Chinese National Oil Companies in Kazakhstan Implications for Geopolitics and Energy Security

University of Amsterdam Graduate School of Social Sciences

Chinese national oil companies in Kazakhstan Implications for geopolitics and energy security

MSc Thesis Political Science: International Relations Research Project: The Political Economy of Energy

24 June 2016

Author: Supervisor: S. (Simon) Spornberger Dr. M. P. (Mehdi) Amineh 11128569 Prof. Dr. K. (Kurt) Radtke

Table of Contents

Abstract ...... 5 Acknowledgement ...... 6 Maps ...... 7 List of tables and figures ...... 9 List of abbreviations ...... 10

Chapter I – Introduction ...... 12 1.1. Overview of the research ...... 12 1.2. Literature review ...... 14 1.3. Theoretical and conceptual framework ...... 18 1.4. Outline of the argument and hypotheses ...... 22 1.5. Research method and operationalization ...... 24 1.6. Structure of work ...... 25

Chapter II – State-market relations of China’s energy sector ...... 26 2.1. Introduction ...... 26 2.2. Power structure and state-society relations ...... 26 2.3. Industrialization and energy scarcity ...... 28 2.4. The nature of Chinese national oil companies ...... 32 2.4.1. Brief history ...... 32 2.4.2. Ownership and control ...... 33 2.5. The going-global strategy of China‘s energy sector ...... 37 2.6. Conclusions ...... 39

Chapter III – Sino-Kazakh energy relations ...... 40 3.1. Introduction ...... 40 3.2. The Kazakh energy sector ...... 40 3.3. The Sino-Kazakh partnership ...... 44 3.3.1. Diplomatic relations ...... 46 3.3.2. Economic relations ...... 48 3.3.3. Security relations ...... 56 3.4. Conclusions...... 56

Chapter IV – CNPC in Kazakhstan ...... 58 4.1. Introduction ...... 58 4.2. Relationship with Kazmunaygaz ...... 58 4.3. Relationship with IOCs...... 61 4.4. Conclusions...... 66

Chapter V – Implications for geopolitics and energy security ...... 67 5.1. Introduction ...... 67 5.2. Domestic impediments ...... 67 5.3. Interests of other major powers ...... 70 5.3.1. United States ...... 71 5.3.2. Russia ...... 73 5.4. Geopolitics and energy security...... 74 5.5. Conclusions...... 76

Chapter VI – Conclusions ...... 78

Bibliography ...... 82 Books ...... 82 Articles, book chapters, reports ...... 84 Online sources ...... 91 Databases ...... 96

Abstract

This thesis studies the implications of Chinese energy investment in Kazakhstan with regards to geopolitics and energy security. China‘s rapidly increasing demand for imported fossil fuels has forced its government to expand its energy policy beyond its national borders. In order to enhance its access to energy resources abroad, the Chinese government has been facilitating the cross-border expansion of its national oil companies through diplomatic and financial support. Since 1997, China has built a strong political and economic partnership with resource-rich Kazakhstan, as Chinese NOCs have gradually increased their cross-border investment in the country‘s oil and gas sector. Assessing the increasing interaction between Chinese NOCs and other energy companies, the findings of this thesis suggest that Chinese energy investment in Kazakhstan has accelerated the integration of the global energy market. Viewing the cross-border expansion of China‘s energy sector mainly in geoeconomic terms, the results of this study indicate that the increasing number of alliances between Chinese NOCs and Western-based IOCs enhances the possibility of future cooperation between China and other major energy importers.

Acknowledgement

This thesis is the result of five months of research, data collection, writing and editing. It has been a period of intense learning on an academic and on a personal level. First and foremost, I would like to express my gratitude to my supervisor and mentor, Dr. Mehdi Amineh, whose guidance and personal dedication have enabled me to conceptualize and conduct this research. Through participating in his course ‗Energy and Geopolitics in Eurasia‘ in the first semester of my master‘s program, I developed the knowledge and interest that encouraged me to conduct my own study on the subject. Also, I would like to thank my second reader, Dr. Kurt Radtke. Having been raised in a family that values critical thinking and academic learning, I would like to thank my parents for their support and confidence throughout my educational path. Finally, I would like to express my appreciation to my brother and my close friends for their continuous encouragement.

Simon Spornberger 24 June 2016

Map 1 – China

Source: The CIA World Factbook (2016).

Map 2 – Kazakhstan

Source: The CIA World Factbook (2016).

List of tables and figures

Tables

Table 2.1. The three main Chinese NOCs in numbers………………..………….………. 33

Table 3.1. Kazakhstan‘s main oil and gas fields…………………..………..………...... 43

Table 3.2. Presidential visits between China and Kazakhstan since 1992…………...... 47

Table 3.3. Chinese investments in the Kazakh energy sector, 1997-2016…………...….. 51

Table 3.4. Chinese loans to Kazakhstan, 2008-2016…………………………………….. 53

Table 3.5. Selected energy-related loans from China to Kazakhstan, 2009-2014……….. 55

Table 4.1. Major joint ventures of CNPC and KMG in Kazakh upstream oil sector……. 59

Table 4.2. Shell and CNPC in numbers. ………………………………………………… 63

Table 4.3. Cooperation and sales between CNPC/PetroChina and Shell since 1999…..... 64

Figures

Figure 2.1. China‘s GDP and energy consumption, per capita, 1980 – 2012………….... 30

Figure 2.2. Governance structure of Chinese national oil companies………………….... 36

Figure 3.1. Kazakh crude oil export destinations, 2014 ………………………………..... 44

Figure 3.2. Kazakh bilateral trade volume with China, 2004-2014……..……………….. 48

Figure 3.3. Chinese foreign direct investment in Kazakhstan, 2001-2012………….…… 51

Figure 3.4. Volume of petroleum exports from Kazakhstan to China, 2004-2014...…….. 52

Figure 4.1. CNPC‘s acquisition at Kashagan, 2013……………………………………… 60

Figure 4.2. Shareholders at Kashagan oil field…………………………………………... 62

Figure 5.1. GDP Growth in Kazakhstan, 2011-2016……………………………………. 69

Figure 5.2. Kazakh bilateral trade volume with the United States, 2005-2014………….. 72

Figure 5.3. Kazakh bilateral trade volume with Russia, 2005-2014……………………... 73

List of abbreviations

BBC British Broadcasting Corporation bbl/d Barrels per day CDB China Development Bank CEO Chief Executive Officer China ExIm Export-Import Bank of China CIA Central Intelligence Agency CIS Commonwealth of Independent States CITIC China International Trust and Investment Corporation CNOOC China National Offshore Oil Corporation CNPC China National Petroleum Corporation COD Central Organizational Department CPC Communist Party of China EEU Eurasian Economic Union EIA Energy Information Administration EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product IEA International Energy Agency IMF International Monetary Fund IOC International Oil Company IPE International Political Economy IR International Relations JV Joint Venture KDB Kazakhstan Development Bank KMG Kazmunaygaz kWh Kilowatt hour LNG Liquefied natural gas MCI Ministry of Coal Industry MNC Multinational Corporation MOF Ministry of Finance MOFA Ministry of Foreign Affairs MOFCOM Ministry of Commerce MPI Ministry of the Petroleum Industry 10

NDRC National Development and Reform Commission NEA National Energy Administration NEC National Energy Commission NOC National Oil Company NPC National People‘s Congress OECD Organization for Economic Cooperation and Development ONGC Oil and Natural Gas Corporation Politburo Political Bureau PRC People‘s Republic of China PSA Production Sharing Agreement PSC Production Sharing Contract SASAC State-Owned Assets Supervision and Administration Commission SCO Shanghai Cooperation Organization SDPC State Development and Planning Commission Sinopec China Petroleum and Chemical Corporation SOE State-Owned Enterprise Tcf Trillion Cubic Feet TNC Transnational Corporation UN Comtrade United Nations Commodity Trade Statistics Database UNCTAD United Nations Conference on Trade and Investment US the United States of America WTO World Trade Organization

Chapter 1 - Introduction

1.1. Overview of the research

China‘s rapid economic rise of the past decades has boosted its thirst for energy and made it a net importer of fossil fuels. With its massive population of 1.3 billion, China has become the world‘s largest consumer of energy and the second largest consumer of crude oil. As its GDP continues to grow at a rapid pace, China‘s consumption of oil, gas and coal is expected to grow further in the coming years. Following these developments, energy security has become a major challenge for the Chinese government, which has been seeking to strengthen ties with supplier countries and diversify its imports. As a consequence, Chinese national oil companies (NOCs) have gradually expanded their cross-border activities in resource-rich countries around the globe.

With its location in China‘s immediate neighborhood and its vast fossil fuel resources, Ka- zakhstan has become a key target country for Chinese energy investment. Since 1997, Chi- nese NOCs have acquired a significant volume of assets in the country‘s oil and gas sector. With its high share of foreign direct investment (FDI) in the Kazakh energy sector, China has established a strong political and economic presence in Kazakhstan, as its NOCs operate side- by-side with Kazakh, Russian and Western-based energy companies. As the Caspian region contributes a significant share to the world energy supply, China‘s increasing presence in Ka- zakhstan is expected to have consequences in terms of geopolitics and energy security on a regional and global level.

This master thesis attempts to analyze the geopolitical and geoeconomic implications of Chi- nese national oil companies‘ (NOCs) investments in Kazakhstan between 1997 and 2016. The following chapter will assess (1) the nature of Chinese NOCs and their relationship with the government, (2) the Sino-Kazakh energy partnership as well as (3) the relationship of Chinese NOCs with national and international energy companies in Kazakhstan. The overarching goal is to analyze the (4) implications of these issues for geopolitics, energy security and the global energy market.

Based on the described objectives, this study‘s research interest can be summarized by the following question: „What are the geopolitical and geoeconomic implications of Chinese national oil company investments in Kazakhstan and what is the nature of their cross-border expansion?‟ This question can be divided into the following sub-questions.

1. What is the nature of Chinese NOCs and their relationship with the Chinese government? 2. What are China‘s foreign policy objectives towards Kazakhstan and what is the nature of Sino-Kazakh energy relations? 3. What is the nature of Chinese NOCs‘ cross-border expansion in Kazakhstan with regards to their relationship with other national and international energy companies? 4. To what extent has Chinese energy investment in Kazakhstan contributed to the transnational integration of the global energy market? 5. What are the geopolitical and geoeconomic implications of Chinese NOC investments in Kazakhstan?

Broadly speaking, the first three sub-questions are aimed at providing a profound understanding of Chinese NOC investment in Kazakhstan with related policy tools, strategies and corporate alliances while the fourth and fifth sub-questions attempt to place these issues within the context of energy security and geopolitics. The overall timeframe for this study is the period between 1997 and 2016, from the year of the first Chinese energy investment in Kazakhstan until today. The main social entities and actors under study are the Chinese and Kazakh governments, Chinese and Kazakh national oil companies as well as private-based international oil companies active in Kazakhstan, specifically the Chinese National Petroleum Corporation (CNPC), the Kazakh national oil company Kazmunaygaz (KMG) and the Dutch/British-based international oil company Shell. Other relevant actors are the governments of the United States and Russia as major powers in the region.

