises are actively involved in international energy cooperation, participating in overseas energy infrastructure projects and expanding cooperation in energy engineering and services’.9 These statements are the result of China’s “Going Out” (Going Abroad) policy that entails that Chinese (national oil) companies actively seek to connect China to the international market, whether their motives are economically or politically driven. Furthermore, China has made significant efforts to diversify both routes and sources of its oil supply, to strengthen its navy and to develop its own strategic petroleum reserves (Zhang 2011: 7613-7614). However, the preferences of the Chinese government and the NOCs do not coincide. They have different interests and priorities in securing fossil fuels abroad. On the one hand, the Chinese government encourages the NOCs to gain experience and catch up with IOCs by “going out”, but on the other hand the government expects the NOCs to cooperate in maintaining China’s energy security. When the government thinks it is necessary, the NOCs should put political and social obligations above commercial incentives. Nevertheless, due to this going out of NOCs, they have become more and more market- oriented, commercial enterprises that have the ambition to increase both their financial and energy reserves: Chinese NOCs now have equity oil production in over 20 countries and their equity oil production reached 2.1 million barrels per day (mb/d) in 2013 (IEA, 2014a), the equivalent of half the Chinese domestic production in the same year (Jiang & Ding 2014: 7).
9 White Paper of China’s Energy Policy 2012, Oct. 24 2012. Via www.china.org.cn
39 Table 2.2 Chinese NOCs in numbers
NOC Global Revenue 2014 Profits 2014 Assets 2014 Employees Ranking (Million USD) (Million USD) (Million USD) CNPC 4 432 007 18 504 620 651 1 668 072* 10 328 500 21 100 386 900 Sinopec 3 457 201 8 932 352 982 368 953** 29 445 300 10 900 228 400 CNOOC 79 95 971 7 700 172 062 98 750* 108 43 000 10 600 102 700 Note: *data from 2011; ** data from 2013. Sources: Fortune Global 500; Forbes Global 2000; cnpc.com.cn; sinopecgroup.com; cnoooc.com.cn.
Thus, they not really tend to be solely obedient to state instructions (Chen 2011: 622-623). This policy is in the eyes of Chen (2008) strongly motivated by the NOCs will to “forge the capability to operate globally so as to become real multinational oil companies, enhance their expertise, grasp the set of international rules, find a niche in foreign markets, gain managerial and marketing experiences from foreign operations and foreign cooperation, export Chinese labor and oilfield operation technologies, and so on” (Chen 2008: 92).
2.7 CONCLUSIONS
Through institutional reforms, China has in the last two decades been seeking to reform both its energy sector and energy policies. Since 2003, the country has had the ambition to retake the control over its NOCs by reforming the complete institutional framework. With the government assessing NOCs as key players in mitigating China’s energy vulnerability, it aimed at changing its responsibilities and created a co-governance structure for the oil companies. This structure entails an increased autonomy with regard to the NOCs’ cross-border activities, but makes the NOCs more accountable to the government when it comes to domestic operations. This ambiguity between autonomous cross-border activities, the so-called transnationalization of NOCs, and the binding domestic regulations make it difficult to assess the relationship between the state and the corporations, increasingly so when we take into account that the state is a majority shareholder of all three major NOCs. On the other hand, the ambition to make the NOCs internationally more competitive has led to the listing of these corporations on international stock markets. This commits them to abide by foreign laws and regulations and make them increasingly operate as other IOCs. The current academic debate on this ambiguous connection can be roughly divided into three arguments. The first argument
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is that NOCs have no autonomy at all: they are both state-led and state-run. A second, more mainstream, argument is that of NOCs being state-invested and not state-run. Finally, there is the argument that NOCs are completely autonomous of the government. This research places itself between the second and third argument and argues that the NOCs increasingly become autonomous entities with regard to foreign operations, but that the state still has full control over their domestic activities.
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CHAPTER III: KAZAKHSTAN: POWER STRUCTURES, SOCIETY AND CHINESE
INVESTMENTS IN THE ENERGY SECTOR
3.1 INTRODUCTION
Kazakhstan exemplifies China’s ambition to diversify its energy supply sources and routes in order to maintain its energy security for the future. Kazakhstan has vast natural resources and has positioned itself as an open and “multivectoral” player in the international energy market.10 Kazakhstan is, besides Russia, China’s most important focus in the Caspian Region, just because of their open stance to both the East and West (Saurbek 2008: 79-80). Furthermore, the Caspian region is the resource-rich region that is closest to China. China’s high dependency on the Strait of Malacca, an 1,100km long bottleneck through which about 80% of China’s oil imports must pass, urges them to find alternative routes and sources to meet their soaring energy demand. This “Malacca Dilemma” has led to the decision to construct both oil and gas pipelines from Myanmar and Pakistan to China (Chen 2008: 83). The wish to focus on Kazakhstan in order to diversify energy supply was expressed by the decision to construct two oil pipelines running from Kazakhstan to China and by purchasing a production company and an oil refinery in the South of Kazakhstan. Since 1997, Chinese NOCs have made significant commitments to the Kazakh energy sector and now own majority shares in several Kazakh oil and gas companies. The political elite in Kazakhstan enables the Chinese NOCs’ foreign investments in the domestic energy sector by creating a favorable investment climate and providing the legal and financial frameworks necessary for such agreements. Kazakhstan’s ruling elite has a pivotal role in this investment structure and directly profits from Chinese FDI. First, this chapter provides an assessment of the state-society relations in Kazakhstan and addresses the country’s resource nationalism. Then, it examines Kazakhstan’s power structure by examining the political and economic power of the president Nursulatan Nazarbayev and the composition of the ruling elite groupings surrounding him. Next, it gives an overview of the societal forces that play a role when addressing Chinese NOCs’ investments in Kazakhstan. Third, and most important, this
10 Kazakhstan’s multivectoral foreign policy refers to the country’s ambition to position itself as an Eurasian country; a bridge between Europe and Asia. It is Nazarbayev’s ambition ensure Kazakhstan’s sovereignty and independence by compensating Russia’s hegemony in the region through diversifying its economic and political ties with other countries (e.g. China and the US) (see Clarke 2015)
43
chapter gives a detailed overview of Kazakhstan’s energy sector. It addresses the current structure of the energy sector and its political oversight, assesses Kazakhstan’s energy ties with its neighbors and looks at the trade, investment and finance flows between Kazakhstan and China. The focus in this chapter will be on a quantitative analysis of Chinese NOCs’ FDI in the Kazakh energy sector.
3.2 KAZAKHSTAN: STATE, SOCIETY AND RESOURCE NATIONALISM
Despite the fact that Kazakhstan is categorized as a nominal democracy, its democratic institutions are weak (O’Neill 2014: 145), many of the Kazakh people were afraid to openly express their political views (Kazakhstan National Opinion Poll 2011) and ‘the stagnating neopatrimonial political regime’ of Nazarbayev ‘has prevented social mobility and the emergence of a democratic political system with a viable political opposition’ (Yemelianova 2014: 292). Kazakhstan retained its governmental structure from the time it still belonged to the Soviet Union and most of the politicians that were part of the leadership in 1990. Nazarbayev, first secretary of the Communist Party of Kazakhstan (CPK) has been the only president of Kazakhstan since the country became independent from the Soviet Union and his clan still has almost total control over the country’s economy and politics. After Nazarbayev was elected president in 1991, he reinforced his position by drafting a new constitution that made the Ministries responsible solely to the president. Despite the authoritarian character of these changes, Nazarbayev gained significant popularity by limiting the economic decline of separation from the Soviet Union (Guo 2013: 7). This popularity is underscored by Nazarbayev’s approval ratings reaching 90% in 2011, according to the Kazakhstan National Opinion Poll (2011).11 Kazakhstan is still an authoritarian regime. This authoritarianism can be characterized by four components as theorized by Linz (1964): (1) constraints on political institutions, (2) a basis for the regime’s legitimacy, (3) constraints on the mass public, and (4) ill-defined executive power (pp. 297). Systems are authoritarian if they are
Political systems with limited, not responsible, political pluralism, without elaborate and guiding ideology, but with distinctive mentalities, without extensive nor intensive political mobilization, except at some points in their
11 Some independent polls have reported lower approval rates in the past (around 70-80%). According to Hess (2013: 175) this means that electoral fraud has provided some insurance to the president, though election fraud on a major scale has not been necessary to assure Nazarbayev’s victory.
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development, and in which a leader or occasionally a small group exercises power within formally ill-defined limits but actually quite predictable ones (Linz 1964: 255)
Kazakhstan’s authoritarianism can be linked to “the model of pursuing economic growth while eroding the independence of critical institutions” (Walker & Goehring 2008). The abundance of energy resources has yielded enormous wealth for a small group in Kazakhstan. With transparency and accountability already being weak in the country, this new wealth has functioned as a driver of authoritarianism, which has allowed the ruling elite to further marginalize critical institutions. This type of state is what scholars call “petro-authoritarianism” (Walker & Goehring 2008; Friedman 2008). The importance of Kazakhstan’s energy sector is emphasized by figure 3.1. Oil and mineral fuels accounted for 78% of the country’s exports in 2014.
Figure 3.1 The composition of Kazakhstan’s exports in 2014
Oil & Mineral Fuels 5% Iron & Steel Inorganic Chemicals Ores 4% Copper Cereals Precious Stones & Metals 78% Zinc Natural Minerals & Stone Milling Products Other
Source: UN Comtrade (2015). Graph made by author.
The country’s dominant presidential system enables the government to control and check political opposition and the emergence of political institutions. This system reassures the tight grip of the government on Kazakhstan’s society. The absence of a strong civil society is a direct result. This weak civil society and the unchecked power of a president are however not merely the result of manipulation or government control. According to Linz (2000), the underdevelopment of rural areas (like the majority of
45 Kazakhstan), linked with ‘clientelistic power structures integrated into the unified party’, does not create a society with much political participation (pp. 167). However, unlike other bureaucratic, authoritarian regimes, Kazakhstan and Nazarbayev did deliver on the promise of development. The government met all the challenges to its statist, redistributive, inward-oriented and authoritarian character and retained its legitimacy. This legitimacy was mainly due to the fact that the government zealously changed its economic policy and opened up its border to foreign investors, thereby meeting the demands of the newly emerging domestic economic and political elites who were dissatisfied with excessive state interventions and had a lot to gain from economic reforms (Biersteker 1992: 114-115; Agnew 1995: 200-203). So authoritarianism in Kazakhstan has to be distinguished from more oppressive regimes for the fact that the country has some form of authoritarian rule, but also has some democratic elements. A small grouping around president Nazarbayev controls domestic politics. Nazarbayev’s maintains his position through an unofficial patronage network in which other power holders are incorporated by providing them with resources (e.g. jobs and access to money-making opportunities). They can distribute these resources to their own constituents, making a strong allegiance to a direct patron the key to a successful career. These patronage systems bridge the public-private divide and incorporate clients into the power structure, thereby avoiding the emergence of a strong civil society. This system maintains corruption in most authoritarian countries and prevents sound institutions to emerge, while keeping pragmatic alliances strong (Hague and Harrop 2010: 100-103). According to King (2007), this patronage system leads to substantial misallocation of capital, a weak banking sector and reduced FDI. However, this is only partly true for Kazakhstan. There are some examples of misallocation of capital (see Hess 2013: 181), especially in the energy sector, but the country has a fairly strong banking sector that plays an important role in enabling and attracting foreign investments, one of the main focuses of the country’s “multi-vector” approach towards its neighbors (Domjan & Stone 2009: 60). Despite the lack of a strong civil society and the absence of sufficient “lateral pressure” (Amineh & Guang 2014: 509), the government’s mandate is certainly based on a form of legitimacy: Kazakhstan’s economic track record. Nazarbayev’s political and economic reforms have achieved impressive GDP growth in Kazakhstan and opened up the country to the global markets. Kazakhstan’s state-owned corporations and financial institutions have gained major influence by connecting to the global economy. The
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soaring commodity and energy prices, combined with the influx of FDI from neighboring countries have caused a vast increase in government-controlled assets and capital (Harris 2009: 139). This form of resource-based economic development is often referred to as resource nationalism. This can be understood as referring to a wide range of strategies and tools that domestic elites use in order to increase their control of natural resources (Domjan & Stone 2009: 38-39), but usually refers to ‘the nationalization or expropriation of foreign-owned resource exploitation sites and assets” (Matutinovic 2008: 4254). Bremmer and Johnston (2009) have identified four varieties of resource nationalism: (1) a revolutionary type, linked to political unrest (e.g. Russia and Venezuela); (2) an economic type, driven by the ambition to foster economic development (e.g. Kazakhstan and Algeria); (3) a legacy type, a consequence of the reassertion of a legacy of national control (e.g. Kuwait and Mexico); and (4) a soft type, referring to resource nationalism through legal channels (e.g. Canada and United Kingdom). Humphreys et al. (2007: 323-324) focus on the financial side of resource nationalism. They argue that resource nationalism is the consequence of governments’ inability to broker deals that remain profitable in case commodity prices rise. A comparable scenario emerged in Kazakhstan, where low commodity prices led to the signing of contracts with favorable terms in order to attract FDI, but when prices rose, these contracts were seen as very strict. According to a study by Guriev et al. (2008), the rise of oil prices is one of the main drivers of governments’ propensity to nationalize energy assets. However, what we see in Kazakhstan is that the nationalization of energy assets did not lead to the expropriation of foreign assets but rather led to an increase in FDI attraction. This open stance towards its neighbors is for a part due to the fact that KazMunaiGas does not have the technological and financial resources to explore and develop the country’s geologically challenging oil and gas fields and thus needs foreign expertise and capital. On the other hand is this attitude the outcome of Kazakhstan’s ambition to have a balanced diplomatic position in the Caspian Region and Central Asia.