This proposed research is socially relevant for a number of reasons. Firstly, China‘s quest for foreign oil and the following cross-expansion of Chinese NOCs in resource-rich countries across the globe have implications for the global energy market and global energy security. Therefore, it is crucial to study China‘s foreign energy policy and the overseas investments of its NOCs. Secondly, the topic of this research is related to the broader context of China‘s transformation from a developing to an industrialized country and addresses the general question on the transnationalization of the Chinese economy in general and that of Chinese NOCs in particular. Thirdly, as China‘s NOCs are rapidly increasing their cross-border activities, studying their relationship with other national and international oil companies contributes to the crucial debate on the nature of Chinese NOCs and to the geopolitical and geoeconomic implications of their cross-border activities. Located in the heart of Central Eurasia, both the United States and Russia have vital geostrategic interests in Kazakhstan. At the same time,

Kazakhstan supplies a significant share of the European Union‘s crude oil imports. Through analyzing the investments of Chinese NOCs in Kazakhstan and their relationship with private IOCs, this study discusses the crucial issue of energy supply security from Kazakhstan and its future possibilities and impediments, addressing the overall question of whether China‘s rise will lead to increasing conflict or cooperation in the future.

1.2. Literature review

This research revolves around the concept of energy security, which Yergin (1988) defines as ―the availability of energy at all times in various forms, in sufficient quantities and at reason- able or affordable prices, without an unacceptable or irreversible impact on the environment‖. Winzer (2012: 36) defines energy security as the ―continuity of energy supplies relative to demand‖. Similarly, Ang et al. (2015) discuss a variety of studies conducted on the subject and point at the broad scope of conceptualizations currently used within the scholarly debate on energy security, while Umbach (2010) discusses the interconnection between traditional, purely economic approaches to energy security and more recent, increasingly strategic approaches focusing on security and stability.

Following China‘s rapidly increasing energy demand and fossil fuel import dependence in the past decades, a number of scholars have given particular attention to China‘s energy security. In their analysis of China‘s main energy security challenges, Cao and Bluth (2013) suggest that China‘s future energy policy will significantly affect its overall geopolitical grand strategy. In an earlier study, Manning (2000) discusses the Chinese shift from an economic to a strategic approach to its energy policy. Cheng (2008) provides a comprehensive analysis of China‘s strategy of securing access to resources through diplomacy rather than purchase on the international market, although Lee (2012) points out that China still covers most of its imported oil supply from openly traded markets. Zhang (2011) discusses China‘s current reliance on the Malacca Strait for nearly three-quarters of its crude oil imports and the resulting incentive for China to create direct pipeline links with countries in its immediate neighborhood, although Leung (2011) suggests that the contribution of pipelines to China‘s energy security should not be overstated.

On an economic level, several scholars have focused on the role of Chinese national oil companies for China‘s energy security on a domestic and international level. Significant attention has been given to the relationship of Chinese NOCs with the government, with a number of scholars arguing that Chinese NOCs act according to government interests (Liao, 2015; Mat-

14 tlin, 2009; Taylor, 2012) while others have suggested that they are growing increasingly independent, particularly in their overseas activities (Chen, 2008; Downs, 2010; Jiang and Sinton, 2011; De Graaff, 2014). Dumbaugh and Martin (2009), Lawrence (2013), as well as Law- rence and Martin (2013) have attempted to describe the overall political structure of China while Ding (2014) and Teets (2013) have analyzed contemporary Chinese state-society relations. Addressing China‘s energy policy in relation to its NOC activities, Wu (2014) con- cludes that the Chinese government has been actively promoting the overseas investment of its NOCs through political support. The transformation of Chinese national oil companies into fully-integrated and internationally active corporations has been referred to as transnationalization, which De Graaff (2012; 2014) has addressed in several works. Both Jiang and Sinton (2011) and Jiang and Ding (2014) provide comprehensive overviews on Chinese NOC overseas investment, showing the gradual increase of their cross-border acquisitions and activities over the past decades, and Amineh and Yang (2014) have placed the subject within the context the ongoing economic globalization process. Moreover, Salidjanova (2011) links the overseas investments of Chinese state-owned companies to the government China‘s ‗going- out policy‘. Alves (2013), Bräutigam and Gallagher (2014) and Downs (2011) discuss the role of Chinese state-owned banks as development financiers, often accompanying state-owned enterprises (SOEs) in their cross-border expansions.

A major issue within the debate on the transnationalization of Chinese NOCs has been their relationship with other energy companies, in particular private-based IOCs. De Graaff (2011) suggests that the rise of non-triade (United States, Europe, Japan) oil companies in recent decades has caused an increasing transnationalization of the global energy market following the growing number of alliances between state-owned and private energy companies. In a later study focusing on Chinese NOCs, De Graaff (2014) suggests that their cooperation with IOCs has increased rapidly, accelerating the integration of the global oil and gas sector. The issue of IOC/NOC relations is directly connected to the concept of resource nationalism, which refers to the assertion of governmental control on domestic natural resources, as discussed by Stevens (2008) and Wilson (2015). Vivoda (2009) states that growing resource nationalism has limited the possibilities of IOCs for investment while noting that they have nev- ertheless remained highly profitable. The increasing importance of national oil companies for the global oil market has been studied by Pirog (2007), though Eller et al. (2011) have shown that they remain significantly less efficient than their private-based counterparts.

Since Chinese NOCs started investing in Kazakhstan in the late 1990ies, several scholars have studied China‘s foreign policy towards Central Asia in general and Sino-Kazakh energy relations in particular. Valeev and Kadyrova (2015) provide an overview of the two states‘ diplomatic relationship since 1991. At the early stage of Chinese energy efforts in the region, Christoffersen (1998:3) states that ―pipelines through China from Central Asia and Russia would help to diversify Northeast Asian energy supply—reducing the region‘s dependence on supplies from the Middle East‖ while Andrews-Speed and Vinogradov (2000: 397) point out that China‘s energy interests in Central Asia are complemented by a ―range of political, economic, and security concerns‖. More recent studies have been conducted by Rosseau (2013), Saurbek (2008) and Sheives (2006), focusing on the possibilities and impediments of Sino-Kazakh relations within and beyond energy-related issues, while O‘Neill (2014) as well as Kalyzhnova and Lee (2014) assess how the Chinese government assists its NOCs in securing their investments in Kazakhstan through foreign policy support. In a comprehensive analysis of Chinese NOC investments in Russia and Kazakhstan, Cutler (2014) suggests that China‘s ties with Kazakhstan have gradually increased but remain constrained by Ka- zakhstan‘s ‗multi-vector foreign policy‘.

Analyses of Kazakhstan‘s political economy and its oil and gas sector have been conducted by several scholars. Olcott (2010), Schatz (2008) and Ziegler (2010) provide analyses of the power structure, state-market relations and authoritarian rule in Kazakhstan. Ostrowski (2010) studies the connection between the Kazakh ruling elite and the oil sector, identifying a pattern of what he refers to as ‗patron-client relationships‘. Kaiser and Pulsipher (2007) analyze the Kazakh government policy with a focus on petroleum legislation and obstacles to foreign investment, while Yenikeyeff (2008) provides an overview of the Kazakh gas sector. Ka- zakhstan‘s strategy of fostering energy relations with both the European Union and China while maintaining a strong bond with Russia as well as ties with the United States has been referred to as a ‗multi-vector foreign policy‘, as discussed by, among others, Ipek (2007) and Hanks (2009). In their comparative study of resource nationalism in Russia and Kazakhstan, Domjan and Stone (2010) suggest the Kazakh government‘s involvement in the energy sector follows mainly economic interests while Russian resource nationalism is rooted in geopolitical objectives. Other studies on Kazakh resource nationalism have been conducted by, among others, Cutler (2012) and Sarsenbayev (2011).

The geopolitical landscape of Central Asia has been studied by, among others, Edwards (2003), Kleveman (2007) and Kubicek (2013) while Stegen and Kuznir (2015) analyze the

16 increasing influence of China in the region. The United States‘ post-Afghanistan policy towards Central Asia has been discussed by Mankoff (2013) and Rumer et al. (2016) who assess possibilities and impediments for U.S. interests, while Raphael and Stokes (2014) analyze the U.S. energy strategy in the region. Kim and Blank (2013), as well as Kim and Indeo (2013), address the issue of Sino-Russian relations in the regional context of Central Eurasia. With regards to regional frameworks for cooperation, Bailes et al. (2007) and Schneider (2013) have studied the Shanghai Cooperation Organization while Godehardt (2014), Sum- mers (2016), Verlare and van der Putten (2015), as well as Zhang (2015) have assessed Chi- na‘s ‗New Silk Road‘ strategy. Studying the consequences of China‘s energy quest for global energy security, Amineh and Yang (2012) challenge the dominant perception of China and the European Union being competitors in energy issues. Similarly, Zhang (2012) suggests that China and the West share a common interest in a stable global oil market and reliable supply, arguing that China‘s overseas oil and gas acquisitions have hardly enhanced its energy security. This view is shared by Dadwal (2007) who argues that more cooperation between China and other consumer countries will be necessary to secure energy supply in the future.

The presented scholarly work offers a broad overview of Chinese energy security, Chinese NOCs, Sino-Kazakh relations, the transnationalization of Chinese NOCs and the implications of China‘s energy quest for geopolitics and energy security in Central Asia. However, much of the literature applies either a strictly geostrategic or a strictly economic perspective. Fur- thermore, the implications of the transnationalization of Chinese NOCs and their relationship with private IOCs have not been sufficiently addressed. As the focus of this research is the study of Chinese NOC investments in Kazakhstan‘s, it contributes to the scholarly literature on the transnationalization of Chinese national oil companies. By analyzing the relationship between Chinese NOCs and private IOCs, this study fills the gap currently existing in the scholarly debate on the nature of Chinese national oil companies and the implications of their cross-border activities. In doing so, it furthermore adds to the understanding of China‘s foreign energy policy and its relations with Kazakhstan in questions of energy and beyond. Fi- nally, this research connects Chinese NOC investments in Kazakhstan with regional geopolitics and energy security, attempting to identify the geopolitical and geoeconomic consequences of China‘s energy quest. In doing so, it complements the existing scholarly literature on the crucial question of whether China‘s economic rise will lead to more cooperation or confrontation with other major powers in the future.