3.3 POLITICS AND MARKET IN KAZAKHSTAN: ELITE ANALYSIS
To understand the political system in Kazakhstan, one must take a look at the different groupings that have economic and political power (these two often coincide in Kazakhstan). These groupings are not fixed entities and there have been several shifts in economic and political power. However, the mapping of these elites does give an
47 indication of the political system in Kazakhstan and adds to our understanding of the structure of political and economic ties. The first and most important grouping is the Nazarbayev family. This is the most influential formation in Kazakhstan and has, via close blood relations, a firm grip on domestic politics and has interests in Kazakhstan’s main economic sectors. Nazarbayev’s family can be divided into two subgroups (see figure 3.1): the grouping of Dariga Nazarbayeva, the president’s eldest daughter, and the grouping of Timur Kulibayev, who is married to Nazarbayev’s middle daughter Dinara Kulibayeva (Bloomberg 2015).12 Dariga Nazarbayeva currently leads her father’s party faction in parliament and is the legislature’s deputy speaker. Timur Kulibayev holds a position as member of the board of directors of Gazprom and has served as a chairman on the boards of KazMunaiGas and Kazatomprom. He therefore is one of the most influential people in the domestic energy sector. Nazarbayev aims at controlling Kulibayev, because he is sometimes fearful of his growing influence, especially due to his close ties with Karim Massimov (Stratfor 2011). Timur Kulibayev attended Moscow State University with Nurzhan Subkhanberdin, billionaire and founder and chairman of the Kazkommertsbank. According to O’Neill (2014), he leads his own grouping, despite the fact that he is politically tied to Kulibayev. Subkhanberdin has, via his stake in the Central Asian Investment Company (CAIC), interests in Kazakhstan’s oil and gas sectors (Forbes 2015). The grouping around Subkhanberdin belongs to Nazarbayev’s inner circle. A new emerging grouping is that around Nurali Aliyev, the eldest son of Dariga Nazarbayeva and the disgraced Rakhat Aliyev. Rakhat Aliyev currently lives in exile in Europe after he fell out of favor with Nazarbayev and is suspected of murder. Nurali has been appointed the deputy mayor of Astana. This is his first achievement in Kazakh politics. Before his appointment as mayor, Nurali was chairman on the boards of the Development Bank of Kazakhstan and Nurbank.13 Another grouping that is worth mentioning is that around Kairat Satybaldy, a nephew of Nazarbayev. Satybaldy served for a long time on the National Security Committee (KNB) and currently leads the youth department of Nazarbayev’s party Nur Otan. His grouping has some influence over KMG, but lacks the actual political clout of the other groupings. One of the most influential groupings is that around Prime Minister Karim Massimov. Not only is he the leader of the Kazakh government, but he also holds a
12 See also www.eurasianet.org (8 May 2015). 13 ‘Kazakhstan: Nazarbayev Grandson Assumes Astana Power Post’ (21 Dec 2014). via www.eurasianet.org
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position as General Director of the Sovereign Wealth Fund Samruk-Kazyna, which supervises Kazakhstan’s SOEs. Over the last years, Massimov has expanded his grouping and aligned himself with Timur Kulibayev. Both are said to be Nazarbayev’s potential successor. Associated with the grouping of Massimov are Adilbek Dzhaksybekov, the current mayor of Kazakhstan’s capital Astana and former leader of Nazarbayev’s administration, and Nurlan Nigmatulin, head of the executive office of the president and former chairman of the Parliament (Mazhilis). 14 This grouping does not belong to Nazarbayev’s inner circle, despite the fact that Massimov has led his government for years. Groupings that do belong to Nazarbayev’s inner circle are those around Nurtai Abykayev, the Executive of the National Security Committee (KNB) and nephew and close friend of the president; Marat Tazhin, the current Secretary of State and former aide to the president; Akhmetzhan Yesimov, the mayor of Almaty, and Imangali Tasmagambetov, the current Secretary of Defense, former head of the government and governor of the three most important regions (O’Neill 2011: 293). Bulat Utemuratov, billionaire, former Secretary of the KNB and founder of the Almaty Trade-Finance Bank (renamed ATF Bank JSC in 2002) has close ties with Nazarbayev and was his former economic aide. Although Utemuratov has followed a more independent course in recent years (he has close ties with Karim Massimov, who was ATF’s first chief executive officer, and Timur Kulibayev, ATF’s first chairman) he is still considered one of the president’s loyal lieutenants (Bloomberg 2013). Two other important companions of president Nazarbayev are the Chairman of the Senate Kassym-Jomart Tokayev, former Prime Minister and Foreign Minister, and Kalibulla Jakupov, the Chairman of the Parliament. Tokayev and Jakupov assure Nazarbayev’s power over Kazakhstan’s Congress and control the movements of the various power groupings. As we can see in figure 3.1, there does not actually exist a separation between politics and economy in Kazakhstan. It is not uncommon in Kazakhstan for government officials to own shares in, or control big companies. For instance: Defense Minister Adilbek Zhaksybekov has majority shares in Tsesnabank JSC. Erbolat Dosayev, Minister of Trade and Economic Development, and Environment Minister Nurlan Kapparov own shares in Lancaster Group, a holding company with a subsidiary operating in the Kashagan oil field (Bloomberg 2013).15 Kazakhstan’s energy sector is one of the most
14 Dzhaksybekov is majority shareholder in Tsesnabank JSC (Bloombertg 2013). 15 Erbolat Dosayev is also a member of the board of Sovereign Wealth Fund Samruk-Kazyna.
49 important economic sectors. The General Directors of the biggest energy companies therefore have the political clout to influence policy at the highest level. Besides Nazarbayev, the most influential person in this sector is Vladimir Shkolnik, head of the newly created Ministry of Energy and General Director at Kazatomprom. He supervises Kazakhstan’s energy sector and has close ties with both the president (who appointed him) and the leaders of the country’s major energy companies (Kazatomprom 2015). The director of the state-owned KazMunaiGas, Myanbayev Sauat Muhametbayevich, is Shkolnik’s predecessor and held the position as Minister of Oil and Gas between 2010 and 2013 before his appointment at KMG (KazMunaiGas 2015). KMGs subsidiary KazRosGas also is closely tied to the leadership through Kairat Boranbayev, who is chairman of the board KazRosGas (KasRosGas 2015). His daughter is married to Aysultan Nazarbayev, the president’s grandson (Aljazeera 2013). Aibek Sabitovich, who is General Director at KazRosGas, has on his turn ties with Kulibayev (via Gazprom) and was appointed by Nazarbayev (Eurasianet 2014). Two other influential players in Kazakhstan’s energy sector are (1) Sharipbayev Kairat Kamataevich, the Director General of KazTransGas. Kamataevich is also a member of the board of KMG and member of the Political Council of Nur Otan. (2) Kuandyk Bishimbayev is the General Director of the Development Bank of Kazakhstan (DBK) and Chairman of Sovereign Wealth Fund Samruk-Kazyna (SK) (KazTransGas 2015; Development Bank of Kazakhstan 2015). Samruk-Kazyna is comparable to China’s SASAC and owns many SOEs through a majority stake. Many persons in Nazarbayev’s inner circle are or have been members of the Board of Directors at SK. SK is also the institution through which Karim Massimov exerts a major part of his influence and can be linked to several members of Kazakhstan’s political and economic elite. The Development Bank of Kazakhstan (similar to the China Development Bank) is a crucial institution for enabling FDI inflows from abroad and providing loans to companies looking to invest in Kazakhstan’s energy sector. When assessing politics in Kazakhstan, we can roughly identify six stages of development from 1991 until now. The first stage is the period directly after the independence from the Soviet Union (1991-1995). Kazakhstan had the ambition to create a democracy based on the Western model. The Kazakh people sought to actively participate in domestic politics, but Nazarbayev had already started to strengthen his presidential power. This last development leads to a second stage from 1995-1999. In this period, a definitive personification of state power took place. Nazarbayev reinforced
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his position as president by drafting a new constitution in 1995, in which he enshrined his executive powers as president of Kazakhstan. This period was also crucial for creating the economic and social fundament that formed the framework for the country’s development. This fundament was based on an “Asian model” of development, meaning “economy before politics”. The choice for this socio-economic framework led to a period of economic and political stabilization between 1999-2001. A list of economic reforms was implemented in order to enable the country to connect to global markets and achieve a growth in GDP. This all happened without affecting the conservative presidential politics in the country. Besides the fact that Nazarbayev consolidated his power, the economic prosperity effectuated stability inside Kazakhstan’s political elite. However, this period of stability did not last long, because there were some growing conflicts inside Kazakhstan’s political elite. The excessive influence of the Nazarbayev family annoyed many of the members of the Kazakh political and business elite (Satpaev 2011: 289). Nevertheless, the discrepancy between an increasingly open economy and a closed and conservative political system caused a shift in the balance of power from being predominantly politically oriented to more economy-based power. This fifth stage (2004-2008) caused some shifts in Kazakhstan’s political elite and reassured the president’s already firm grip on the domestic politics. The sixth and last stage of political development has taken place from 2008 until now. The country’s impressive economic growth levels since 1991 and its quick recovery from the 2008-2009 financial crisis boosted Nazarbayev’s approval ratings and created stability both inside the elite and in the country. Many of the state owned enterprises were already privatized, but vital economic sectors, such as the energy sector, remained mostly under direct government control. These privatizations created a system of “patron–client ties atop which Nazarbayev could preside to great effect. Thus, privatization shifted relations from a formal, corporatist type to a more informal, patron– client style” (Schatz 2011). It was in this fourth period (2001-2004) that the opposition in Kazakhstan unified itself in political bodies and clashed with the government. The government reacted by strengthening its grip over important economic sectors and by amending the constitution in order to expand the power of president Nazarbayev (Satpaev 2011: 284- 286).
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Figure 3.2 Kazakhstan Elite Analysis
Nazarbayev Family Adilbek Dzhaksybekov (I) Nurlan Nigmatulin (J) Mayor of the City of Astana Head of executive office of the president Political Leadership Kabibulla Jakupov Chairman of the Mazhilis Orynbayev Yerbol Turmakhanovich Energy Elite Assistent to the President, Member of the Board of Samruk-Kazyna Kassim-Jomart Tokayev (E) 6. Karim Massimov (B) New Grouping Chairman of the Senate Prime Minister, General Director Samruk-Kazyna Kairat Satybaldy (D) 7. Independent Grouping 1. Nurtai Abykayev (C) Leader Youth Department Nur Executive National Security Otan Committee (KNB) (A) Potential Successor Nazarbayev 5. Nurzhan Subkhanberdin Chairman Kazkommertsbank II Main Subgrouping
2. Bulat Utemuratov Proven Connection Private Equity, ForteBank, Verniy Capital Nursultan Nazarbayev Dinara Nazarbayeva II Timur Kulibayev (F) Akhmetzan Yesimov (A) Chairman Gazprom Mayor of the City of Almaty President of Kazakhstan 4. Imangali Tasmagambetov (H) Secretary of Defense Rakhat Aliyev I Dariga Nazarbayeva (G) Vladimir Shkolnik Faction leader Nur Otan, Deputy Speaker of the Parliament Minister of Energy, Director General 3. Marat Tazhin Kazatomprom Secretary of State Nurali Aliyev Alima Boranbayeva Deputy Mayor of the Aysultan Nazarbayev Daughter of Kairat City of Astana Boranbayev Erbolat Askarbekovich Dosayev Minister of Trade and Economic Development, Member of the Board of Samruk-Kazyna Aibek Sabitovich Director General KazRosGas
Bakhyt Sultanov Kairat Boranbayev Deputy Prime Minister, Chairman KazRosGas Minister of Finance, Sharipbayev Kairat Kamataevich Mynbayev Sauat Muhametbayevich Member of the Board of Director General KazTransGas, Chairman KazMunaiGas, Director General KazMunaiGas Samruk-Kazyna Member Political Council Nur Otan
Kuandyk Bishimbayev General Director Kazakhstan Development Bank, Chairman of the Board of Samruk- Kazyna
Note: This model is based on the theoretical framework of SNA and describes causal and interactional interdependencies in social configurations (see Scott 2012: 12-16) Sources: Eurasianet (2014); Bloomberg (2014); Satpaev (2011); O’Neill (2011). Graph made by author
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One of the important consequences of this patronage system and a major factor in Kazakh politics is that president Nazarbayev constantly has to distribute resources to members of the political and economic elite in order to assure his position. His relatively unchecked power seems particularly problematic and risky for foreign parties looking to invest in Kazakhstan. Their investments surely have more institutional protection in more democratic countries. However, it is exactly this executive power and the lack of a viable opposition that enables foreign parties to invest. The absence of legal and executive constraints is key for the huge increase in FDI in Kazakhstan and the success of those investments. Making the political and economic elites stakeholders in this FDI system, they share in the success and keep the system in play (O’Neill 2011: 148).