1.3. Theoretical and conceptual framework

The presented research will make use of several concepts in order to place the subject within a theoretical framework. Firstly, the resource-scarcity model provides the foundation for connecting resource-dependent China with resource-rich Kazakhstan. Secondly, the concept of transnationalization will provide the context for understanding the increasing cross-border activities of Chinese NOCs, their changing relationships with other energy companies and the consequences of these developments. Finally, critical geopolitics will provide the overall framework for studying the logic behind Chinese NOC investments and their implications for energy security and geopolitics. The following paragraphs are going to briefly introduce the used concepts and put them into relation with one another. For this purpose, a brief outline of the scholarly debate as well as the most relevant elements of each concept will be presented.

Resource scarcity model

To begin with, the resource scarcity model of Amineh and Houweling (2007) helps explain the Chinese government‘s need to expand its energy policy efforts beyond its national borders. The model distinguishes between three types of resource scarcity. Firstly, the authors define ‗demand-induced scarcity‘ as caused by population growth, rising per-capita income and technological change, which consequently leads to an increasing consumption of resources. ‗Supply-induced scarcity‘, on the other hand, is ―caused by the dwindling of stock‖ (p. 375). Finally, ‗structural scarcity‘ is defined as caused by the deliberate action of a powerful actor. The authors suggest that the United States are at this point in time capable of induc- ing structural scarcity of crude oil for East Asia by blocking shipping routes through their maritime military power.

Clearly, China is facing increasing demand-induced scarcity, as its population, per-capita income as well as industrial production have been growing rapidly over the past decades and are expected to grow further (World Bank, 2016a). Despite increasing policy efforts to foster renewable energy (Ma et al., 2010), fossil fuels accounted for more than 90% of China‘s energy consumption in 2012 (U.S. EIA, 2015a). Consequently, China is seeking to gain access to oil and gas assets abroad in order to maintain its level of economic growth and stability. The overseas acquisitions of Chinese NOCs are viewed as part of this effort. Furthermore, the risk of structural scarcity induced by the United States through blocking oil imports on sea encou- rages China to create direct pipeline links with resource-rich countries in its immediate neighborhood in order to enhance its energy supply security.

Overall, the resource scarcity model links China‘s industrialization process with its need for pursuing an active foreign energy policy in resource-rich countries such as Kazakhstan. In this research, Chinese bilateral trade, investment as well as diplomatic and security relations serve as indicators to assess China‘s efforts of countering its energy scarcity in Kazakhstan.

Transnationalization of national oil companies

Since the late 1990ies, Chinese national oil companies have steadily expanded their cross- border activities around the globe, raising questions on their impact on the international geopolitical order. Within the scholarly debate on globalization and internationalization, the impact of transnational corporations (TNCs) on world politics has been widely discussed, focusing initially on the positive or negative effect of foreign direct investment (FDI) by TNCs on host countries. While there has been little consensus within the scholarly debate about the concept of globalization and its consequences, there has been some agreement on the increasing influence of transnational actors in the international system. Referring to their causes, O‘Brien and Williams (2007: 183) suggest that ―the rise and development of TNC is to be understood as the result of a changing political, economic, technological and managerial context‖. This ‗transnationalization of governance‘ has changed the nature of international relations, as ―transnational nonstate actors develop political regulations and activities without being formally authorized by states‖ (Zürn, 2013: 410). The growing significance of TNCs is reflected by their capability of allocating capital and moving resources across borders (Risse, 2013). The concept of transnationalization has been linked to Mercille‘s (2008) ‗logics of power‘ and Harvey‘s (1985) works on the ‗geopolitics of capitalism‘, who argue that the capitalist system tends to expand geographically. In the context of Harvey‘s ‗spatial fix‘ and Mercille‘s ‗geoeconomic logic‘, the increasing cross-border activities of large corporations are viewed as a response to capital overaccumulation within a state.

In recent years, a scholarly debate on the transnationalization of Chinese national oil companies has emerged, which De Graaff (2014: 547) defines as ―the extent to which they (the NOCs‘) engage in cross-border alliances and/or involving private partners‖. The transformation of Chinese national oil companies from purely domestic state-owned enterprises (SOEs) to globally active players has been the result of a number of governmental reforms as well as political and economic developments (Amineh and Yang, 2014).

As this research aims at studying the relationship of Chinese NOCs with both the Chinese government and with other energy companies in Kazakhstan, the concept of transnationaliza-

19 tion helps understand the changing nature of Chinese NOCs as well as their influence on the global energy market.

Critical geopolitics

Critical geopolitics is a broad set of theories which share the commonality of deconstructing discourses and practices of classical geopolitics. The school is rooted in critical theory and scholars of the Frankfurter Schule such as Horkheimer, Adorno, Habermas and Faucault (Kelly, 2006), whose stream of thinking was applied to the study of international relations by Robert Cox (1981) in his article ‗Social Forces, States and World Orders: Beyond Interna- tional Relations Theory‘. Since then, a number of scholars have utilized critical theory to cri- ticize the grand theories of realism and liberalism from both positivist and post-positivist perspectives.

As part of this debate, critical geopolitics assumes that intellectuals and scholars construct ideas about places, which have influence and reinforce their political behaviors and policy choices, which in turn affects how people process their own notions of places and politics. Broadly speaking, the school of critical geopolitics can be divided into three main streams of thinking. The first group of scholars has been focusing on culture as the determining variable, bringing forward theories such as Anderson‘s (1983) concept of ‗imagined communities‘ which are socially constructed as they are not based on face-to-face interaction between their members. The second main line of argument is based on the analysis of discourses, with scholars such as Dodds (1994) studying the decision-making level as the main unit of analysis, assessing narratives, concepts and practices of geopolitical discourses. Finally, the third and most recent stream of critical geopolitics has included the study of international political economy (IPE) into the analysis of geopolitics from a critical IR perspective.

In their important book ‗Mastering Space: Hegemony, Territory and International Political Economy‘, Agnew and Corbridge (1995) suggest a shift of focus in the study of geopolitics away from territory towards capital flows, arguing that in light of increasing transnational integration of markets, the classical, state-centered approach to geopolitics is no longer sufficient. In a later publication, Agnew (2003) connects the issue of US hegemony with its ability to control capital flows outside national borders. Addressing the subject of US foreign policy, Mecille (2008) presents an interpretation of ‗radical geopolitics‘ following a geopolitical and a geoeconomic logic, arguing that in the post-Cold war period, economic forces dominate state policy while at the same time the capitalist state retains a degree of relative autonomy.

Based on Harvey‘s (2001) ‗logic of power‘, Mercille views the process of policymaking as a tension between the interests of, firstly, capitalists and secondly, state managers, arguing that the two groups are dependent on each other, as the state relies on capitalists to maintain economic growth in order to assure their survival, while capitalists rely on the state to maintain a business-friendly environment through economic governance.

It becomes apparent that the interdependence of political and economic forces in the cross- border expansion of Chinese national oil companies and its consequences is best understood through the third strand of critical geopolitics. As Realism neglects the influence of non-state actors in international relations (Donnelly, 2000), it is not suitable to study the transnationali- zaton of Chinese NOCs. Liberal IR theory, on the other hand, assumes that there is a clear distinction between state and market forces (Doyle, 1986), which certainly does not apply to China‘s current state-society structure, as in China‘s state-led industrialization process, the government retains a strong grip on the country‘s economy. At this point, it is necessary to note that Agnew‘s and Mercille‘s conceputalizations of critical geopolitics are based on the liberal state-society structure of the United States. Therefore, the second chapter of this research is dedicated to the conceptualization of power structure, state-market relations and governance of national oil companies in China.

In response to demand-induced scarcity, this research assumes that Chinese NOCs serve as tools of the Chinese government for the pursuit of energy policy outside its national borders. Therefore, their overseas investments are a reflection of the Chinese government‘s interests regarding energy security. As conceptualized by Amineh and Houweling (2010), the Chinese state class is exposed to lateral pressures from socio-economic demand and market forces, which push it to secure the access to natural resources and markets abroad. By facilitating the cross-border investments of its national oil companies, China projects power to secure the access to natural resources in order to maintain credibility at home and secure its wealth- power structure (Amineh and Yang, 2014). Therefore, this research views the investment of Chinese NOCs in Kazakhstan as a reflection of China‘s foreign energy policy objectives.

Furthermore, it is expected that the investments of Chinese NOCs have implications for other major powers in the region on both a geoeconomic and geopolitical level. In particular, the United States and Russia have wide-ranging geostrategic interests in Central Asia, while the U.S. and the European Union are dependent on energy imports from the Caspian Region following demand-induced scarcity. Furthermore, the activities of Western-based IOCs are affected by the ongoing transnationalization of national oil companies across the globe. There- 21 fore, this research attempts to analyze the implications of Chinese NOC investment in Ka- zakhstan both on a geopolitical and geoeconomic level.

Overall, the presented interpretation of critical geopolitics combines elements of IR and IPE theory and therefore provides the most suitable framework for the study of Chinese national oil companies, their relations with private international oil companies and the implications of their investments and relationship. In focusing on the relevant forces constraining the actions of the main social entities under study, this theoretical framework helps better understand the subject and provide a full assessment of Chinese energy supply security from Kazakhstan and the geopolitical and geoeconomic implications of Chinese energy investment.

1.4. Outline of the argument and hypotheses

The research question ‗What are the geopolitical and geoeconomic implications of Chinese national oil company investments in Kazakhstan and how can we understand their cross- border expansion?‘ contains two variables. The independent variable is the investment of Chinese NOCs in Kazakhstan, while the dependent variable is the geopolitical and geoeconomic implications of these investments. Based on this interdependence, the following paragraphs will apply the presented set of theories to the previously listed sub-research questions to deduct hypotheses which comprise this work‘s main line of argument.

Firstly, this research views the cross-border expansion of Chinese NOCs in the context of the ongoing economic globalization and integration of China into the global economy. As China‘s industrialization process has created a demand-induced scarcity of fossil fuels, lateral pressures from socio-economic demand and market forces push the Chinese government to secure access to markets and energy resources outside national borders. Consequently, the Chinese government facilitates the overseas investment of its NOCs. Thus:

Hypothesis 1: As China faces increasing energy scarcity, Chinese national oil companies serve as tools for the Chinese government to enact its energy policy abroad.

Then, considering the Chinese government and Chinese NOCs as a unitary actor, the investments of Chinese NOCs in Kazakhstan are viewed as an effort of the Chinese ruling elite to access natural resources outside its national borders in response to lateral pressures and resource scarcity. Consequently, the cross-border expansion of Chinese NOCs in Kazakhstan follows mainly geoeconomic objectives. Thus:

Hypothesis 2: During the period under study, China has built a strong bilateral partnership with Kazakhstan based on increasing energy-related trade, investment, and finance in order to enhance its access to Kazakh energy resources.

Then, as Chinese NOCs have been gradually expanding their cross-border activity and turning into transnational actors, they are entering new forms of alliances with other national and international energy companies. Thus:

Hypothesis 3: It is expected that during the period under study there has been an increase in cooperation between Chinese NOCs, other NOCs and Western-based IOCs in Kazakhstan.

Then, as Chinese NOCs are increasingly interacting with Western-based IOCs as part of their transnationalization process, they create new forms of cooperation between private and state- owned enterprises which change the nature of the global energy market. Thus:

Hypothesis 4: It is expected that during the period under study, Chinese investment in the Kazakh energy sector has accelerated the integration of the global energy market.

Then, as China‘s policy efforts towards Kazakhstan are mainly focused on energy trade and investment, its geoeconomic power projection does not pose a geostrategic threat to other major powers in the region. On the contrary, the increasing number of alliances between Chi- nese NOCs and Western IOCs reflect the mutual interest China and other major energy importers in the region have. Thus:

Hypothesis 5: It is expected that the increasing interaction between Chinese NOCs and IOCs in Kazakhstan increases the future possibility of cooperation between China and other major powers.

To sum up, this work assumes that Chinese NOCs serve as policy tools of the Chinese government. Therefore, their steadily growing cross-border investments reflect Chinese energy policy interests. Furthermore, Chinese NOCs are increasingly cooperating with other energy companies in Kazakhstan, which accelerates the integration of the global energy market. As China‘s involvement in Kazakhstan follows mainly geoeconomic interests, it does not pose a geopolitical threat to other major powers in the region. Therefore, the interaction between Chinese NOCs and other energy companies enhances the possibility of future cooperation.

1.5. Research method and operationalization

Regarding sources, this research is based on secondary data from international institutions and think tanks, primary resources from governments and corporations as well as the main scholarly contributions to the academic debates in the English and German languages. Firstly, a detailed account of China‘s and Kazakhstan‘s energy situation will be given based on the country reports of the U.S. Energy Information Administration (EIA) and the World Energy Outlook of the International Energy Agency (IEA). Specific information on China‘s per capita energy consumption, GDP growth and other economic indicators will be derived from databases provided by the World Bank and International Monetary Fund (IMF). For the assessment of the Sino-Kazakh economic partnership, several databases such as those provided by UN Comtrade, UNCTAD, and China Aid Data will be consulted. These quantitative figures will be complemented by a number of primary sources from governments and companies. China‘s energy policy will be assessed by studying its 2012 Energy Policy White Paper and its 2014 Energy Development Strategy Action Plan. The assessment of Chinese NOCs‘ interaction with other energy companies in Kazakhstan will be mainly based on the recent annual reports and company data of CNPC, Sinopec, Kazmunaygaz and Shell as well as reports from highly reputed international business publications such as Bloomberg, Reuters, Wall Street Journal and the specialized Oil and Gas Journal. Moreover, public statements from high- ranked state officials or company leaders will be reviewed. Specific information on Ka- zakhstan and Central Eurasia will be derived from the Jamestown Foundation‘s ‗Eurasia Dai- ly Monitor‘. Finally, every section will discuss the main scholarly contributions on the issue, covering a variety of specialized monographs, book chapters and peer-reviewed articles from the English and German-speaking academic debates.

Regarding methodology, this research applies a mixed approach of quantitative and qualitative methods, depending on the specific operationalization of the sub-research questions. The first part of this work addresses the nature of Chinese NOCs and their role for China‘s energy policy, for which the ‗resource-scarcity model‘ serves as a theoretical framework. Through a qualitative analysis of the formal and informal ties between the government and the NOCs, the level of dependence between the two will be assessed. The second sub-question of this research is concerned with Sino-Kazakh energy relations, studying both geoeconomic and geopolitical factors as conceptualized in Mercille‘s interpretation of critical geopolitics. Firstly, diplomatic relations will be assessed by studying the frequency and outcomes of presidential state visits since 1991. Economic relations will be assessed through a quantitative

24 analysis of bilateral flows in trade, investment, and finance using the previously mentioned databases. Finally, cooperation on the security level will be assessed through joint military exercises, bilateral arms trade and participation in international security frameworks such as the Shanghai Cooperation Organization. The third and fourth sub-questions address the transnationalization of Chinese NOCs, which will be analyzed by two case studies on CNPC‘s cooperation with other energy companies in Kazakhstan. Firstly, the relationship of CNPC with Kazakhstan‘s main national oil company KMG will be assessed through a qualitative review of the 2013 purchase at the Kazakh oil field of Kashagan. Then, the relationship of CNPC with Dutch-British-based Shell will be studied through a qualitative assessment of all joint ventures, production sharing agreements and sales between the two companies worldwide. Based on the theoretical framework of Chinese NOCs‘ transnationalization, the consequences of these developments for the global energy market will be discussed. The final part of this research will study the geopolitical and geoeconomic implications of Chinese NOCs investments in Kazakhstan by analyzing the interests and strategies of other major powers in the region, in particular the United States and Russia. Furthermore, it will attempt to measure the consequences of Chinese NOC expansion in Kazakhstan for energy security and the global energy market by reviewing competing European, Russian and Chinese pipeline projects. Overall, this work will provide a comprehensive overview of Chinese NOC investment in Kazakhstan and its implications for geopolitics and energy security.

1.6. Structure of work

As presented in the previous sections, my thesis is structured into four main parts. After an introductory chapter, chapter II focuses Chinese NOCs, their nature, and their relationship with the government. Chapter III studies Sino-Kazakh relations on a political, economic and security level and also presents an overview of the Kazakh oil and gas sector. Chapter IV discusses the relationship of Chinese NOCs with other national and international oil companies in Kazakhstan. Chapter V will connect the results of the previous chapters and link Chinese NOC investments in Kazakhstan with energy security and geopolitics. Finally, the concluding chapter will review the findings with regards to the theoretical framework and hypotheses and present the overall conclusions of this research.

Chapter II – State-market relations of China’s energy sector

2.1. Introduction

Since the late 1970ies, China has transformed from an underdeveloped into a rapidly indu- strializing state. In an ongoing and gradual reform process, the Chinese government has been opening its market to foreign investment, boosting manufacturing, exports and urbanization. This economic rise has increased China‘s demand for natural resources, in particular fossil fuels. Since China turned into a net importer of crude oil in 1993, securing the access to energy resources from abroad has been a key challenge for the Chinese government. As the Chi- nese state has retained a strong grip on the country‘s economy, China‘s energy sector is predominantly state-owned. Therefore, it is necessary to understand the interplay of state and market forces in China in order to understand its energy strategy and the cross-border expansion of its national oil companies.

Having laid out the overall framework of this research in chapter I, the aim of this chapter is to introduce state-market relations in China, discuss the country‘s energy situation and analyze the role of national oil companies for its energy security. In doing so, this chapter addresses the sub-question ‗What is the nature of Chinese NOCs and their relationship with the Chinese government?‘ The following pages are going to (1) discuss the power structure in contemporary China, (2) introduce China‘s energy situation based on its rapid industrialization process, (3) analyze the nature and governance of China‘s national oil companies and (4) address the ‗going-global strategy‘ of China‘s energy sector.

Overall, this chapter will provide the conceptual foundation for the following analyses of Si- no-Kazakh energy relations in chapter III, the cross-border expansion of Chinese national oil companies in Kazakhstan in chapter IV and the geopolitical and geoeconomic implications of their investments in chapter V.

2.2. Power structure and state-society relations

Throughout the great part of the past 2000 years, China was an advanced nation and leading economic power in the world. From the 19th century, however, China experienced Western and Japanese imperialism which led to economic decline and political crises (Landsberger, 2014). After a perceived ‗century of humiliation,‘ the People‘s Republic of China (PRC) was established in 1949 after the victory of the Chinese Communist Party (CPC) in the civil war against the Kuomintang nationalist forces. Between 1953 and 1978, the new communist lea-

26 dership under Mao Zedong initiated a reform process which embraced all aspects of political, economic and social life (ibid). However, Mao‘s ‗Great Leap forward‘ resulted in mass fa- mine and death, and is widely considered a central planning disaster (An et al., 2001). Shortly after Mao‘s death, the year of 1978 marked the turning point in modern Chinese history, as the new paramount leader Deng Xiaoping began passing economic reforms which gradually transformed the Chinese economy from communism to state-led capitalism and led to ongoing and rapid economic growth. This reform process has reconverted China into a major political and economic power, the world‘s largest exporter (CIA, 2016) and second largest economy in terms of total GDP (World Bank, 2016a).

Since the establishment of the PRC in 1949, it has been under the sole rule of the Chinese Communist Party (CPC). While the reform process since the late 1970ies has fundamentally changed the country‘s economic system, the Communist Party‘s monopoly on power has remained. According to the 1982 constitution, the Chinese political system consists of several institutions which include the National People‘s Congress (NPC) as the main legislative body of China, the State Council as the main administrative authority, the State Central Military Commission, the Supreme People‘s Court and the Supreme People Procuratorate (Lawrence, 2013). However, there is a broad consensus that the de facto political system of China varies significantly from the official power division stated in the constitution, as the key figures of the CPC form an elite network which embraces all relevant political institutions in China (Dumbaugh and Martin, 2009). Consisting of more than 85 million members, the CPC is the largest political party in the world. Its constitution requires it to hold a congress every five years, the most recent on taking place in 2012. At every congress, the delegates vote a central committee, with currently 205 full and 171 alternate members. Among its members, the Cen- tral Committee elects at its first meeting a 25-person Politburo and a 7-person Politburo Standing Committee. One of the Politburo Standing Committee members is appointed Gener- al Secretary and serves as China‘s paramount leader (Lawrence, 2013). Essentially, this group of seven high ranked officials controls all relevant political institutions in China. The current General Secretary, Xi Jinping, serves as China‘s president and Chairman of the State Military Commission, while the second-highest ranked member, Li Keqiang, serves as Premier presid- ing over the State Council (Lawrence and Martin, 2013). While the election of the Standing Committee is officially conducted by the Central Committee, its members are in practice cho- sen by party elders and current leaders who engage in heavy horse trading to help their protégés and allies gain power (McGregor, 2010).

Traditionally, economic growth and nationalism have been the main sources of legitimacy for the Chinese authoritarian regime (Roskin, 2009). In recent studies, additional factors such as the provision of public goods or the maintenance of social stability have been identified (Breslin, 2009). While the PRC has a long history of suppressing social and oppositional movement by restricting freedom of expression and association (Perry, 2000), recent years have seen a shift in Chinese state-society relations towards a more open approach. Ding (2014: 81) states that during the recent modernization process, ―one of the significant developments in Chinese society and politics is the dynamic growth of civil society organizations (CSOs) that manifest the interests and will of Chinese citizens.‖ Referring to a system of ‗consultative authoritarianism‘, Teets (2013) suggests that in present day China, the state al- lows the activity of civil society group that it considers useful while it continues to govern them through increasingly indirect forms of control.

Overall, the Politburo Standing Committee forms the heart of a small and powerful ‗ruling elite‘ or ‗state class‘ which dominates the Chinese Communist Party and, consequently, all politics in the CPC. Next to controlling the Chinese government, legislative, military and civil society, this small group of individuals executes significant power over the Chinese economy, which will be discussed in the following sub-section 2.4 on the nature and governance of Chi- nese national oil companies.