3.4 THE EMERGENCE OF ENERGY COOPERATION BETWEEN CHINA AND KAZAKHSTAN:
TRADE, INVESTMENT AND FINANCE
To understand Kazakhstan’s energy sector and make an assessment of the Chinese energy investments in the country, it is crucial to analyze the trade, investment and finance flows between the two countries. When we take a look at these figures, we see that in macroeconomic terms, Kazakhstan now has the largest economy in Central Asia (Rousseau 2013: 40), with a GDP of $231.9 billion as of January 2014 (World Bank 2014) and has increasingly opened up its borders to foreign investors. The net inflow of FDI in Kazakhstan was 4.2% of the GDP in 2013 (World Bank 2014). ` Figure 3.3 Foreign direct investment in Kazakhstan, net inflows (% of GDP)
14 12 10 8 6 % of GDP 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: World Bank (2014). Graph made by author
53 This percentage was 12.6% in 2008 (World Bank 2014), which denotes the fact that the country’s FDI inflow is still recovering from the global financial crisis (see figure 3.3) China and Kazakhstan rapidly expanded their bilateral relationship by promoting trade between the two countries and securing these ties through international organizations and agreements. China currently is Kazakhstan’s most important export partner and accounted for an average export of $13.4 billion in the last five years (UN Comtrade 2015), predominantly consisting of oil and gas. China is Kazakhstan’s single-most important import partner after Russia, and accounted for an average import of $11 billion in the last five years (UN Comtrade 2015).
Figure 3.4 Kazakhstan-China bilateral trade 2010-2014
18 16 14 12 10 Import 8 Export
Billion USD 6 4 2 0 2010 2011 2012 2013 2014
Source: UN Comtrade (2015). Graph made by author.
Kazakhstan’s first agreement with an international oil company was signed in 1993, when the country established a joint venture between Kazakhoil and Chevron in order to develop the Tengiz oil field. This agreement enabled other IOCs to invest in the country’s energy sector. With rising oil prices and the institutional development of the Kazakh government, the country began to seek a more active role in the domestic energy sector. KazMunaiGas was established in 2002, after Nazarbayev signed a decree to merge Kazakhoil with the National Oil and Gas Transportation Company (Kaztransoil 2015). KazMunaiGas played a crucial role in assuring the government’s control over the energy sector. Since 2004, KMG has expanded its assets in the domestic energy sector by purchasing stock from international oil companies. There aim was not to limit the influence of the IOCs operating in Kazakhstan, but to profit from the rising oil prices and boost economic growth (Yenikeyeff 2008: 5-7). With this ambition, KMG purchased stock in several energy projects and the government reserves a majority stake for KMG
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in all new projects and joint ventures and the government adopted a law that gives Kazakhstan the right to review the production sharing agreements (PSAs) (Yenikeyeff 2008: 5-7). This law enables Kazakhstan to assess whether certain agreements go against the national security and economic interests. This active role Kazakhstan is seeking in the domestic energy sector is the result of almost 25 years of foreign companies’ involvement in the country’s oil and gas sector.
Figure 3.5 Kazakhstan’s oil exports to China 2010-2014
10
8
6
4
Billions USD 2
0 2010 2011 2012 2013 2014 Source: UN Comtrade (2015). Graph made by author.16
Kazakhstan was forced to grant IOCs the right to develop the country’s oil and gas fields because KazMunaiGas lacked both the financial resources and technological expertise to develop the Caspian hydrocarbon fields itself. Nevertheless, KMG does control (via its subsidiaries KazTransGas and KazTransOil) the pipelines that function as main export routes for important markets as Europe, China and Russia. China’s made its first significant commitment to the Kazakhstani oil sector in June 1997, when CNPC purchased a 60.3% stake in AktobeMunaiGas (AMG). 17 Chinese NOCs and other investment corporations are now major stakeholders of some of the biggest oil and gas companies in Kazakhstan and have invested almost $30 billion in the country’s energy sector since 1997 (see table 3.2). Kazakhstan exports 16% of its crude oil to China and this number will rise when oil production restarts at the Kashagan oil fields in 2016-2017 (IEA 2014).
16 Oil exports include petroleum oils, oils from bituminous minerals and crude 17 ‘CNPC in Kazakhstan’ via www.cnpc.com. CNPC now has a stake of 85.42% in AMG.
55 Table 3.1 Kazakhstan's main oil fields Field Proven reserves Consortium (billion barrels) Kashagan 15.0 Shell (16.81%), KMG (16.81%), ExxonMobil (16.81%), Total (16.81%), ENI (16.81%), CNPC (8.33%), Inpex (7.56%) Tengiz 9.0 Chevron (50%), ExxonMobil (25%), KMG (20%), LukArco (5%) Karachaganak 2.4 BG Group (29.25%), ENI (29.25%), Chevon (18%), Lukoil (13.50%), KMG (10%) Aktobe 1.0 KMG (50%), Lukoil (25%), Sinopec (25%) Uzen 1.0 CNPC (100%) Kumkol 0.6 CNPC (50%), Lukoil (50%) Others 1.0
Total 30.0 (4.0 billion tons) Sources: EIA, Kazakhstan Energy Profile, January 14, 2015; Reuters (2014); Tengizchevroil (2015).
The country produced a modest amount of oil in the Soviet era, but opened its borders and oilfields to Western IOCs after the collapse of the Soviet Union. After President Nazarbayev assumed office in 1991, Kazakhstan developed a form of resource nationalism that was different from that of Russia. Kazakhstan’s resource nationalism’s main goal was to achieve economic growth that would function as a political legitimacy of the political elite, while Russia sought to increase its domestic and geopolitical influence through the revenues from natural resources. This ‘open resource nationalism’ enabled both foreign and domestic NOCs to invest in Kazakhstan’s oil and gas companies (Domjan & Stone 2009: 38-40). Although the first agreement between China and Kazakhstan was signed in 1997, it was not until President Nazarbayev’s visit to China in 2004 that the practical realization of the project started, because experts had come up with a report that a pipeline between the two countries was not feasible. The President’s visit kick started and accelerated efforts to cooperate in the energy sector. In the same year, though CNPC was appointed as the major NOC to operate in Kazakhstan, Sinopec purchased 100% of the petroleum assets from Kazakhstan’s First International Oil Company for $153 million (Jiang & Sinton 2011: 40). After 2004, we can see a rapid increase in Chinese NOCs’ investments in Kazakhstan. As we can see in table 3.2, not only the three big NOCs are acquiring shares of overseas equity oil. Smaller
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investment consortiums like XGI, CITIC and CIC have purchased shares in Kazakhstan’s oil corporations as well. This exemplifies the open stance Kazakhstan’s government has towards foreign investors. In the period between 2000-2011, accumulated Chinese FDI in Kazakhstan exceeded $9 billion (O’Neill 2014: 146-147).18 CNPC is and has been the most active Chinese NOC in Kazakhstan and directs most of its investment toward oil and gas companies with a connection to KazMunaiGas, Kazakhstan’s national oil company. This Chinese strategy to both direct a majority share of its investments towards KMG and to sometimes fund (through loan-for-oil and loan- for-gas deals) KMG’s share is not only economically motivated. With maintaining KMG as the strongest oil company in Kazakhstan, China tries to enhance the political stability in Kazakhstan. With the Kazakh government currently owning a 63.21% stake in KMG, China has a firm grip on Kazakhstan’s energy market.19 Moreover, it is in China’s national interest to keep this region safe in order to secure future energy supplies. The relative successes of the cooperation between China and Kazakhstan can be explained by two factors. First, the two countries share the same normative institutional structures, dating back to the Soviet era. The countries have a similar organization when it comes to investment in the oil and gas industry. China has its triangle comprising of the State Council, the CDB and CEIB, and the NOCs, while Kazakhstan has a triangle comprising of the government, the Development Bank of Kazakhstan (DKB) and KMG. This similarity has eliminated the threshold that often exists between two countries. A second factor is the similarity between the two countries’ decision-making and political culture that are autonomous from civic or societal influence (Cutler 2014: 690). This absence or limited presence of “lateral pressure” (Amineh & Guang 2014: 509) enables the Chinese and Kazakh ruling elite to project their power in resource-rich regions without the conduct of their constituencies. The decision to invest in oil and gas companies can thus be made without too many impediments.
18 This figure may be underestimated; official Kazakh figures for 2006 stated that Chinese FDI amounted to $362.9 million, while CITIC alone invested $950 million in JSC Karazhanbasmunai (O’Neill 2014: 146- 147). 19 Kazakhstan Stock Exchange (2014). “Notes to the Condensed Consolidated Interim Financial Statements”. pp 5-19. Via www.kase.kz
57 Table 3.2 Chinese energy-related acquisitions in Kazakhstan 1997-2014 Year Month Investor Million Share Partner Sector US$ Size 1997 Jun CNPC $4.200 60.3% AktobeMunaiGas Gas 2003 May CNPC $150 25% AktobeMunaiGas Gas 2003 Sep CNPC Undiscl 35% Lukoil, Nimr Petroleum Oil osed 2003 Sep CNPC Undiscl 65% Chevron Texaco Oil osed 2004 Oct Sinopec $153 100% First International Oil Oil Company 2005 Oct CNPC $4.200 67% PetroKazakhstan Oil 2006 July CNPC $1.390 33% KazMunaiGas Gas 2006 Oct CITIC $950 50% Karazhanbasmunai Gas 2006 Oct CITIC $1.910 100% Nations Energy Oil 2007 Dec CNPC $1.540 Gas 2009 Jan Xinjiang Guanghui $300 49% Tarbagatay Munay Gas 2009 Apr CNPC $2.600 50% Central Asia Petroleum Gas 2009 Sep CIC $940 11% JSC KazMunaiGas E&P Gas 2009 Oct CNPC $3.300 100% KazMunaiGas, Gas MangistauMunaiGas 2010 Feb Gezhouba and Xinjiang $730 Kazakhstan Natural Gas Hydro International Technology Economic Cooperation 2010 Mar Sinopec $1.700 Kazakhstan Petrochemical Petro 2011 Dec CITIC $100 Kazakh State Energy Oil 2011 Dec Sinopec $850 Marubeni Oil 2012 Dec CNPC $900 KazMunaiGas Gas 2013 Jul CNPC $5.300 8.33% KazMunaiGas National Oil 2013 Dec Hainan Zhenghe $500 95% Maten Petroleum Oil Industrial Group 2014 Apr Sinopec $1.200 50% Lukoil Oil
Total $29.613 Sources: OECD/IEA (2014); CNPC (2014); New York Times (2014); O’Neill (2014): 151; The Heritage Foundation & The American Enterprise Institute (2015). Table made by author.
There are also critics that state that Chinese NOCs are deliberately overpaying there stock purchases in Kazakhstan’s oil and gas companies, because they are obligated by the Chinese government to transport their share of equity oil back to China (Zhang 2012: 699). There is however no evidence that support this claim. The NOCs’ apparent preference is to let the conditions on the international energy market decide whether to send the oil back to China or to sell it on the market. Before the completion of the Atyrau-Alashankou pipeline, Chines equity oil from Aktobe was shipped to the port of Atyrau and sold on the market. Even after the construction of the pipeline between Kazakhstan and China, some of CNPC’s equity oil is still not being transported to China (Zhang 2012: 700).
58 III KAZAKHSTAN: POWER STRUCTURES, SOCIETY AND CHINESE INVESTMENT IN THE ENERGY SECTOR
3.5 CONCLUSIONS
This chapter has provided an analysis of the relationship between the state, society and market in Kazakhstan and examined in what way the framework of a ruling elite in petro- authoritarian state has embedded and enabled Chinese NOCs’ investments in its energy sector. The main findings in this chapter is that the wealth from energy resources has strengthened the position of president Nazarbayev and ruling elite groupings surrounding him. The intertwinement between politics and business (i.e. energy sector) is so strong, that the ruling elite has established itself as main beneficiary of energy revenues leading. These financial benefits both yield and consolidate direct political power for members of the ruling elite through a strong and unofficial patronage network. The scope of Chinese NOCs investments in Kazakhstan underlines the interests at stake for both parties: since 1997, Chinese NOCs have invested approximately $30 billion in the country’s energy sector. Besides the interests of the ruling elite in Kazakhstan, this amount is also a reflection of the importance of Kazakhstan’s energy sector for China. China’s soaring energy demand and growing supply vulnerability have forced the country to secure foreign equity oil. In this geoeconomic quest for foreign energy resources, NOCs have proven key players. The next chapter assesses the transnationalization of Chinese NOCs and the role of the Chinese ruling elite.