2.3. Industrialization and energy scarcity

Since the beginning of its economic reform process in 1978, China has transformed from an agrarian state to an emerging economy with a strong manufacturing sector, rapidly increasing international trade and a high inflow of FDI. These developments have changed China‘s energy situation and turned it into a net importer of fossil fuels. In order to understand the challenges of Chinese energy security today, the following paragraphs will discuss China‘s recent economic development and analyze the implications for its energy policy.

China‘s economic development since the late 1970ies has been impressive. Within a few decades, the country transformed from an economically insignificant state into the world‘s second-largest economy in terms of total GDP (Zhu, 2012). In an ongoing reform process, the Chinese government opened the country‘s economy and transformed it from a strictly communist to a market-based system. The industrialization process was initiated at the National Party Congress in 1978, where the party leadership acknowledged that Mao‘s economic policies had failed and that China was lagging not only behind Western economies but also rising

East Asian states such as Japan, South Korea or Singapore (MacFarquhar, 1987). However, the strategy of new leader Deng Xiaoping was not to privatize state-owned industries but to maintain the Communist Party‘s monopoly of power over state and economy while gradually opening the economy to elements of the free market (Dreyer, 2012).

Throughout its state-led industrialization process, the Chinese government has retained a strong grip on the economy, reflected by the large number and size of state-owned enterprises which have been estimated to account for around half of China‘s non-agricultural GDP (Sza- mosszegi and Kyle, 2011: 1). Consequently, state and market in China cannot be viewed as separate entities, like it is the case in liberal democracies. Instead, China‘s ―red capitalism‖ (Lin, 1997) or ―capitalism with Chinese characteristics‖ (Huang, 2008) constitutes a system in which the ruling elite dominates the state-led economy in order to sustain its power. Walter and Howie (2011:73) state that the ―economy […] is being carved up by China‘s rulers, their families, relations and retainers‖, adding that ―China‘s state-owned economy is a family business and the loyalties of these families are conflicted, stretched tight between the need to preserve political power and the urge to do business. To date, the former has always won‖. This tension between state control and commercial interest will be the key focus for the coming section‘s discussion on the governance of Chinese national oil companies, which comprise the heart of China‘s state-owned energy sector.

China‘s state-led development process has triggered an impressively rapid industrialization, as the country‘s GDP has grown at an annual rate of nearly 10% since the late 1970ies (World Bank, 2016a) and, despite a slowdown due to the global financial crisis, will continue to increase at a rate of well over 6% in 2016 (IMF, 2016a). Today, China is the world‘s second- largest economy in terms of nominal GDP and the largest in terms of GDP adjusted for the purchasing power parity (World Bank, 2016a). At the same time, China‘s economic rise since 1978 has led to rapid urbanization, as its massive population of currently 1.3 billion is increasingly moving to the prosperous cities on the country‘s east coast. As China‘s economic rise has been fueled mainly by non-renewable domestic coal and oil resources, its energy production and consumption have increased rapidly since the 1970ies. The correlation between economic development and energy scarcity has been conceptualized by Amineh and Houweling (2007), who link the problem of ‗demand-induced scarcity‘ to population growth, rising per- capita income and technological change. Clearly, China is affected by all three factors, as its massive population of 1.3 billion continues to grow, its GDP per capita increased from below

$300 in 1980 to $7.400 in 2014 (World Bank, 2016a) and much of its economy has shifted from agriculture to energy-intensive manufacturing.

The correlation between economic growth and energy scarcity is reflected by China‘s per capita energy use, which nearly quadrupled from 598 kg of oil equivalents in 1981 to 2.079 kg in 2013. Within the same period, its per capita electricity consumption rose from 363 kWh to 3.475, showing a more than ten-fold increase in little more than three decades. In comparison, the 2013 per-capita energy use in the United States was at 6.909 kg of oil equivalent, more than three times as high as that of China (all figures: IEA, 2015). These numbers show that firstly, China‘s per-capita energy consumption has increased enormously since the beginning of the economic reform process and secondly, that it can be expected to increase further, considering the expected economic growth, rising population size and increasing purchasing power in the coming years and decades.

Figure 2.1. China’s GDP and energy consumption, per capita, 1980 – 2012.

7 2,5

6 2,0 5

4 1,5

3 US$ 1000 US$ 2 1,0

1 1000 kg of oil equivalentoil of kg 1000

0 0,5 1980 1985 1990 1995 2000 2005 2010

GDP per capita Per capita energy consumption

Sources: World Bank (2016a), IEA (2015); Graph by author.

Following its enormous reserves, China has historically covered the majority of its energy demand with coal, which accounted for nearly 66% of China‘s total energy consumption in 2012. The second-largest sources are petroleum and other liquids, covering nearly 20%. The remaining share is made up by hydropower (8%), natural gas (5%), renewables (around 1%) and nuclear power (less than 1%; all figures: U.S. EIA, 2015a). While China covers most of its coal and a significant share of its gas demand through domestic production, the consumption of crude oil has exceeded production capacity in 1993, and the gap has since widened

30 increasingly. China has proven oil reserves of around 24.6 billion barrels, and its production has risen by 50% over the past two decades. The U.S. EIA (2012) predicts that China‘s oil production will further increase to over 4.6 million bbl/d by 2016, 5.5 million bbl/d by 2030, and 5.7 million bbl/d by 2040. At the same time, China consumed about 10.7 million barrels of crude oil in 2014 and its consumption is expected to grow further in the coming years and decades. Also, China surpassed the United States as the largest net importer of oil in 2013 (U.S. EIA, 2015a).

Clearly, the rising dependence on energy imports, in particular for crude oil, has major implications for China‘s energy policy, as an uninterrupted supply of energy resources is crucial for the maintenance of economic growth and social stability, which are vital to the legitimacy of the Chinese ruling elite. Therefore, the Chinese government has adopted strategies to enhance the country‘s energy security in order to address the challenge of demand-induced scarcity and the rising dependence on energy imports. In its Energy Policy White Paper, the Chinese State Council (2012) lays out a comprehensive set of measures aimed at tackling the country‘s energy problem, among others the increasing of efforts in energy conservation, the expansion of the renewable energy sector, the fostering of clean fossil fuel energy, and institutional reforms of the energy sector. In its Energy Development Strategy Action Plan, the State Council (2014) announced a cap on the total primary energy use until the year 2020 as well as an increase of non-fossil fuel energy to 15% in the same year. Following its dependence on imported oil since 1993, China has expanded the scope of its energy policy beyond its national borders, stating in its 2012 White Paper that:

“A fair and rational international energy management mechanism is a prerequisite for a stable global energy market [and] the international community should work collaboratively to maintain stability in oil producing and exporting countries, especially those in the Middle East, to ensure the security of international energy transport routes and avoid geopolitical conflicts that affect the world's energy supply” (China State Council, 2012: 24).

A clear reflection of China‘s new energy policy has been the high number of overseas acquisitions by Chinese national oil companies in resource-rich countries across the globe, often accompanied by governmental support in terms of diplomacy, trade or finance (Chen, 2008; Wu, 2014). Furthermore, China has been seeking to construct oil and gas pipelines in its immediate neighborhood in order to counter risks of maritime supply routes (Zhang, 2011).

As part of China‘s effort to enhance its energy supply security, Chinese national oil companies have taken the role of accessing oil and gas supplies from outside national borders. To 31 understand China‘s energy policy and its overseas energy investments, it is necessary to analyze the nature of Chinese NOCs. Therefore, the following sub-chapter will discuss their history, governance and their relationship with the central government.

2.4. The nature of Chinese national oil companies

Having conceptualized the power structure in China and the country‘s energy problem as a result of its rapid economic development in recent decades, it is necessary to discuss the state- market relations of China‘s oil and gas sector the governance of its main actors, Chinese national oil companies. Therefore, the following paragraphs are going to lay out a brief history of the sector, discuss the emergence of Chinese national oil companies and assess their current relationship with the government.

2.4.1. Brief history

The development of the Chinese oil sector started in the 1950ies when the newly founded Ministry of Petroleum Industry (MPI) under the authority of the State Council was given the task of developing the country‘s petroleum sector. As the first oil discoveries were developed with Soviet support, Soviet-style central planning influenced the administration of China‘s oil industry during its early years (Kambara and Howe, 2007). After the collapse of the Sino- Soviet partnership, Mao‘s economic approach followed the concept of ‗self-reliance‘, and in 1963, Premier Zhou Enlai declared that ―China‘s oil is basically self-sufficient and the epoch of Chinese people using imported oil will be gone forever‖ (Kang, 2001). During this period, the Chinese energy sector remained under the strict administrative authority of the MPI. In 1970, the Ministry of Petroleum Industry, the Ministry of Coal Industry (MCI) and the Minis- try of Fuel and Chemical Industry were merged but were a few years later dismantled back into an MPI and an MCI.

When Deng Xiaoping assumed power in 1978, the Chinese economy was on the verge of col- lapsing. As part of its economic system reforms, the Chinese government disbanded, among others, its Ministry of Petroleum Industry and its Ministry of Chemical Industry and incorporated their profitable assets into state-owned enterprises (SOEs). This led to the foundation of the China National Offshore Oil Corporation (CNOOC) in 1982, which was mainly engaged in offshore upstream activities, the China Petroleum and Chemical Corporation (Sinopec) in 1983, mainly engaged in downstream activities, and the China National Petroleum Corporation (CNPC) in 1988, mainly engaged in onshore upstream activities (Downs, 2010). Although formally becoming corporations, the NOCs retained their ranks within the minis- 32 terial hierarchy and therefore remained subject to governmental control through the Ministry of Petroleum Industry. Before China‘s entrance of the World Trade Organization (WTO) in 2001, several reforms were put in place in the late 1990ies in order to prepare the NOCs for the market entry of international competitors. Firstly, the NOCs were restructured and entered a stage of limited competition with each other. Furthermore, the three main NOCs created subsidiaries on the Hong Kong and New York stock exchanges, making them subject to international business trade legislation (Downs, 2010). During this process, Sinopec and CNPC gradually turned into vertically integrated companies, although their initial focus remained the same, with CNPC being the largest onshore producer largest onshore producer and pipeline constructor, CNOOC being engaged in offshore upstream production and Sinopec dominating refining and distribution (Downs, 2010; Jiang and Sinton, 2011). Today, Sinopec and CNPC are, by revenue, China‘s two largest SOEs and the world‘s second and fourth largest corporations (Fortune, 2015).

Table 2.1. The three main Chinese NOCs in numbers.

Company Global Rank Revenue 2015 Profits 2015 2015 US$ billion US$ billion Sinopec 2 311 8 CNPC 4 308 12.7 CNOOC 72 35.5* 9.8*

Source: CNPC, 2015; Fortune, 2015; Sinopec, 2016; Table by author. *numbers from 2014.