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60
CHAPTER IV: THE TRANSNATIONALIZATION OF CHINA’S NATIONAL OIL
COMPANIES AND THE ROLE OF DOMESTIC ENERGY ELITES
4.1 INTRODUCTION
The how and why of the increased activities of Chinese national oil companies in Kazakhstan can be understood through the theoretical framework of transnationalization. The transnationalization of NOCs refers to the increased cross- border activities of these corporations. This chapter aims at answering the question: How we can assess and map the concept of a Chinese ‘energy elite’ and how can we understand the role of Chinese and Kazakh energy elites in enabling Chinese NOCs transnationalization and transnational investments? It analyzes the key drivers of this transnationalization, thereby focusing on the composition of China’s ruling elite and their role in enabling NOCs investments in Kazakhstan. Other important drivers of this transnationalization are the Chinese policy banks and national investment funds in both Kazakhstan and China, which have proven to play a decisive role in providing the financial means to gain access to foreign energy resources. This financial structure, referred to as loan-for-oil and loan-for-gas deals, is increasingly being used to enable NOCs to acquire foreign equity oil and gas.
4.2 THE TRANSNATIONALIZATION OF CHINESE NATIONAL OIL COMPANIES
Kazakhstan’s weak democratic institutions, its lack of lateral pressure, and a weak civil society, combined with a political system ravaged by corruption make the country a less than ideal investment environment for foreign corporations. Despite these factors, overall FDI in Kazakhstan has risen substantially over the last decade (see figure 4.1). The reason for this increase in foreign direct investment inflows in Kazakhstan is the country’s open stance towards foreign companies seeking to invest. According to O’Neill (2014: 146-148) this increase in FDI is particularly due to the fact that the country’s political and financial system lack transparency and that a flexible government that is not accountable to a democratic constituency thus can facilitate these investments.
61
Figure 4.1 Foreign direct investments in Kazakhstan 2005-2014
35
30
25
20
15 Billions USD 10
5
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Source: “Invest in Kazakhstan” (2015). Via www.invest.gov.kz. Graph made by author
The previous chapter has provided us with a mapping of Kazakhstan’s ruling elite. That framework of groupings around president Nazarbayev enables foreign parties to invest in Kazakhstan’s energy sector. The most prominent investors in this sector are Chinese SOEs, looking for financial (and maybe even geopolitical) influence in Central Asia and the Caspian Region. Investments by these Chinese state-owned enterprises are often facilitated by small elites in both Kazakhstan and China that (in)directly profit from these inflows.
Fewer democratic constraints and a lack of transparency mean that deals among elites can be made that might be unacceptable to the general public in both the FDI receiving (host) and sending (home) states (O’Neill 2014: 146).
The countries’ “winning coalition”, whose support is crucial for maintaining power see their resources expanded by these investments and thus hold the system in place (Bueno de Mesquita, Smith, Siverson, & Morrow 2003). The ruling elite in Kazakhstan being the direct beneficiaries of these investments makes it a top priority for them to approve Chinese FDI and shape the domestic policy in a way that is favorable for these investments. According to the China Global Investment Tracker from The Heritage Foundation and The American Enterprise Institute (2015), China alone invested $20.9
62 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
billion in Kazakhstan’s energy sector between 2005-2014.20 This vast increase in foreign investment is the result of economic globalization, referring to a growing interconnectedness of economic factors as means of production and finance. To understand Chinese FDI in Kazakhstan and the transnationalization of Chinese NOCs, one must examine the forces of this economic globalization that enables these investments in production and mergers and acquisitions of foreign companies (Nye & Keohane 1971: 331). In this work, the term transnationalization is used in order to describe the cross- border activities of Chinese NOCs. De Graaff (2014: 547) has defined the concept of transnationalization with regard to NOCs as ‘the extent to which they (NOCs) engage in cross-border alliances and/or involving private partners’. This term encompasses the increasing entanglement between non-state actors and the blurring boundaries that facilitate these transnational activities. The separation between what takes place within national borders and the activities beyond these borders has become increasingly difficult. Meanwhile, transnationalization does not entail the disappearance of states, but it holds that they have become just an actor among others (Katzenstein, Keohane and Krasner 1998). In contrast to the term ‘internationalization’, transnationalization entails more than just the manifestation of national actors (states) beyond their borders and also implies numerous other interactions that go beyond state-to-state and corporation-to- corporation connections (Djelic & Quack 2008: 300). Thus, transnationalization theory functions as a relevant framework in order to assess the cross-border activities of Chinese NOCs in Kazakhstan and the ‘transnational energy elite network’ that has emerged, linking China’s and Kazakhstan’s energy sector together. This transnationalization can be placed in the broader theoretical framework of critical geopolitics and linked to the geoeconomic logic. The critical aspect covers the how and why of these increased cross-border activities and the overaccumulation of capital across borders can be explained through the geoeconomic logic. Due to an increased influx of cross-border investments, soaring energy and commodity prices, trade surplus and production, we have seen an immense increase in state-owned assets, mainly in developing countries. According to Harris (2009: 139), transnational state capitalism indicates a new stage in the development of economic globalization. This statist globalization has created a Transnational Capitalist Class (TCC)
20 Calculations by the author amounted to an accumulated FDI of China in Kazakhstan’s energy sector of 25.1 billion USD in the period between 2005-2014 (see table 3.2)
63 that increasingly possesses international investment portfolios. Globalization had the effect of decreasing the individual, institutional and governmental investors prepossession with the domestic market and expanding their investment portfolios beyond the national borders (Harris 2009: 139-142). In order to understand the function of a Chinese transnational capitalist class, in this work referred to as ‘energy elite’, in facilitating investments in Kazakhstan, it is important to map China’s transnational energy elite.
4.3 CHINA’S ENERGY ELITE NETWORK
Despite the fact that there exists a massive overlap between state and market (politics and business) in China, it is function to make a distinction between the country’s “ruling elite” and “energy elite”. Defining the concept of a ruling elite and, in this research, an energy elite is difficult since there is a huge variation in definitions of this concept. The term ruling elite refers to those who ‘control real, effective power’ (Zuckerman 1977: 327) and is derived from the work of Gaetano Mosca, who preferred the terms "political class," "ruling class," and "governing class" (Zuckerman 1977: 325), combined with the conceptual framework of classic elite-theorist Vilfredo Pareto, who made a distinction between what he defined as a governing elite and a non-governing elite (Zuckerman 1977: 234; and see Etzioni-Halevi 1997: 47-63 for the work of Pareto and Mosca). Zuckerman (1977: 326) makes a distinction between “political class”, which he defines as ‘all those groups which exercise political power or influence’, and “political elite”, which he refers to as ‘those individuals who actually exercise political power in a given society at any given time’. Robert A. Dahl refers to a ruling elite as ‘a controlling group less than a majority in size that is not a pure artifact of democratic rules. It is a minority of individuals whose preference regularly prevails in cases of differences in preferences on key political issues’ (Dahl 1958: 464). The variance in definitions underscores the difficulties of this concept. On the one hand, equal definitions are being used to describe different phenomena, while on the other hand different labels are used to cover the same concepts. For this research, it is necessary to define the concept of an “energy elite”. Here, the same difficulties appear. First, defining the elusive concept of “power” is a debate on itself. A commonly used definition is that of Dahl (1957). He defined this concept as ‘A has power over B to the extent that he can get B to do something that B would not otherwise do’ (Dahl 1957: 202-203). However, this description of power is
64 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
criticized by several scholars for being too superficial and value-dependent.21 Another often-used premise is that those who play a role in government constitute a coherent group, and that they possess distinguishing characteristics (Zuckerman 1977: 332). This premise should be debunked, since most elites are comprised of loose networks of actors with differing (and often conflicting) goals and priorities. This and other research already has shown that the ruling/energy elite in Kazakhstan is made up of several coherent groupings that do not necessarily form a coherent whole. Second, to define a political elite by the control of specific institutional positions makes it harder to compare elites across national borders. However, for this research it is not relevant to make a comparison between Chinese and Kazakh ruling and energy elites. Therefore, in this case, a person’s institutional position is taken into account when measuring influence. An assessment of their structure predominantly supports an examination of the actors that enable and shape the investments of Chinese NOCs in Kazakhstan rather than a cross- border comparison. In this research, I use the term ruling elite to refer to to all the actors with a clear political agenda that are not directly involved in the country’s energy sector but have great influence over the institutions that do have a link with the energy sector. When applying these theoretical frameworks to define the concept of an energy elite, it can be defined as those people who posses real and effective power over both the domestic and cross-border activities of the companies in the country’s energy sector. This power can be exerted through institutional positions in both politics and business. Compared to Kazakhstan, China’s energy elite is more incorporated into the central government. Where Kazakhstan’s energy elite still has some form of autonomy from the Nazarbayev regime, China’s energy elite is fully incorporated into the state. China’s government bodies have full authority over the appointment of CEOs for the three major NOCs and the government is the only regulator of the energy sector. President Xi Jinping stands at the top of the hierarchal pyramid. As party secretary and head of both the Central Committee (376 members) and the Politbureau Standing Committee (7 members), Xi has a final say in almost all party-related affairs. China’s premier Li Keqiang is leader of the State Council, the country’s highest organ of executive state power. The State Council functions as a cabinet and supervises all the
21 See Steven Lukes’ (2005) three dimensions of power for a critique on Dahl’s conceptualization of power. He argues that the concept of power should be analyzed from a broader perspective and that scholars should pay attention to those facets of power that are least observable. And see Bachrach and Baratz (1962). They argue, partly in line with Lukes, that the concept of power is not merely reflected by decisions.
65 ministries, SASAC, NDRC, NEA, CBRC and the Chinese Central Bank, the Peoples Bank of China (PBC). The Central Organization Committee and the NEC operate parallel of the State Council. Li Keqiang is the director of both institutions and thus has great influence in the Chinese energy sector. His NEC supervises the NEA, a vice- ministerial institution led by Wu Xinxiong that is concerned with the approval of energy- related projects. Wu is also deputy chairman of the NDRC. This institution functions on the ministerial level and sets the oil and gas prices in China. Xu Shaoshi leads NDRC. One of the key players in the interaction between the government and the NOCs is Zhang Yi, Chairman of SASAC. His institution manages the NOCs and has the power to appoint the top managers of these companies. The Central Organization Department (COD) of the Communist Party of China (CPC) is the central human resources department of the CPC. This body has the power to appoint and dismiss the chairmen and CEOs of the NOCs and functions as a stepping-stone for NOC chairmen with the ambition to pursue a career in party politics. Zhao Leji heads this department and nominally reports to the State Council. The financial intertwinement between the CPC and the NOCs is evident from the function of the Ministry of Finance. The MOF is (majority) shareholder and supervisor of all the Chinese state-owned commercial and policy banks.22 Together with the CBRC, led by Shang Fulin, MOF supervises the banks that have entered into strategic alliances with the NOCs. The CBRC examines and approves senior officials for all the state-owned banks and reports to the State Council. Hu Huaibang and Hu Xiaolian, chairmen of respectively the CDB and the CEIB, were appointed by the CBRC. All the CDB’s and CEIB’s actions fall directly under the supervision of the CBRC, MOF and PBC and together they regulate and supervise the entire Chinese banking sector. Furthermore, as a shareholder, the Ministry of Finance receives dividend over its stock in the oil companies. Now the NOCs are required to pay 15 percent of their post-tax profits to the state (Financial Times 2010). Yet, this percentage is significantly lower than the actual dividend the NOCs would be required to pay to the MOF if their actual majority share ownership was taken into account (see table 2.1, pp. 28) The MOF plays a crucial role in supervising the financial system that enables the NOCs to invest in foreign and domestic energy projects. This makes Lou Jiwei, China’s Minister of Finance, one of the most important actors in financing the cross-
22 The MOF is shareholder and supervisor of the “Big Four”: The Agricultural Bank of China (ABC), the Bank of China (BC), the China Construction Bank (CCB) and the Industrial and Commercial Bank of China (ICBC). Next, it has shares in and supervises the Bank of Communications (BOCOM) and the two policy banks CDB and CEIB.