Following their origin as Chinese ministries and their complicated, non-transparent reform process and corporate development, relations between the Chinese government and its NOCs in terms of control and ownership have been subject to scholarly debate. Based on the previous description of China‘s ruling elite, state-market relations and energy situation, the following paragraphs will analyze the relationship between Chinese NOCs and the government.

2.4.2. Ownership and control

Within the scholarly literature on the governance of Chinese national oil companies, two main arguments can be distinguished. The first group states that the NOCs are a tool of the Chinese government which executes significant control over them (Liao, 2015; Mattlin, 2009; Taylor, 2012). The second group suggests that following their increasing overseas activities, Chinese NOCs have grown increasingly independent of the government (Chen, 2008; Downs, 2010; 33

Jiang and Sinton, 2011; De Graaff, 2014). These conflicting scholarly opinions are a reflection of the complex state-market relations in China which embrace the relationship Chinese government and its NOCs. The following paragraphs will review the scholarly argumentation of both groups, present the legal framework of the NOC-government relationship and assess the connections through an analysis of the key leaders.

Similar to China‘s overall political system, the governance of Chinese national oil companies involves a number of institutions and actors with varying degrees of control and interdependence. Firstly, the Chinese government‘s State Assets Supervision and Administration Com- mission (SASAC) acts as the main body assigned with the administration of state-owned enterprises. Furthermore, Chinese NOCs are connected with the National Development and Reform Commission (NDRC), the National Energy Administration (NEA) and the Ministry of Commerce (MOC). Finally, the CPC is directly involved with the staffing of high posi- tioned posts of its NOCs through its powerful Central Organizational Department. In order to shine a light on the control mechanisms behind Chinese NOCs, following paragraphs are going to introduce briefly the listed institutions involved with the governance of China‘s national oil companies and provide an assessment of their relationship.

SASAC

After the reforms of the 1990ies had significantly loosened the government‘s grip on the NOCs, the establishment of the State Assets Supervision and Administration Commission (SASAC) in 2003 was implemented in order to unify the government‘s management of state- owned enterprises (Jiang and Sinton, 2011). Responding directly to the State Council, SA- SAC is the formal owner of 121 SOEs and therefore serves as the formal link between the government and the NOCs. Through SASAC, the government has a number of tools available in order to exercise control over its NOCs. Firstly, SASAC has been collecting dividend from the companies, which it started to do in 2007. Furthermore, it has linked the salary of the SOE‘s top managers to the performance of their firms. Finally, all foreign investments over $30 million and all investments over $200 million must be approved by the Commission (Downs, 2010). The current head of SASAC, Zhang Yi, is a member of the 18th Central Committee of the CPC.

State Council

The Chinese State Council is China‘s highest government body and synonymous with China‘s central government. It is the highest executive and administrative body, composed of, mainly, 34 the premier, vice-premiers, ministers and chairs of major agencies (Chinese State Council, 2016). One of the many institutions directly under the State Council is SASAC. As previously discussed, the State Council is under the direct control of the CPC, and the second-highest ranked member of the Politburo Standing Committee serves as Premier (Dumbaugh and Mar- tin, 2009).

Other bodies

Next to SASAC, there are three other government bodies which influence the governance of Chinese national oil companies. Firstly, the National Development and Reform Commission (NDRC) is the management body which oversees the economic development of China. It mainly studies and formulates policies aimed at the development of China‘s economy (Jiang and Sinton, 2011). Under control of the State Council, its chairperson is nominated by the Premier and approved by the National People‘s Congress. Secondly, the National Energy Commission (NEC) coordinates the overall energy policy of China (ibid). Its current chairperson is Premier Li Keqiang, and its vice-chairperson is Vice-Premier Zhang Gaoli, both of whom are members of the Politburo Standing Committee. Finally, the Chinese Ministry of Commerce (MOC), which reports directly to the State Council, formulates policies on foreign trade and investment (ibid). The MOC is also involved in the governance of the Export- Import Bank of China and the China Development Bank, which regularly provide financial support for Chinese NOCs in their overseas investments, as chapter IV will elaborate on in more detail.

Central Organizational Department

The Central Organizational Department (COD) is the institutional heart of the Chinese Com- munist Party‘s Leninist party system. Controlling the staffing of more than 70 million party personnel assignments (Shaumbaugh, 2009), it has been referred to by former China bureau chief of the Financial Times Richard McGregor (2010: 69) as ―the largest and most powerful human resources body in the world‖. The current head of the COD, Zhao Leji, is a member of the Politburo. The COD controls the staffing of the three main managerial positions of the national oil companies, the party secretary, chairman and chief executive officer (CEO). The ability to do so constitutes the key instrument of control for the CPC on its NOCs.

Figure 2.2. Governance structure of Chinese national oil companies

Source: Dumbaugh and Martin, 2009; Lawrence, 2013; Graph by author.

Overall, the figure shows how the Chinese ruling elite centered around the Politburo and Po- litburo Standing Committee directly controls every institution concerned with the governance of its NOCs and related legislation. Through the COD, it furthermore manages the staffing of key executives of the NOCs.

As mentioned earlier, several scholars have questioned the unity of the Chinese government and its national oil companies and in particular their internationally listed subsidiaries. Downs (2010) suggests that the lack of a single supervisory institution such as a ministry of energy has shifted authority from the government towards the NOCs. Furthermore, she refers to commentators who argue that the increasing size, revenue and tax payments of the NOCs enhance their independence (ibid). In her article on the ‗Two Faces of Chinese National Oil Companies‘, De Graaff (2014) states that in their international activities, NOC executives increasingly follow commercial incentives rather than party-state interests. However, when given a closer look, these arguments do not appear plausible. Firstly, the establishment of SASAC in 2003 has created a somewhat unified governmental agency for the management of the NOCs, as Mattlin (2009: 8) suggests that ―by taking all central enterprises away from the

36 control of various government agencies and putting them under the unitary supervision of an organ that reports directly to the State Council, the central government asserted its authority‖. Moreover, Down‘s (2010) statement on increasing NOC independence is unconvincing, as in a later study on the staffing authority of the COD, she states that the ―oil executive reshuffle [of 2011] was a blatant reminder of the CCP‘s control over China‘s flagship firms‖ (Downs and Meidan, 2011: 3). Similarly, De Graaff‘s argument of conflicting commercial and party interests does not prove an increased level of NOC independence, as SASAC has linked the salaries of NOC executives to their performance, showing that commercial success does not conflict with government interest as instead, it is expected.

Overall, this research assumes that the Chinese government fully controls its national oil companies through SASAC and three other institutions which enable it to, among other things, regulate investments abroad and grant or reject financial support for overseas acquisitions. Through the State Council, the Politburo Standing Committee of the CPC controls all involved bodies while maintaining the authority to appoint and dismiss NOC executives through the party‘s Central Organizational Department. As previously shown, counterargu- ments suggesting that Chinese NOCs are growing increasingly independent of the central government are not convincing. Having established earlier that the Chinese government and Communist Party are closely interconnected and equally dominated by the party‘s Politburo Standing Committee, this research conceptualizes that Chinese national oil companies are tools of the Chinese ruling elite, which utilizes them for the pursuit of its energy policy within China and beyond. Therefore, the following chapters will view the Chinese state and its NOCs as a unitary actor.

2.5. The going-global strategy of China’s energy sector

The pervious sections have linked China‘s industrialization process with its energy problem and conceptualized state-market relations with regards to its energy sector. Following demand-induced scarcity and the need to access energy resources outside national borders, the ‗going-global‘-strategy of China‘s energy sector constitutes the link between China‘s foreign energy policy and the cross-border expansion of its NOCs.

Although China still covers most of its imported crude oil supply from openly traded markets (Lee, 2012), its energy policy strategy has clearly shifted towards an approach of enhancing relations with export countries and purchase of oil and gas equity overseas (Chen, 2008). Since the 1990ies, Chinese NOCs have gradually expanded their activity outside national bor-

37 ders and are now active in resource-rich countries across the globe (Jiang and Sinton, 2011). Following its reliance on energy supplies from beyond state borders, Cao and Bluth (2013) argue that China‘s thirst for energy will significantly affect its overall geopolitical grand strategy.

China‘s overall ‗going-global‘ policy of Chinese state-owned enterprises was initiated in 1999 in order to encourage Chinese enterprises to invest abroad. In her comprehensive analysis of Chinese outward direct investment, Salidjanova (2011) has identified three main objectives behind this policy, namely (1) the access to raw materials and energy, (2) the acquisition of technology and (3) the search for new markets. The cross-border activity of Chinese NOCs can be viewed as a pursuit of these three goals, as firstly, they enhance China‘s energy supply security. Secondly, they help Chinese NOCs gain experience, and thirdly, they open up new markets for bilateral trade, investment, and finance. This research views the global expansion of Chinese NOCs within the context of ‗transnationalization‘ and attempts to analyze the investments of Chinese NOCs through the framework of critical geopolitics.

The international expansion of Chinese NOCs started in 1993 when CNPC won the bid for the Talara-7 oil field in Peru (Kong, 2009). Since the early years, acquisitions of NOCs abroad have been actively supported by the Chinese government and Chinese state-owned banks, in schemes later referred to as ‗oil diplomacy‘ (Chen, 2008: 79), ‗commodity-backed finance‘ (Bräutigam and Gallagher, 2014: 348) or ‗loans for oil‘ (Trunsjø, 2013: 80). By 2013, Chi- nese NOCs owned production entitlements in 42 countries across the globe, with their total overseas oil and gas production of Chinese NOCs amounting to 2.5 million barrels of oil equivalents per day (Jiang and Ding, 2014). Government support for the NOCs‘ international expansion remains strong, as Amineh and Yang (2014: 496) state that ―oil trade and investments in both the upstream and downstream parts of the industry are combined with political and financial support for wider strategic economic cooperation‖. As part of this process, Chi- nese NOCs have created a network of alliances with other NOCs and IOCs and are today considered as ―respected competitors and valued partners‖ on the global energy market (Cala- brese, 2012: 406).

The transformation of Chinese NOCs from domestic actors into globally active players constitutes the focus of this research. By studying the cross-border expansion of Chinese NOCs in Kazakhstan and analyzing both geopolitical and geoeconomic implications, this research attempts to contribute to a better understanding China‘s energy security and the consequences of its economic rise. 38

2.6. Conclusions

This chapter has conceptualized power structure and state-market relations in contemporary China with regards to the energy sector. China is an authoritarian state with centralized power and limited civil society movement that is dominated by the head figures of the Communist Party which form the core of a small and powerful ruling elite. Following a decade-long state- led industrialization process, China has since the late 1970ies achieved an impressive level of economic growth, which has, in turn, increased its energy consumption and created an import dependence of fossil fuels. Although China has substantial energy reserves, its demand continues to grow faster than its production and has, in the case of crude oil, substantially exceeded it. In response to this demand-induced scarcity, the Chinese government has adopted an energy policy which aims at enhancing its access to energy resources outside its national borders in order to maintain economic growth and credibility. In China, the state dominates the market and like most key industries, the energy sector is state-owned. The analysis of government-NOC relations shows that the Chinese ruling elite effectively controls China‘s national oil companies through a variety of control mechanisms, regulations, and staffing authority. Consequently, this research assumes that Chinese NOCs are tools of the government which utilizes them as tools for their foreign energy policy. In line with the ‗going-global‘ strategy of China‘s state-owned enterprises, the Chinese government has actively promoted the cross-border expansion of its NOCs through political, economic and financial support in order to gain access to resources and markets abroad. These developments will be discussed in more detail in the coming chapter on Sino-Kazakh energy relations.

Chapter III – Sino-Kazakh energy relations

3.1. Introduction

As a resource-rich country in its immediate neighborhood, Kazakhstan has been an attractive target for China‘s strategy of strengthening ties with supplier countries and diversifying imports. Since the 1990ies, China and Kazakhstan have expanded their bilateral cooperation as Chinese NOCs have gradually increased their presence in the Kazakh energy sector. Ka- zakhstan has been the first and to this day the only country to be connected to China through a direct crude oil pipeline link.

Having conceptualized state-market relations as well as the governance and ‗going-abroad‘ strategy of Chinese national oil companies in the previous chapter, the aim of the following sections is to analyze in detail the bilateral relations between China and Kazakhstan with a focus on energy-related exchange. Addressing the sub-research question ‗What are China‘s foreign policy objectives towards Kazakhstan and what is the nature of Sino-Kazakh energy relations?‘, the following sections will (1) discuss the Kazakh energy sector and its state- market relations (2) analyze China‘s policy towards Central Asia and (3) assess the Sino- Kazakh partnership on the level of diplomacy, economic cooperation and security.

The analysis in this chapter will be conducted purely on state level. As elaborated in chapter I, the bilateral relationship between China and Kazakhstan will be mainly assessed through data analysis. Before that, the Kazakh energy sector will be analyzed using data from international energy-specific institutions and the main scholarly contributions to the debate.

3.2. The Kazakh energy sector

Since its independence in 1991, Kazakhstan has become an increasingly important producer of fossil fuels, as an increasing size of investment from foreign oil companies has boosted its output of oil and gas. To understand the Sino-Kazakh energy partnership, the following paragraphs are going to provide a short overview of Kazakhstan‘s power structure and its oil and gas sector.

Although officially a presidential republic with a bicameral parliament, Kazakhstan has weak democratic institutions and a marginalized civil society (O‘Neill, 2014; Ziegler, 2010). Since its independence in 1991, Kazakhstan has been ruled by President Nursultan Nazarbayev, the previous First Secretary of the Communist Party of Kazakhstan. Showing clear similarities to the Soviet political system, power in Kazakhstan is centralized, as the president serves as both 40 head of state and commander in chief while also retaining the right to veto any legislation passed by parliament. Through a patrimonial network that grants privileges to his clan and extended family, President Nazarbayev dominates political and economic life in Kazakhstan (Schatz, 2008). The small and powerful ruling elite around Nazarbayev has been described as ―a symbiotic mixture of the former Soviet nomenklatura and a group of people who came to politics as a result of their clan and family bonds‖ (Sasaki, 2008: 131). Oppositional movement in Kazakhstan is suppressed, as ―structural obstacles [,] including restrictions on freedom of the press and speech […] ensure that antiregime groups will have trouble in mobiliz- ing public support‖ (Olcott, 2010: 95). Overall, Ziegler (2010: 778) describes the Kazakh political system as a ―hegemonic electoral authoritarian regime, where elections are a facade, parliamentary opposition is marginalized and has no chance of winning, and the dominant party controls most or all of the seats in the legislature.‖

However, unlike many other authoritarian regimes, Kazakhstan has achieved an impressive level of economic growth and development in recent years. After the collapse of the Soviet Union had created a severe crisis, economic decline and loss of jobs in the early 1990ies, the Kazakh government initiated a successful reform process which boosted the economy (OECD, 2016). As part of this process, the inflow of foreign direct investment was facilitated while the level of state intervention in the economy decreased. Consequently, Kazakhstan‘s GDP per capita increased more than tenfold in less than 20 years, from $1.288 in 1995 to $13.611 in 2013 (World Bank, 2016b). Following this rapid economic growth and a significant rise in per-capita income, approval ratings of President Nazarbayev were as high as 90% at the Kazakhstan National Opinion Poll in 2011 (International Republican Institute, 2011). Therefore, despite its authoritarian nature, the Kazakh regime certainly enjoys some legitimacy thanks to the economic boom it has been able to create. Executing its power mainly through ‗persuasion‘ rather than ‗coercion‘, Schatz (2008: 50) refers to the Kazakh political system as ―soft authoritarian‖. It is necessary to note, however, that the recent decline in oil prices has significantly slowed down the Kazakh economy, which will be discussed in more detail in section 5.2.

Clearly, a significant share of Kazakhstan growth in recent years has been a consequence of the country‘s vast and untapped energy resources. With most of its oil and gas fields being located in difficult or high-pressure terrain, Kazakh energy companies were lacking the technical expertise necessary for their development. By opening its economy to the investment of foreign international oil companies, Kazakhstan boosted fossil fuel production and exports

(U.S. EIA, 2015b). Parallel to the steady inflow of foreign direct investment since the mid- 1990ies, Kazakh energy production and exports have increased significantly. Today, oil and gas make up a significant share of Kazakhstan‘s economy, accounting for around 30% of its GDP (including related activities), a third of its budget revenues and two-thirds of its exports (OECD, 2016). Today, oil and gas comprise a crucial element of both the Kazakh economy and the Kazakh ruling elite‘s legitimacy. As its economy continues to depend heavily on the export of fossil fuels, Kazakhstan has joined the group of ‗rentier states‘, which Mahdavy (1970: 428) defines as ―countries that receive on a regular basis substantial mounts of external rent‖, pointing out that ―oil revenues received by the governments of the oil exporting countries can also be external rents‖.

There is no doubt that Kazakhstan‘s vast energy resources and its authoritarian regime are linked, as increasing revenues from energy production enable the ruling elite to marginalize critical institutions while maintaining legitimacy through economic growth. This phenomenon has been referred to as ‗petro-authoritarianism‘, describing regimes where ―the abundance of hydrocarbon resources has masked negative practices, like pervasive rent-seeking behavior and widespread corruption‖ (Walker and Goehring, 2008). Consequently, the Kazakh ruling elite has been seeking to maintain a strong grip on the country‘s oil and gas sector. Through a network of formal, informal and quasi-formal ‗patron-client relationships‘, the Kazakh ruling elite under President Nazarbayev executes control over the main actors within the oil rich areas and the national oil companies (Ostrowski, 2010).

As the Kazakh regime‘s legitimacy is mainly based on securing economic growth, a thriving energy sector is, therefore, crucial to its survival. Consequently, the Kazakh ruling elite‘s attempt of asserting state control over the country‘s energy resources can be linked to its pursuit of political objectives. This strategy has been defined as ‗resource nationalism‘, referring to systems where ―resource policies are designed to direct economic activity in the mining and energy sectors towards politically defined national goals‖ (Wilson, 2015: 399). Especially since the mid-2000s (decade), changes in the Kazakh legislation have disadvantaged foreign oil companies and asserted governmental control on energy resources. In 2008, for instance, the Kazakh parliament passed a law that allowed the government to amend any contract regarding the extraction of the country‘s natural resources (Sarsenbayev, 2011). Regular changes in legislation and wide-spread corruption in the oil and gas sector have been among the main risks for foreign oil companies in Kazakhstan and an impediment to a high influx of

FDI (Kaiser and Pulsipher, 2007). Clearly, Kazakh resource nationalist policies are directly aimed at increasing economic growth and regime legitimacy (Domjan and Stone, 2010).

With proven crude oil reserves of around 30 billion barrels, Kazakhstan is the world‘s 12th largest oil endowment (all figures in this paragraph: U.S. EIA, 2015b). Following independence from the Soviet Union in 1991 and major investments by Western-based international oil companies, Kazakhstan‘s oil production exceeded one million bbl/d in 2003 and reached 1.7 million bbl/d in 2013. Next to crude oil, Kazakhstan has been producing significant amounts of natural gas, mostly as a by-product of oil production. Its proven gas reserves are at around 85 trillion cubic feet (Tcf), with annual production having increased from 0.6 Tcf in 2003 to 1.6 Tcf in 2013. It is predicted that once large-scale production at the massive offshore field of Kashagan in the Caspian Sea starts, the country‘s fossil fuel output will further increase and lift Kazakhstan into the group of the world‘s top 10 oil producing countries.

Table 3.1. Kazakhstan’s main oil and gas fields.

Field name Shareholders Production Proven reserves start (billion barrels) Karachaganak British Gas, Eni, Chevron, Lukoil, Kaz- 1984 2.4 MunaiGaz Tengiz Chevron, ExxonMobil, KazMunaiGaz, 1991 9 Lukoil Kashagan CNPC, Eni, ExxonMobil, Inpex, KazMu- 2016/2017 15 naiGaz, Shell, Total (expected)

Source: U.S. Energy Information Agency, 2015b, Table by author.

Kazakhstan‘s energy resources are concentrated on several large-scale oil fields, the most important ones being Tengiz and Karachaganak which currently cover around half of the country‘s oil production, as well as the massive Kashagan field, where the start of production is expected by 2017 (U.S. EIA, 2015b). The Kazakh state owns stakes in all three major oil fields through its national oil and gas company KazMunayGaz (KMG) which currently holds 10% of Karachaganak, 16.8% at Kashagan and 20% at Tengiz.

While suffering from the disadvantage of being landlocked, Kazakhstan benefits from its geostrategic location between Europe, Russia, and East Asia. Through an extensive pipeline network, it is connected to the Russian Black Sea port of Novorossiysk in the West and, since

2006, to China in the East. Kazakhstan‘s crude oil export was at around 1.4 million bbl/d in 2013, showing a steady increase from 0.353 million bbl/d and 0.879 million bbl/d in 1993 and 2003, respectively (all figures: U.S. EIA, 2015b). With an annual export volume of nearly $60 billion, oil and mineral fuels comprise more than 77% of Kazakhstan‘s total exports (UN Comtrade, 2016). Over three-quarters of Kazakhstan‘s crude exports travel to the European Union, while around 16% are shipped east to China via pipeline, a number which is expected to significantly increase once production at the Kashagan field has started (U.S. EIA, 2015b).

Figure 3.1. Kazakh crude oil export destinations, 2014.

Asia & Oceania 17% Americas 4% Other 2%

Europe 76%

Source: U.S. EIA, 2015b; Graph by author.