66 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
border activities of Chinese NOCs. The Ministry of Finance also controls the state- owned CITIC Group (formerly the China International Trust and Investment Corporation). This is the biggest conglomerate in China and invests in sectors that are crucial for China’s economic growth and development (comparable to Kazakhstan’s Sovereign Wealth Fund Samruk-Kazyna). CITIC is headed by Kwom Peter Viem and is for 50% shareholder of Karazhanbasmunai. The intertwinement between the government and the national oil companies in China can be understood through the position of the chairmen. They all have been appointed by either SASAC (management appointments) or the COD (CEO and chairmen appointments). The COD, the human resources department of the CPC, facilitates career moves of NOC managers looking for a career in politics. Nevertheless, the chairmen of CNPC and Sinopec, Wang Yilin and Wang Yupu are also member of the 18th Committee of the CPC. Victor et al. (2012) have examined the employment history of the leaders of CNPC and found that many of the leaders are shuffled between the NOCs.23 These personnel changes are predominantly based on political grounds rather than the performance of the persons involved (Victor et al. 2012: 397-398). A shift in the leadership of a NOC often happens after a crisis or incident in the company. Besides these changes, only the ruling elite can jeopardize the top leaders’ job security. With respect to the ties between the state and the corporations, De Graaff (2014: 555) has shown that besides the fact that the top leaders of the NOCs have extensive high-level state relations, they also have substantial corporate affiliations both in China and abroad. Nevertheless, despite the corporate ties, these leaders have not per se integrated into a cross-border corporate network (De Graaff: 2104: 558). Thus, the Chinese ruling elite has a strong grip on the NOCs when it comes to their domestic operations. Although the management and directors have been appointed by the government, the NOCs have proven to act increasingly autonomous from this government when they operate abroad and are not merely a tool of Chinese foreign policy. Figure 4.2 shows the causal and interactional interdependencies between members of the ruling elite in China and is based on the theoretical framework of social network analysis. This theory has proven useful in mapping group and interpersonal connections.
23 CNPC chairman Wang Yilin is the former chairman of CNOOC.
67
Figure 4.2 China Elite Analysis
Xi Jinping President of the Peoples Republic of China State-owned Investment Company
Political Leadership Wu Xinxiang Director NEA Zhang Yi Zhao Leji Chairman Xu Shaoshi Head Central National Oil Companies Lou Jiwei SASAC Chairman NDRC Organization Minister of Finance Department Policy Banks
Link With Kazakhstan
Subcommittee of the Li Keqiang Hu Xiaolian State Council Premier of the State Chairman CEIB Council, Chairman Wang Yi NEC Minister of Foreign Affairs
Hu Huaibang Chairman CDB
Kwok Peter Viem Chairman CITIC Jiang Daming Minister of Land and Resources Wang Yupu Chairman Sinopec
Yang Hua Chairman CNOOC Du Dewen Le Yucheng Consul General in Ambassador to Kazakhstan Wang Yilin Kazakhstan Chairman CNPC
Note: This model is based on the theoretical framework of SNA and describes causal and interactional interdependencies in social configurations (see Scott 2012: 12-16) Source: “Connected China” (2015). Via www.china.fathom.info. Graph made by author
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4.4 THE CHINA DEVELOPMENT BANK, THE CHINA EXPORT-IMPORT BANK AND THE
DEVELOPMENT BANK OF KAZAKHSTAN: LOAN-FOR-OIL AND LOAN-FOR-GAS DEALS
State financial support to Chinese NOCs is a highly debated issue. It is often said that this support favors Chinese companies in acquiring equity oil shares and securing long- term energy supplies and even that Chinese NOCs are deliberately overpaying for certain energy assets in order to secure resources, backed-up by the state. This state support is being realized through the so-called loan-for-oil and loan-for-gas deals of Chinese policy banks with several resource rich countries. Chinese NOCs have entered several times into strategic alliances with two important Chinese banks to expand their influence and acquire a bigger share of equity oil. Nevertheless, this system of state-backed loans in order to acquire equity oil and gas shares has not necessarily been a decisive factor in the competitive global energy market.
Yet, as with any cheap capital that Chinese government institutions provide directly to the Chinese oil majors, it is hard to assess how much of an advantage Chinese tied aid gives China’s NOCs vis-à-vis the IOCs because it is not clear that the IOCs would bid for some of the assets that the Chinese have pursued in “oil-for-infrastructure” deals if the IOCs had been given the opportunity to do so (Downs 2010: 95).
The largest part of the lending comes from the China Export-Import Bank and the China Development Bank. The Chinese government reformed the financial sector in 1994, thereby creating both CEIB and CDB as ‘policy banks’, as tools of the government. Before 1994, all the loans were provided by four Chinese banks: the Bank of China, the China Construction Bank, the Agricultural Bank of China and the Industrial and Commercial Bank of China. With this reform, the government intended to make a clear distinction between policy and commerce (Gallagher, Irwin & Koleski 2012: 3). In this way, Chinese banks did not have the excuse of not being commercially driven due to their obligation to achieve policy goals. However, this does not mean at all that the policy banks do not have profitability as a key objective. Both the China Development Bank and the China Export-Import Bank partnered-up with the NOCs in loan-for-oil and loan-for-gas deals around the globe.
69 Table 4.1 Loan-for-oil and loan-for-gas deals since 2009
Country Lender Borrower Amount Beneficiary Amount Purpose (USD / buyer b/d billion) Angola CDB Angola 1 Approximately (2009) government $5bn in loans since 2002 Bolivia Bolivian 2 In return for (2009) government energy contracts Brazil CDB Petrobras 10 Sinopec 150.000 150 kb/d in 2009. (2009) and Unipec 200-250kb/d between 2010 and 2019 Ecuador CDB PetroEcuador 1 CNPC/ 96.000 Two-year contract (2009) PetroChina Kazakhstan CEIB KMG 10-15 CNPC 300.000 $3.3bn to buy 49% (2009) of Manguistau- MunaiGas (MMG) from Indonesia’s Central Asia Petroleum Russia CDB Rosneft 15 CNPC 300.000 (2009) 20 years Russia CDB Transneft 10 CNPC Pipeline linking (2009) East Siberia-Pacific pipeline system (ESPO) at Skovorodino to Daqing oilfield. Transneft to build part in Russia (70km) and CNPC to build part in China (980 km). Turkmenistan CDB Turkmengaz 4 CNPC 40 bcm/y 30 year contract (2009) Venezuela CDB Bandes 4 CNPC/ 200.000 Loan goes in a (2009) (PVDSA) PetroChina joint development fund
70 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
Venezuela CDB Bandes 10 CNPC Development of (2009) (PVDSA) and (and Junin 4 block and government RMB infrastructural 70bn) projects Brazil CDB Petrobras Sinopec Cooperation in (2010) expanding deep- water exploration Ghana CDB GNPC Sinopec Development of (2010) Jubilee Oil field Turkmenistan CDB Turkmengaz 4.1 CNPC 25 bcm/y Feed extra gas into (2011) the Central Asia- China gas pipeline Venezuela CDB Bandes 10 CNPC 230.000 Develop Orinoco (2012) (PVDSA) and 3 years oil fields and for government industry, agriculture and housing Russia CDB Rosneft 15 CNPC 300.000 Double oil imports (2013) 25 years from Russia. Oil at market price Russia CDB Transneft 10 CNPC $10bn to Transneft (2013) for pipeline construction Venezuela CDB Bandes 4 CNPC 310.000 Increase (2013) (PVDSA) 4 years production from Orinoco oil fields Kazakhstan CDB KazTransGas 0.7 CNPC 15-year loan to (2014) complete Beyneu- Bozoi-Shymkent pipeline (10bn bcm) Kazakhstan CDB KMG 0.15 CNPC Building of oil and (2014) gas pipeline plant Kazakhstan CDB KMG 1 CNPC Modernization of (2014) Shymkent refinery Source: OECD/IEA (2014); OECD/IEA (2011); CNPC Economic and Technical Research Institute (CNPCETRI) (2013). Wall Street Journal (2009). Tengri News (2015). Central Asia-Caucasus Analyst (2014). Table made by author.
Since 2009, twenty of such deals were concluded. This has been a significant result for the NOCs in their quest for new oil and gas supplies. A significant deal was signed in
71 2009 between China and Russia that encompassed a loan of $15 billion from CDB to the Russian corporations Rosneft and Transneft in exchange for 300.000 b/d for the next twenty years (Jiang & Sinton 2011: 22). Another $25 billion deal to double Russia’s oil export to China (from 300.000 to 600.000 b/d for 25 years) was signed in 2013 (Jiang & Ding 2014: 8). Similar deals were being signed with Venezuela, Brazil, Ecuador, Ghana, Kazakhstan and Turkmenistan. In 2010, these loan-for-oil deals were worth around $90 billion (Lee 2012: 86-87). The largest combined loan-for-oil (and gas) deals were signed with Russia and Kazakhstan. The former is now supplying China with 600.000 barrels of crude per day; the latter accounts for 300.000 b/d (Lee 2012: 87). Furthermore, CNPC and Kazakhstan’s NOC KazMunaiGas (KMG) agreed to jointly buy a 49% share of Kazakh oil and gas producer MangistauMunaiGas (MMG) from Indonesia's Central Asia Petroleum Ltd, worth $3.3 billion (Jiang & Sinton 2011: 41). The China Export-Import Bank agreed to provide the loans to the Kazakhstan Development Bank as part of a bigger package. The Kazakh state-run news agency Kazinform reported that the CEIB agreed to lend the Kazakhstan Development Bank $5 billion.24 The China Development Bank agreed to a $700 million/15year loan to Kazakhstan’s KazTransGas in March 2014. This loan was provided to complete an extra 300km pipeline to supply China with additional volumes of gas. The pipeline would be connected with the already existing Kazakhstan-China pipeline (Jiang & Ding 2014: 25). These state-backed financial deals are commonplace in China. The CEIB alone supported African countries with over $5 billion between 2001-2006 in return for access to natural resources (Evans, 2006). The two major Chinese banks CDB and CEIB have the financial clout to support China’s NOCs in securing new energy supplies. Since 2009, Chinese policy banks’ loans amounted to $60 billion and there are sings that China wants to step up the pace for loan-for-oil and loan-for-gas deals (Reuters 2010). The agreements almost always entail that the country in question sells an agreed amount of oil or gas to China, rather than on the international commodity markets or to other countries. This ‘locking’ of energy supplies is viewed with suspicion by other IOCs, because they don’t have that kind of financial (state) power backing them. However, it must be said that this strategy is not without risks. Long-term contracts can be voided when a regime change is taking place in politically unstable regions, like for instance the Middle East. Because of this reason, China has not (yet) signed loan-for-oil or loan-for-gas deals with countries in this region.
24 ‘China, Kazakhstan Sign Loan-for-Oil Deal’ via www.wsj.com (April 2009)
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Despite the fact that these deals are not without risks, they have proven a successful means to diversify China’s energy supply and the efficiency with which the actors in the triangle, consisting of the Chinese government, the banks and the NOCs, are able to work together in order to secure foreign energy supplies.
Figure 4.3 Sino-Kazakhstan loan-for-oil deal structure
Source: OECD/IEA (2014); OECD/IEA (2011); CNPC Economic and Technical Research Institute (CNPCETRI) (2013). Wall Street Journal (2009). Tengri News (2015). Central Asia-Caucasus Analyst (2014). Graph made by author.
The system of loan-for-oil and loan-for-gas deals works as follows: one of China’s policy banks (CDB or CEIB) provides a loan to a foreign corporation, government or (development) bank. In return, one of China’s NOCs is supplied with a predetermined amount of oil or gas that is purchased at market prices. The policy bank collects these payments and transfers possible profits to the corporation/government/bank. The loans-for-oil and loans-for-gas allow the Chinese government to provide loans to borrowers that are otherwise not creditworthy. The system reduces the risk of borrower default, because China can deduct interest directly from the oil/gas payments. Countries seeking to export oil or gas to China first have to meet the obligations of the loan. This reduced default risk lowers the risk premiums and reduces the interest rates, improving the competitive advantage of Chinese banks in the global financial system (Gallagher, Irwin & Koleski 2012: 16).
73 In the last six years there has been a vast increase in loan-for-oil and loan-for-gas deals between Chinese policy banks and resource rich countries. In Kazakhstan, the Development Bank of Kazakhstan facilitates these deals according to the regulatory framework that was established by the heads of state of the Shanghai Cooperation Organization (SCO). On 26 October 2005, the leaders of the member states25 took the decision to establish the SCO Interbank Consortium (IBC). This establishment entailed an agreement on Interbank Cooperation within the framework of the SCO. The members of this cooperation are the Development Bank of Kazakhstan, the State Development Bank of China, the Settlement & Savings Company of the Kyrgyz Republic “RSK Bank”, the Bank for Development and Foreign Economic Affairs of the Russian Federation “Vnesheconombank”, the State Savings Bank of the Republic of Tajikistan “Amonatbonk” and the National Bank for Foreign Economic Activity of the Republic of Uzbekistan (SCO 2014). Its main goal is to establish a framework in order to provide funding for investment projects supported by the governments of the SCO members. The main focus of these investments is infrastructural projects in export- oriented economic sectors that enhance and stimulate the trade relations between the SCO members. In China, the State Administration of Foreign Exchange (SAFE) monitors all the international transactions of both the policy banks (CEIB, CDB) and the commercial banks (e.g. Bank of China), in order to track and check all the cross-border capital flows. SAFE manages China’s $3.9 trillion in foreign exchange reserves and signs contracts with the banks authorising the lenders to provide credit to domestic companies for overseas investment projects (Reuters 2010; State Administration of Foreign Exchange 2014). In 2014 these international loans amounted to $374.7 billion (State Administration of Foreign Exchange 2015). It is China’s aim to strengthen its trade and finance ties with Kazakhstan through a framework in which the policy banks and SAFE play a crucial role. The 2014 Shanghai Summit marked the countries’ ambition to deepen their economic ties. Several agreements and memoranda of understanding were signed to underline this strategy (Central Asia-Caucasus Analyst 2014). Nazarbayev has expressed its interest in China’s “Silk Road Program”, linking the economy of China to the Central and South Asian countries and creating a market of approximately 3 billion people. Above all, China’s excess financial reserves form a huge attraction for countries looking
25 The SCO has six member states (Kazakhstan, China, Kyrgyzstan, Russia, Tajikistan and Uzbekistan); five observer states (Afghanistan, India, Iran, Mongolia and Pakistan); and three dialogue partners (Turkey, Belarus, Sri Lanka) (SCO 2015).
74 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
to finance infrastructural projects through foreign capital. This system of generating foreign capital (in the form of loans form the Chinese policy banks) has provided Kazakhstan with the financial means to realize several major infrastructural projects in the domestic energy sector, boosting the country’s economy and modernizing it’s infrastructure and energy sector. The ease with which this cooperation between China as a lender and Kazakhstan as a borrower has emerged is mainly due to the overlapping institutional frameworks. The Chinese Development Bank has a mandate and modus operandi that is comparable to that of the Development Bank of Kazakhstan. Furthermore, the lack of (democratic) checks and balances and the intertwinement between the ruling elite and the NOCs in both countries make it quite easy to sign off on these loans. This is especially the case for deals of which the beneficiaries are amongst these elites. For instance, Kuandyk Bishimbayev, the General Director of the Development Bank of Kazakhstan and Chairman of Sovereign Wealth Fund Samruk- Kazyna (KazTransGas 2015; Development Bank of Kazakhstan 2015) is the most important link between the Chinese policy banks and the Kazakh government. He is a close ally of president Nazarbayev and his DBK processes the loans provided by China. Bishimbayev’s position as Chairman of the Sovereign Wealth Fund Samruk-Kazyna further ensures their influence over Chinese investments in Kazakhstan.
Table 4.2 Comparison of CITIC and the Sovereign Wealth Fund Samruk-Kazyna 2013 Total Assets Total Revenue Net Profit USD Billion USD Billion USD Billion CITIC 686.34 52.77 6.25
Samruk-Kazyna 82.25 27.30 2.37
Sources: CITIC (2014) “Annual Report 2013”. Via www.citic.com; Sovereign Wealth Fund “Samruk- Kazyna” (2014). “Annual Report 2013”. Via www.sk.kz. Table and calculations made by author
Bishimbayev’s Chinese counterpart is Kwok Peter Viem, Chairman of the state-owned investment fund CITIC. Due to its vast financial resources, this investment fund is also one of the key actors in facilitating loan-for-oil and loan-for-gas deals and M&A in Kazakhstan. The fund currently holds a 50% stake in Karazhanbasmunai (KBM) (KMG owns the other 50%). KBM is engaged in the exploration, development and production of oil and holds the right to develop and produce oil in the Karazhanbas oilfield until 2020 (CITIC 2013). KBM extracts 38.000 barrels per day from the Karazhanbas oilfield, which has a proven reserve of 250 million barrels (CITIC 2015: 25). The fund cooperates with the Sovereign Wealth Fund Samruk-Kazyna in order to finance projects in
75 Kazakhstan. A comparison of the two national investment funds CITIC and SK (see table 4.2), show the scope of China’s investment capabilities. CITIC Energy, the fund’s subsidiary concerned with investments in energy projects, has an investment portfolio worth over $19 billion in 2014 (CITIC 2015). The loan-for-oil and loan-for-gas deals between the Chinese policy banks and the governments and IOCs of resources rich countries are internationally known for their benefits to China. They help diversify China’s energy supply, enable exports, put foreign exchange reserves (i.e. USD) to a use and enhance the economic and diplomatic ties with the borrowing countries. In this way, the loans provided by the Chinese policy banks serve both commercial and policy purposes (Gallagher, Irwin & Koleski 2012: 15). This has led to irritations in the Chinese banking sector. CDB annoyed the commercial banks when it commenced investing activities. Due to the fact that CDB is a policy bank, it is not bound by the Commercial Banking Law (CBL), which prohibits commercial banks to conduct both commercial and investment banking activities. The China Banking Regulatory Commission (CBRC), NDRC and the Ministry of Finance shared this concern and attempted to regulate the policy banks. CDB became a commercial bank in name when it started to operate as a joint stock company in 2008 with a starting capital of 300 RMB billion. However, the global financial crisis halted the commercialization process. Both CEIB and CDB used this crisis to underscore their importance as policy banks for the economic growth of China. The CDB has proven to be the only Chinese bank that has the financial resources to finance China’s long and medium term industrialization and urbanization goals (Downs 2011: 18-20). These domestic fixed- investments are the key driver of economic growth in China:
Bank loans drawn from the deposits of its citizens and funneled into state- controlled banks constitute around 80 percent of all investment activity in the country. State-controlled banks dominate the formal finance sector private domestic and foreign banks constitute only 2-5 percent of the sector (Lee 2012: 80).
The necessity for the CDB and CEIB to remain policy banks can be summarized by three factors. First, both banks serve the Chinese government and are key players in financing major projects of the ‘going out’ policy. Their ability to finance loan-for-oil and loan-for-gas deals could be hampered if the CBL were to apply to CDB and CEIB. Second, both banks’ capacity to quickly finance cross-border investment projects could
76 IV THE TRANSNATIONALIZATION OF CHINA’S NOCS AND THE ROLE OF DOMESTIC ENERGY ELITES
be hindered if the banks would fall under the commercial bank corporate governance structure of the CBRC. Finally, the CDB and CEIB have proven very successful in securing natural resources abroad. Their autonomy and experience in signing energy loans distinguishes them from the commercial banks. It is unlikely that they could have been replaced by the Chinese commercial banks (Downs 2011: 62-64).
Table 4.3 Comparison of CDB, the China Export-Import Bank and DBK 2013 Total Assets Total Loans Net Profits NPL Ratio USD Billion USD Billion USD Billion CDB 1665.05 1281.69 15.77 0.48%
China Ex-Im Bank 304.20 234.16 0.69 0.28%
DBK 5.45 2.04 0.10 12.5% Sources: China Development Bank (2013). “2013 Annual Report”. Via www.cdb.com.cn; Export-Import Bank of China (2013). “Annual Report”. Via www.eximbank.gov.cn: Development Bank of Kazakhstan (2014). “2013 Annual Report”. Via www.dbk.kz. Calculations made by author
A comparison of the CDB, CEIB and DBK (see table 4.3) emphasizes the importance and scope of the CDB. The Chinese ExIm Banks has a quarter of the assets of CDB (23.7%) and has made only 4.4% of the profit CDB made over the year 2013. The Development bank of Kazakhstan is an even smaller corporation with only $5.45 billion in assets and $100 million in profits over the year 2013. DBK only invests in projects in Kazakhstan and further facilitates the bankrolling of projects with foreign capital. A remarkable fact is the large share of non-performing loans that is provided by DBK (12.5%). The Chinese banks have a far higher efficiency ratio, especially when it is considered that DBK has transferred its non-performing loans to the Fund of Kazakhstan JSC in order to lower this ratio from 41.9% in 2012 (DBK 2014).
4.5 CONCLUSIONS
This chapter has provided an analysis of the transnationalization of Chinese NOCs and the key drivers enabling their investments in Kazakhstan’s energy sector. This term encompasses the increasing entanglement between non-state actors and the blurring boundaries that facilitate these transnational activities. These cross-border can be understood through the theoretical framework of critical geopolitics and the
77 geoeconomic logic, covering both the rationale and means of the cross-border activities of Chinese NOCs and identifies the drivers behind what according through the geoeconomic logic is referred to as the overaccumulation of capital across borders. This chapter has shown that the Chinese ruling elite plays a major role in facilitating this going abroad of NOCs and has a strong grip on their activities. The links between state and corporate officials are evident. The overlapping structure of politics and business (if there is a distinction at all) has created a hybrid ruling elite that on the one hand controls the country’s domestic energy sector and corporations, though on the other hand loses its grip on these same corporations, since the transnationalization of NOCs has resulted in more autonomy for NOCs conducting cross-border activities. Still, the Chinese government is enabling these activities by enhancing diplomatic ties with resource-rich countries and stimulating its policy banks to provide the financial means to secure foreign energy supplies. This loan-for-oil and loan-for-gas structure is facilitated by the CDB and CEIB. Both banks have increasingly used their financial clout to sign deals with Kazakhstan (in cooperation with the DBK) and other countries. Besides these policy banks, national investment funds like SK and CITIC have proven of paramount importance in signing bilateral oil and gas deals and have been important drivers in facilitating Chinese NOCs’ transnationalization. This chapter has shown the impact and scope of Chinese NOCs’ investment behavior in Kazakhstan and identified its key drivers. The next chapter will assess the geopolitical and geoeconomic consequences of this behavior and provides an analysis of the political risk of investing in Kazakhstan.
78
Chapter V: GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE
ENERGY INVESTMENTS IN KAZAKHSTAN
5.1 INTRODUCTION
The increasing globalization has caused a growing economic interdependence between countries. For China, as for all countries, economic growth is highly dependent on the availability and affordability of natural resources (see table 5.1). The country’s GDP growth, population size, and dependence on the import of energy (see figure 5.1) have made it a strong economic power with the capability of worldwide economic power projection. China’s soaring energy demand has encouraged the country to diversify both the source and nature of its energy supply. This combination of import-dependency and economic growth, accompanied by the growing strategic awareness of energy security and resource scarcity, possibly has major geopolitical consequences, especially in resource-rich regions like the Middle East and the Caspian Region. In China, the process of sequential industrialization has caused significant societal changes, but still has not enabled the emergence of a strong civil society or forces that can effectuate lateral pressure on the Chinese government. It is still the CPC that is predominant in determining the strategies with regard to trade, investment and finance in both the foreign and domestic energy sectors. All these factors have encouraged China to go abroad, enhance the bilateral ties with resource-rich countries and enable the NOCs to expand their investment in those countries. Since the late 1990s, fixed-asset investment and exports have replaced domestic consumption as the main driver of growth in China (Lee 2012: 78). Chinese NOCs’ investment behavior in Kazakhstan is a good example of this strategy. China’s awareness of its import-dependency being a (possible) strategic liability has forced the government to drastically reconsider its energy security policy. According to some, China has since then chosen for a much more politically-driven, geostrategic strategy, rather than approaching its energy security from an economic perspective. Both IOCs and Western countries are suspiciously following this development. This chapter examines the geopolitical consequences of this energy related trade, investment and finance and provides a risk analysis of the cross-border activities of Sinopec and CNPC in Kazakhstan. It argues that Chinese cross-border activities in Kazakhstan should be analyzed through the framework of geoeconomics rather than geopolitics.
79 5.2 GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE FDI
The main driver of China’s oil diplomacy is its growing energy insecurity. Figure 5.1 illustrates China’s growing dependency on oil imports. China consumed approximately 10.7 million b/d of oil in 2014, an increase of 370,000 b/d, or almost 4%, from 2013. China has become the largest global net importer of oil in 2014, surpassing the United States, and the country's total oil imports reached 6.1 million b/d in 2014 (EIA 2014).
Figure 5.1 Forecast of China’s oil production and consumption 2014-2040
25
20
15 Consumption
10 Production Amount ofAmount Oil in b/day 5
0 2014 2016 2020 2030 2040
Source: EIA (2014b). International Energy Outlook 2014: World Petroleum and Other Liquid Fuels.
China’s awareness that its energy security increasingly becomes a possible strategic liability has forced the country to chose for a politically-driven and geostrategic approach. Two factors support this claim. First, the domestic structure of China’s political economy empowers SOEs to be the dominant factor when it comes to achieving national economic objectives and thus securing energy supplies by investing in overseas equity oil. This framework minimizes the market forces that can effect pricing and distribution of energy resources and has in a big way supported Chinese SOEs’ energy investments. Secondly, there is the external factor of China at the one hand participating in international commodity markets, while at the other hand it tries to protect itself against supply disruptions. China’s participation in international commodity markets is the result of a pragmatic approach. Since it has proven too expensive to export all the equity oil to China’s mainland, it is much more profitable and efficient to
80 V GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN sell their equity oil on international commodity markets and use their financial clout to invest in and secure other sources of energy that are closer to China (Lee 2012: 76).
That most equity oil is sold overseas is either because Chinese refineries can hardly process sour crude oil, or because the NOCs are reluctant to bring it home because it makes less economic sense. Even if they are willing to ship it back home, in time of emergency, it is still questionable whether China can ensure its safe transportation (Chen 2011: 608).
However, China’s unwillingness to trust the international markets has led to a ‘China First’ strategy that encompasses broad based political and financial support for Chinese SOEs in their quest for foreign energy. Both IOCs and mainly Western countries have concerns about this strategy, despite the fact that Chinese NOCs’ capacity to actually endanger other countries’ energy security is quite limited and most equity oil of good quality is under the control of western IOCs (Chen 2008: 85; and see Inkpen & Moffett 2011). According to China, its NOCs don’t have an equal chance on securing equity oil shares on the international commodity markets, because most of the spot and futures markets are western-based and thus favor Western IOCs. This conviction forms the main rationale for the country’s oil diplomacy strategy and supports China’s reasoning to trade with and invest in authoritarian or non-democratic states as Sudan, Kazakhstan and Iran. Furthermore, China does not fully trust the international commodity markets. Beijing has the conviction that the West can manipulate the oil and gas pricing mechanisms and therefore is reluctant to rely solely on international trade (Chen 2008: 85). Meanwhile, it is both highly cost-inefficient and risky to ship all the overseas equity oil back to China. A major concern of the Chinese government is that the US still controls most of the sea routes and that practically all the oil tankers have to pass through the Malacca Strait, which forms a strategic bottleneck. These factors force China to sell oil on the international commodity markets and to diversify its energy sources. Table 5.1 shows us four indicators that illustrate China’s perception of energy security: the availability, diversity, reliability and affordability of oil and gas reserves. The complete framework comprising the government, NOCs, policy banks and other state-led bodies enables China to secure oil and gas supplies and enhance its energy security. The country’s increasing trade, investment and finance relations with Kazakhstan are an example of this strategy. But what are the geopolitical consequences of this strategy?
81 Table 5.1 Indicators of China’s energy security Availability o Percentage of foreign equity oil in oil consumption
o Equity oil shipped home o International comparison in acquiring equity oil o Prospect in securing equity oil o Percentage of oil supplies through pipelines in total oil imports
Diversity o Distribution by projects
o Distribution by investment o Percentage of the first three countries in total equity oil o Distribution of oil imports o Percentage of the first four largest suppliers in China’s total oil imports
Reliability o Political risk, including relationship with China
o Policy risk o Transportation risk o Oil depletion risk
Affordability o Cost-benefit analysis
o Costs of equity oil versus international oil prices o Costs of building pipelines versus total oil values at different levels
Source: Chen (2011)
Chinese NOCs investments in Kazakhstan are a direct result of the government’s ambition to diversify its energy sources and reduce the risks of the transportation and price volatility of oil and gas. However, it is also a result of the growing independence of the NOCs vis-à-vis the Chinese government, which has led to increasingly commercial behavior of these oil companies. The combination of the necessity to diversify and the NOCs’ commercialization has resulted in major investments in Kazakhstan’s (amongst other Central Asian countries) energy sector (Zhang 2011: 7614). The China-Kazakhstan pipeline, finished in 2005 and owned by CNPC, has proven to be an important and stable source of oil. Similar connections have been made with Turkmenistan and Russia (Foreign Policy 2015). Investing in these land-based pipelines has become one of the top priorities of the Chinese government in recent years. This strategy enables them to reduce the risk of supply disruptions and combined with a minimization of price volatility due to the aforementioned loan-for-oil and loan-for-gas deals, China is able to enhance its security of energy supply.
82 V GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN
The question is whether increased Chinese involvement in Central Asia, and especially in Kazakhstan has created a new geopolitical reality in the region. Until now, there is not enough evidence to support such a claim. China’s “New Silk Road” program, which encompasses an increasingly geopolitical westward focus, is mainly triggered by the country’s economic growth and the awareness of the new petroleum order in the world. The Chinese government realized that its future ‘energy interests and geopolitical importance lie in expanding its geo-economic space in Central Asia’ (Xu 1999: 52). But this new role of China is mainly market-oriented and has not (yet) led to major geopolitical shifts in the region. Furthermore, China’s geopolitical aims in the region are to strive for a balanced competition for economic expansion and natural resources (Xu 1999: 52). This ambition is illustrated by Chinese NOCs joining in strategic partnerships with IOCs (e.g. Lukoil, Chevron) in order to explore and develop oil and gas fields in the region (see table 3.2). The argument that increased activities of Chinese NOCs in the Caspian Region actively challenge US hegemony in the region is in my view weak (see Jaffe & Lewis 2002). Nevertheless, growing Chinese involvement might challenge Russian influence in the region. The improvements in Kazakhstani-Chinese economic relations (bilateral trade is expected to reach $40 billion in 2015) and the enhancement of diplomatic and economic ties between China on the one hand and for instance Iran and Turkey (and most other Central Asian countries) on the other hand, might proof a decline in Russian influence in the region (Rousseau 2013: 41-42). With China seeking a more active role in the quest for global energy, the global geopolitical balance might shift, which poses new challenges for the West. Despite the fact that China belongs to the oil consuming countries and therefore could possibly benefit from joining international organizations like the IEA, it still pursues a bilateral approach to its energy security problem. While Beijing has emphatically stated that it seeks to fully cooperate on the international energy stage (White Paper of China’s Energy Policy 2012), the country still prefers bilateral energy relations. This approach could be costly since China would become increasingly vulnerable to the pressure from oil and gas producing countries. Politically unstable resource-rich countries could pressure China to sell arms or other sensitive military technologies. Joining multilateral alliances such as the IEA would enable China to refrain itself from these situations and guard itself against price and supply disruptions (Jaffe & Lewis 2002: 116-117). ‘The OECD states have long experience in the use of international institutions and multilateral approaches to mitigate vulnerability to oil-supply disruptions. They have worked together to avoid bilateral
83 trade-offs between energy supply and unrelated political issues’ (Jaffe & Lewis 2002: 128). Building a strategic petroleum reserve (SPR) in compliance with the guidelines set by the IEA, would enable China to mitigate its vulnerability to supply disruptions. A Chinese SPR could also benefit other oil-consuming countries by diminishing an importer’s free-riding off other states’ stock releases (Jaffe & Lewis: 128). According to the National Bureau of Statistics China currently has a SPR of 91 million barrels, spread over four locations. Other estimates diverge from 87-100 million barrels (Energy Aspects) to 150 million barrels (Argus Media), spread over 7 locations (Financial Times 2014). In case of a sudden supply disruption, a SPR of 91 million barrels would only amount to roughly nine days of consumption, far less than the 90 days of imports recommended by the IEA (Financial Times 2014). Nevertheless, until now, China has no ambition to join international institutions and comply with multilateral standards. The country’s bilateral approach to its energy security vulnerability has yielded the country an increasingly diversified flow of oil and gas and China remained its global independence in securing natural resources. This bilateral approach has been subject to criticism from both Western and Chinese scholars and enabled the emergence of several myths concerning Chinese investment and trade strategy to secure energy supplies, what Erica Downs (2007: 53) calls ‘energy mercantilism’. First, China is said to be “locking up” oil and gas supplies by signing long- term contracts and building pipelines between resource-rich regions and China. This argument is purportedly supported by Chinese NOCs’ ever growing equity oil share. However, still only a small amount of Chinese equity oil finds it way back to China. Besides the fact that -just like other IOCs- Chinese NOCs sell the majority of their oil and gas supplies on international commodity markets, they still only have control over 7% of the world’s total crude output (EIA 2014a).26 This brings us to a second myth concerning the geopolitical impact of China’s energy security vulnerability. China’s approach to securing energy supplies is totally different from that of the US. This concern is mainly expressed by either IOCs that have a hard time competing with the state-subsidized Chinese NOCs, or by Western policymakers that are concerned with Chinese engagements with regimes that commit human rights violations (Sudan), have nuclear ambitions (Iran) and are highly corrupt (Kazakhstan). However, the US has a similar record when it comes to subordinate its foreign policy to its energy interests (Downs 2007: 54). US-based IOCs are also operating in Kazakhstan (i.e. Exxon-Mobil,
26 This number was less 1% in 2007 (Downs 2007: 53)
84 V GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN
Chevron) and thus abide by the same laws as Chinese NOCs. A third myth in line with this argument is that Chinese NOCs’ dealings with oil exporting countries run counter to US foreign policy objectives. This may be the case for China’s operations in for instance Iran and, to a lesser extent, Russia, where Chinese NOCs are directly profiting from US and EU sanctions and embargoes. When returning to Chinese NOCs’ operations in Kazakhstan, there is practically no evidence that support either one of the myths mentioned before. Except from China’s general geopolitical ambition to minimize its supply vulnerability, it does not have a clear or distinctive geostrategic approach to its investments in Kazakhstan’s energy sector. Moreover, the increasingly autonomous course of Chinese NOCs vis-à-vis the government has caused a situation in which commercial and national objectives not naturally overlap anymore. This debunks the common perception that Chinese NOCs are merely a tool of Chinese foreign policy and supports the argument that NOCs are increasingly behaving as regular IOCs. From a theoretical perspective, one could argue that the geoeconomic logic of power, rather than the geopolitical logic, is in this case the main driver of China’s foreign (energy) policy. The former can be associated with ‘the molecular processes of capital accumulation in space and time’, which occurs through investment, trade, production and finance (Harvey 2003: 26-27), while the latter refers to a state’s political, diplomatic and military strategies. In the case of Chinese involvement in Kazakhstan, there is a structural dominance of economics over politics. In this way, geoeconomics can be referred to as the natural resources that are contained within a region and the politics of controlling and exploiting these resources (Mercille 2008: 576); as a paradigm concerning the economic imperatives of globalization; and third, to the flows of cross-border investments, trade and finance and the political aspects behind these flows (Mercille 2008: 576; and see Agnew & Corbridge 1995). According to this theorization, Chinese NOCs investment behavior in Kazakhstan can be understood through a geoeconomic rather than a geopolitical logic. The discrepancy between geoeconomics and geopolitics is also visible in Kazakhstan, where NOCs seek short-term, immediate profits and market capitalization, whereas the Chinese government seeks a ramification of long-term policy-making and minimizing energy supply vulnerability (Mercille 2008: 583).
85 5.3 POLITICAL RISK AND CHINESE FDI IN KAZAKHSTAN
To make a balanced assessment of Chinese NOCs’ investment behavior in Kazakhstan, it is also of interest to analyze the risks of these investments in Kazakhstan’s energy sector. For China, these risks fall under the reliability of energy supply, one of the indicator’s of China’s energy security (see table 5.1). With respect to the oil and gas sector, many forms of risk have been examined, ranging from financial risk to technical risk. For this research, it is mainly relevant to look at the political risk facing Chinese investment in Kazakhstan and institutional factors that can increase or decrease these risks. Political risk can be explained as the probability that the profitability of an investment could suffer from political decisions or conditions (Sathi & Luther 1999: 462- 466). There is a revival in the academic literature on this link between institutions and political risk facing corporations (Jensen 2008; Jensen 2006; Li & Resnick 2003; Busse & Hefeker 2005). Closely related research has been done by Ross (2001), who analyzed the link between oil and democracy and concluded that natural resources have a negative impact on democracy. Dunning (2008) examined the link between natural resource wealth and political regimes and Jensen (2008) found empirical results for the argument that democratic institutions lead to lower risk levels due to the constraints placed on executives in democratic regimes (Jensen 2008: 1040) and that there are three mechanisms through which multinational corporations (MNCs) prefer democracies: 1) information, 2) representation and 3) credibility (Jensen 2006: 7-12). For this research, it is especially interesting to assess to what extent the authoritarian character of Kazakhstan’s political regime poses a risk to Chinese NOCs’ investments. Interesting research on authoritarianism and investment has for instance been done by Oneal (1996), Morrison (2009) and Kendall-Taylor (2011). One would expect that the lack of democracy and democratic institutions in Kazakhstan increase the political risk and thus the risks facing Chinese NOCs. On the other hand, in the existing literature there are also findings that democracy does increase political risk (see Rodrik 1991 and Jensen 2008) and that authoritarian regimes proof stable investment climates (Oneal 1996).27 In the former case, the same democratic mechanisms that decrease political risk could endanger foreign parties’ investment. Policy
27 Oneal (1996) deliberately excludes investments in the petroleum industry from his analysis of FDI. Due to “the petroleum industry's size, its inclusion severely distorts examination of the profitability of foreign investments.”
86 V GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN instability (e.g. due to elections) and the ability of competing interest groups to influence government policy are examples of such mechanisms (Jensen 2008: 1042). In the latter case, the absence of these pressure groups and the ambition of Kazakhstan’s leader Nazarbayev to promote and enable FDI in his country, authoritarian regimes could proof stable investment climates, although this is highly dependent on the time horizon of the regime’s leader (see Kendall-Taylor 2011). Since this research has already shown that Nazarbayev, members of his inner circle and the country’s energy elite directly profit from FDI, it is in their direct interest to create a legislative framework that enables these investments. Kazakhstan predominantly makes use of bilateral trade agreements (BTAs) and bilateral investment treaties to establish the terms for FDI. The SCO plays an important role in facilitating these agreements and treaties, though most BITs have been signed during state visits.28 These BITs comprise a regulatory framework with dispute resolution negotiations, expropriation clauses and agreements on profitability and investment entrance (Hallward-Driemeier 2003; Neumayer & Spess 2005). However, these BITs and BTAs are not totally sufficient in ensuring a credible commitment by an authoritarian government. Despite the fact that Kazakhstan has a reputation that it fulfills its commitments concerning BITs, there is still the risk of noncompliance. This risk can be linked to the absence of democratic institutions and a lack of governance in the country. Several scholars have argued that authoritarian rulers will always weigh the costs of noncompliance with the benefits of noncompliance. Without democratic checks and balances, an authoritarian leader can personally gain from violating the terms of an agreement, for instance through the geopolitical risk of expropriation of investments (Li 2009) and thus has an incentive to maximize the profits extracted from this FDI (Olson 1993: 568-569). Signing bilateral or international agreements with an authoritarian regime might therefore entail an increased risk of noncompliance. Nevertheless, in the case of Kazakhstan there is no empirical evidence that support this argument, what makes the country an a-typical case. First, the political and economic ties between China and Kazakhstan are strong, which is indicated by the numerous BITs that have been signed in recent years. Secondly, it is in the direct interest of the officials from both Chinese NOCs and Kazakhstan’s ruling elite to maintain this relationship. Kazakhstan’s lack of governance institutions and democratic pressure groups, or “veto players” that can
28 On March 27, 2015, China and Kazakhstan signed 33 deals worth $23.6 billion. These deal comprised investments ranging from infrastructure to hydropower. Also in 2014, the governments of the two countries signed $14 billion worth of infrastructure projects, adding to the approximately $30 billion agreement signed in 2013 to build roads, railways and to strengthen border security (Foreign Policy 2015).
87 influence legislation with regard to FDI (see Jensen 2006: 8-12), make it an interesting and stable investment partner for China. Finally, Kazakhstan has proven to be an important factor in China’s ambition to mitigate its supply vulnerability. The overlapping governmental structures between the two countries and the fact that China is mainly gaining geoeconomic, rather than geopolitical influence, reduce the risk factor for Chinese NOCs. Furthermore, China sees oil and gas from Kazakhstan as far less risky than being subject to the price and supply volatilities of international oil markets. There are but a few factors that could increase the risk level of investing in Kazakhstan. The most important one is regime stability. Under the rule of president Nazarbayev, the country’s political system has proven stable. For the short (and maybe medium) term, this stability will guard Chinese NOCs against contract violations or expropriation, though with the president getting older, the problem of succession may pose a long-term risk to Chinese FDI and may result in what Morrison (2009: 110-111) calls a “redistributional conflict”.
5.4 CONCLUSIONS
The geopolitical impact of Chinese NOCs’ cross-border activities in Kazakhstan has been subject of an ever-growing debate in academic literature. This chapter has argued that the activities of CNPC and Sinopec, backed-up by the Chinese government’s oil diplomacy, has not created a new geopolitical reality in the region. The NOCs’ share of equity oil still stands in stark contrast with the shares of major IOCs that are active in the same region and fall under the same regulations. Kazakhstan’s multi-vectoral approach to potential foreign investors has caused a situation in which Chinese NOCs enter into a competitive energy market and conduct their business similar to Western IOCs. The fact that Chinese NOCs are not merely a tool of China’s foreign policy debunks the argument that the country has the ambition to pursue a geopolitical agenda in the region, as it does with for instance Iran. Moreover, increased Chinese investments in Kazakhstan’s energy sector should rather be assessed from a geoeconomic point of view. This critical approach is better suited to answer the “how” and “why” of Chinese activities in Kazakhstan. China’s energy security and supply vulnerability may be geopolitical or geostrategic problems; the way of solving them is best understood through this geoeconomic logic. Next, this chapter has assessed the risks facing Chinese NOCs by investing in Kazakhstan’s energy sector. In academic literature there have been written
88 V GEOPOLITICAL AND GEOECONOMIC CONSEQUENCES OF CHINESE ENERGY INVESTMENTS IN KAZAKHSTAN numerous papers about the impact of democracy on the influx of FDI, the impact of oil on democracy and the link between authoritarian regimes and natural resources revenue. This chapter has argued that the Kazakhstan’s authoritarian regime has proven a stable investment climate for Chinese NOCs. The factors that are expected to increase political risk proofed not to be of influence on the risk levels in Kazakhstan.
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90 VI CONCLUSIONS
Chapter VI: CONCLUSIONS
The final chapter is the culmination of this research. The previous chapters have been building on several sub-questions in order to answer the main research question: What are the geopolitical and geoeconomic consequences of Chinese NOCs’ investments in Kazakhstan’s energy sector and how can we assess the role of both the Kazakh and Chinese ruling elite in enabling these investments? The aim of this research has been to add to the understanding of the transnationalization process of Chinese NOCs and their cross-border activities in Kazakhstan. A thorough analysis and assessment of the bilateral trade relations, investment strategies and portfolio’s of both Chinese NOCs and investment funds, and finance structures of Chinese and Kazakh policy banks have provided a framework through which we can better understand China’s energy strategy and its ambition to mitigate its supply vulnerability. This research also aims at identifying the main drivers of Chinese NOCs investments in Kazakhstan. In order to operationalize this aim, this research also provides an analysis of both China’s and Kazakhstan’s ruling elite and their ties with the energy sector. An assessment of the geopolitical and geoeconomic consequences of this investment behavior and the possible political risks facing Chinese NOCs places this research in a broader theoretical framework and provides an overall picture of China’s foreign energy quest. Since 1993, China’s soaring energy demand has forced the country to increasingly import energy sources from abroad. The country’s new status quo as an energy consuming rather than an energy producing state has forces the government to promulgate a comprehensive energy strategy to mitigate its supply vulnerability. Due to this strategic liability, China expressed the ambition to diversify both the origin and sources of its energy supply. As a direct consequence, Chinese NOCs investment activities in Kazakhstan can only be analyzed and understood in this framework. Kazakhstan now plays a pivotal role in this diversification process. Since Chinese NOCs still not fully trust the international commodity markets, the land-based pipelines and railroad connections with its neighbor have proven a viable alternative to meet China’s energy demands. China’s energy policy focus on self-reliance and self-sufficiency has been converted to a geoeconomic strategy of securing equity oil shares abroad and gaining control over foreign oil and gas production facilities and infrastructural projects. This strategy is supported by government institutions and is referred to as oil diplomacy. One
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of the key drivers of this globalization strategy was China’s domestic economic growth. The country’s GDP growth, combined with an increasing population size, resulted in the geographical expansion of capital due to capitalism’s tendency of the overaccumulation of capital. This geographical expansion of capital, displayed by Chinese NOCs’ investments in Kazakhstan, can be understood through the geoeconomic logic. This research has combined the general geographical expansion of capital with the specific oil diplomacy strategy of the Chinese government and has referred to it as the transnationalization of Chinese national oil companies. One of the main arguments of this thesis is that this transnationalization process should be seen from a geeconomic rather than a geopolitical perspective, since these corporations’ investment behavior in Kazakhstan has shown that they have become increasingly autonomous from this government when it comes to cross-border activities. The global outreach of these NOCs and their listing on the international stock markets has made them more competitive and efficient. With these listings, they also have to follow international regulations and abide by foreign laws. Thus, this transnationalization has enabled the NOCs to gain more independence in foreign activities and supports the argument that these corporations are not merely a tool of China’s foreign policy. Now let us return to the first hypothesis of this research: The increased transnational activities of Chinese NOCs have transformed these companies into IOCs that are increasingly autonomous of, though still backed by the Chinese government. Overall, this hypothesis can be accepted, although some footnotes can be placed by the characterization of Chinese NOCs as regular IOCs. This is simply not the case, concerning their strong intertwinement with the government. However, since Chinese NOCs are obviously experiencing a transformation process, this hypothesis is not rejected. Next, this research aimed at identifying the main drivers that enable Chinese NOCs investment in Kazakhstan’s energy sector. First, an analysis of Kazakhstan’s political regime enabled us to label the country as a petro-authoritarian regime, with a lack of democratic institutions, almost no opposition and no societal or lateral pressure worth mentioning, causing practically no accountability for the government. With transparency and accountability already being weak in the country, the new wealth of natural resources has functioned as main driver of authoritarianism, which has allowed the ruling elite to further marginalize critical institutions. Kazakhstan’s ruling elite exists of concentric circles surrounding president Nazarbayev and his family with almost all members having close ties with the domestic energy sector. There is a major
92 VI CONCLUSIONS
intertwinement between the political elite and the management and directors of the energy corporations. Kazakhstan has an unofficial patronage network in which other (rival) power holders are incorporated by providing them with resources (e.g. jobs and access to money-making opportunities). Since a major part of the members of this ruling elite is beneficiary of revenue from energy resources, this system enables and embeds the FDI from Chinese NOCs. In China, we see a comparable intertwinement between the politics and business. Through many institutional reforms, the government has retaken control over the NOCs and made them more accountable to the CPC. In this new structure, almost all management and board of directors appointments are facilitated by the state. This would suggest de-facto direct state control over the NOCs, but the reality is somewhat different. A co-governance structure has emerged in which the NOCs are both market participant and market regulator. When we then assess the role of the Chinese ruling elite in enabling the NOCs’ investments in Kazakhstan, we can argue that they play a major, yet not decisive role. Since the NOCs increasingly transnationalize, they have gained more leverage vis-à-vis the central government, resulting in more autonomy. The course of NOCs abroad is therefore more and more determined by there commercial corporate interests, rather than state interests. However, the construction of the institutional framework of SASAC, the CDB and CEIB, and CITIC emphasizes how influential these institutions (and elites leading them) are. Let us return to the second hypothesis: The emergence of a transnational network of energy elites has facilitated a rapid expansion of Chinese NOCs direct investments in Kazakhstan. This hypothesis can only be rejected since this research has found no empirical evidence for the existence of a transnational energy elite. More than being a monolithic transnational elite network, the ruling elites in Kazakhstan and China can be defined as a loose coalition of people, which has direct power over their country’s domestic energy sector, but has not proven decisive in enabling foreign investments. Thirdly, this research aimed at examining the geopolitical and geoeconomic consequences of Chinese investments in Kazakhstan. In chapter I, it was hypothesized that Chinese NOCs’ investments in Kazakhstan have created a new geopolitical and geoeconomic reality in the Caspian Region. This hypothesis can be rejected after analyzing China’s investment behavior in Kazakhstan. This research has argued that the activities of CNPC and Sinopec, has not created a new geopolitical reality in the region. The NOCs’ share of foreign equity oil still stands in stark contrast with the shares of major IOCs that are active in the same region and fall under the same regulations. Kazakhstan’s multi-vectoral
93 approach parties seeking to invest in the country has caused a situation in which Chinese NOCs enter into a competitive energy market and operate similar to IOCs. The fact that Chinese NOCs are not merely a tool of China’s foreign policy rejects the argument that the country has the ambition to pursue a geopolitical strategy in the region. Hence, increased Chinese investments in Kazakhstan’s energy sector should rather be assessed from a geoeconomic point of view. This critical approach is better suited to answer the “how” and “why” of Chinese activities in Kazakhstan. China’s energy security and supply vulnerability may be geopolitical or geostrategic problems; the way of solving them is best understood through this geoeconomic logic. Finally, a short risk analysis has provides us with an insight in the safety of Chinese investments in Kazakhstan and the prospects for business with the country. As a starting point, it was expected that: Political and economic risks are a result of the unstable situation in Kazakhstan and therefore negatively affect both China’s energy supply from and its investments in Kazakhstan. This hypothesis can be rejected since this research has found no empirical evidence for an increased risk facing Chinese NOCs. In the academic literature, there can been found evidence on the positive impact of democracy and democratic institutions on the risk levels for FDI, and the negative impact of authoritarianism on these same risk levels. Kazakhstan has proven a somewhat a-typical case, in the way that is has an authoritarian regime and lacks democratic institutions, but has proven a stable investment climate for Chinese NOCs. This research has found that this can be attributed to the fact that Kazakhstan’s ruling elite directly benefits from these investments and thus has a major incentive to facilitate and maintain these investments. In conclusion, there are almost no geopolitical consequences of Chinese NOCs’ investment behavior in Kazakhstan. The fact that the transnationalization of NOCs partially serves the mitigation of China’s energy scarcity, does not proof they are a tool of China’s strategic quest for energy resources. The energy ties with Kazakhstan should therefore be assessed from a geoeconomic point of view. The fact that Chinese NOCs have become increasingly autonomous from the government, have commercial rather than national interest and aim at transforming into regular IOCs supports this claim. With the countries strengthening their bilateral relationship, there is further research to be done on China’s foreign energy quest in the Caspian Region and Central Asia and in what way they exactly (aim to) utilize their NOCs to mitigate their supply vulnerability.
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