Overall, Kazakhstan‘s energy sector depends on, firstly, the technology of foreign-based oil companies for the developments of its fields, and secondly, on the cooperation with its neighbors for transporting the oil to their export destination. As the Kazakh authoritarian regime depends on a thriving energy export sector, it has been facilitating energy-related trade and investment while maintaining a strong grip on its resources.

3.3. The Sino-Kazakh energy partnership

Sharing a border of 1782.75 km, China and Kazakhstan established diplomatic relations in 1992. Over the past decades, the two states have established a vital partnership on a both a diplomatic and economic level. China and Kazakhstan are founding members of the Shanghai Cooperation Organization and since 2006, the two states are connected through a crude oil pipeline. When combining the total import and export volumes, China was Kazakhstan 44 second single most important trading partner after Russia in 2014 (UN Comtrade, 2016). Based on a number of data sources, this chapter will give a detailed description of Sino- Kazakh relations on a political and economic level as well as on the level of security. Before that, however, it is necessary to lay out China‘s policy strategy in Eurasia and present Ka- zakhstan‘s position within this framework.

Located in its immediate geographical neighborhood, China has vital political interests in the post-soviet states of Central Eurasia, which include Russia and the Central Asian littoral states. In practice, China‘s objectives in the region are reflected by two comprehensive policy frameworks: Firstly, the Shanghai Cooperation Organization exemplify China‘s strategy of fostering regional security cooperation while the more recent ‗one belt, one road‘ strategy aims at deepening regional economic cooperation.

China and Kazakhstan were among the five founding states of the ‗Shanghai Five‘, which in 1995 established the first framework of security cooperation between five Eurasian states by signing the ‗Treaty on Deepening Military Trust in Border Regions.‘ In 2001, the ‗Shanghai Cooperation Organization‘ (SCO) was founded, with member states being China, Russia, Ka- zakhstan, Kirgizstan, Uzbekistan, and Turkmenistan. Due to a lack of transparency and an unclear degree of institutionalization, the goals and relevance of the SCO have been subject to scholarly debate (Bailes et al., 2007). While some scholars have pointed at the limited funding and authority of the SCO, Jung-Ho and Jin-Ha (2014: 173) suggest that ―SCO members have continued to strengthen cooperation through bilateral and multilateral military exercises.‖ In his analysis of China-Central Asia relations, Sheives (2006) suggests that China‘s leadership role within the SCO enhances its access to energy resources in the region. Schneider (2013) suggests that member states‘ authoritarian regimes utilize their membership within the SCO to increase their legitimacy on a domestic and international level. While the concrete purpose and significance of the SCO remain unclear, it can be assumed that its establishment helped China enhance economic cooperation in the region under its leadership.

In 2013, China‘s leader Xi Jinping announced his ‗one belt, one road‘ strategy, which seeks to expand economic links between China and its neighboring regions by fostering infrastructural, trade and cultural relations (China Ministry of Foreign Affairs, 2015a). Following the route of both an overland and maritime ‗silk road‘ which seeks to connect East Asia with Europe and Africa, Summers (2016) views the framework as a geoeconomic reflection of China‘s globalizing economy. Similarly, Verlare and van der Putten (2015: 2) interpret Xi‘s plan as an ambition of ―positing China as the primary engine of global economic development‖. Gode- 45 hardt (2014) argues that the SCO, as the only Chinese-led regional body in Asia, created the groundwork for Central Asia‘s incorporation as the key region of Xi Jinping‘s ‗one belt, one road‘ strategy.

As a large country on its Western border with vast energy resources and an impressive economic performance, Kazakhstan has been a key country for China‘s Central Asia policy. Geographically, the Caspian Sea is the energy-rich region located closest to China. As a landlocked country, Kazakhstan has had historically strong ties with Russia (Hanks, 2009). However, its foreign policy has been following a ‗multi-vector approach‘ of establishing good relations with all major powers in the region (Ipek, 2007). Therefore, it welcomed Chinese efforts of increasing cooperation to counter U.S. and Russian influence (Saurbek, 2008). Some scholars argue that in recent years, the Kazakh leadership has grown increasingly wary of Chinese growing influence while increasingly depending on China economically, as Rous- seau (2013: 48) states that Kazakhstan is facing a ―policy dilemma‖ on whether to deepen or constrain its cooperation with China. Stegen and Kuznir (2015), on the other hand, argue that Russia‘s economic crisis and decreased U.S. foreign policy efforts in the region drive the Central Asian states further towards China.

3.3.1. Diplomatic relations

China and Kazakhstan established formal diplomatic relations on 3 January 1992. The PRC has an Embassy in Astana and also a Consulate General in Almaty (since 2007) while Ka- zakhstan has an Embassy in Beijing and Consulate Generals in Hong Kong (since 2003) and Shanghai (2005). The diplomatic partnership between China and Kazakhstan is reflected by several bilateral agreements between the two states. Kazakhstan and China have signed the ‗Treaty of Friendship, Neighborliness and Cooperation‘ in 2002, the ‗Agreement on the Creation of a Cooperation Committee in 2004‘, the ‗Concept of the Development of Economic Cooperation‘ and the ‗Joint Declaration on the Establishment and Development of the Strategic Partnership‘ in 2005 and the ‗Joint Communiqué of the Republic of Kazakhstan and the People‘s Republic of China‘ in 2011 (International Business Publications, 2012). Since the early years of diplomatic relations, regular bilateral visits of high-ranked state officials have shown an interest of both sides in fostering and maintaining the partnership. The following table provides a complete list of all bilateral visits on a presidential level between China and Kazakhstan, laying out the outcome of selected visits regarding signed agreements, investment and finance deals.

Table 3.2. Presidential visits between China and Kazakhstan since 1992.

Year Type of visit Outcome of selected visits 1993 Pres. Nazarbayev to China 1995 Pres. Nazarbayev to China 1996 Pres. Jiang to Kazakhstan 1998 Pres. Jiang to Kazakhstan 1999 Pres. Nazarbayev to China Statement on full settlement of border disputes. 2000 Pres. Jiang to Kazakhstan 2002 Pres. Nazarbayev to China Treaty of Friendship Neighborliness and Cooperation. 2003 Pres. Hu to Kazakhstan 2004 Pres. Nazarbayev to China Creation of Kazakh-Chinese Cooperation Committee. 2005 Pres. Hu to Kazakhstan 2006 Pres. Nazarbayev to China Joint fund of $5 billion between China Development Bank and Kazyna to finance infrastructure projects. 2008 Pres. Nazarbayev to China 2009 Pres. Nazarbayev to China 2009 Pres. Hu to Kazakhstan 2010 Pres. Hu to Kazakhstan Several contracts in the energy sector. 2011 Pres. Nazarbayev to China Agreement to export 55.000 tons of Kazakh uranium ore to Chi- na between 2012 and 2010. 2013 Pres. Xi to Kazakhstan More than 30 agreements between Chinese and Kazakh parties, worth around $22 billion. 2013 Pres. Nazarbayev to China 2014 Pres. Nazarbayev to China $500 million credit line between KDB and CDB; Agreement on $150 million joint investment between KMG and CNPC. 2015 Pres. Nazarbayev to China Eleven bilateral intergovernmental and commercial agreements worth $23 billion dollars. 2015 Pres. Xi to Kazakhstan

Sources: Astana Times, 2014; Astana Times, 2015; Chinese Ministry of Foreign Affairs (2015b); IBP (2012); Jung-Ho and Jin-Ha (2014); Reuters, 2012; Valeev and Kadyrova, 2015; Table by author.

Firstly, the presented table suggests that bilateral ties between China and Kazakhstan have been developing fruitfully over the past decades, as in 23 years of diplomatic relations since 1993, a total of 21 presidential visits between the two states have taken place. Furthermore, it becomes clear that diplomatic contact between the states has repeatedly led to (1) agreements to strengthen economic relations in terms of trade and investment, (2) China granting loans to Kazakhstan and (3) joint statements on the pursuit of a closer strategic cooperation, showing 47 that Sino-Kazakh relations manifest themselves in increasing bilateral economic ties and a strengthening strategic partnership. Therefore, the coming sub-chapter 3.2.3 will address Si- no-Kazakh economic relations in terms of trade, investment, and finance while the sub- chapter 3.2.4 will address Sino-Kazakh security cooperation.

3.3.2. Economic relations

Since the late 1990ies, China and Kazakhstan have rapidly enhanced their economic cooperation. Today, China is Kazakhstan‘s second most important trading partner after Russia, with a combined value of imports and exports at around $22 billion (UN Comtrade, 2016). Ka- zakhstan, on the other hand, is China‘s second most important trading partner after Russia in all of Eastern Europe and the Commonwealth of Independent States (CIS). Furthermore, Chi- nese foreign direct investment in Kazakhstan has increased gradually over the past decades, mainly focused on the oil and gas sector. Finally, Chinese state-owned banks have granted a significant amount of loans to Kazakhstan over the past years, particularly since the outbreak of the global financial crisis.

The commitment of both states to pursue a closer partnership is reflected by a significant increase in bilateral trade volume since the early 2000ies (decade). While the combined volume of imports and exports in 2004 accounted for less than $3 billion, it rose to more than $17 billion in 2014 (World Bank, 2016b). The value of Kazakh exports to China typically exceeds that of Kazakh imports from China.

Figure 3.2. Kazakh bilateral trade volume with China, 2004-2014.

Billion USD Billion 5

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Import Export

Source: UN Comtrade, 2016; Graph by author.

Since the early 2000s (decade), the main goods exported from Kazakhstan to China were petroleum and other liquids, comprising more than 50% of the total export value since 2008. Smaller shares are taken by other raw materials such as copper and uranium (UN Comtrade, 2016). China, on the other hand, mainly exported finished consumer items such as textiles, electronics, and pharmaceuticals (Clarke, 2014). Clearly, the opening of the China- Kazakhstan crude oil pipeline in 2006 has boosted total exports and crude-oil exports in particular, though the rise has been reverted by the global financial crisis in 2008 and by the falling oil price and decreasing Chinese demand since 2014.

Next to bilateral trade, investment has been a major pillar of the Sino-Kazakh economic partnership. There has been a steady increase in Chinese FDI flow to Kazakhstan since the early 2000s (decade), focused mainly on the country‘s energy sector and infrastructure. Since the early years of Sino-Kazakh cooperation, acquisitions of Chinese national oil companies in the Kazakh oil and gas sector have been the major component of Chinese investment. In 1997, the first major deal was struck when CNPC acquired a 60.3% stake of Kazakh AktobeMunaiGas (CNPC, 2016). In the following years, CNPC and Sinopec made further investments, including the acquisition of the North Buzachi Oilfield for an undisclosed price in 2003. The first major acquisition of a Chinese NOC was conducted in 2005, when CNPC purchased Petro- Kazakhstan, a Canadian-based oil company focusing on upstream production in Kazakhstan, for $4.2 billion. Four years later, CNPC purchased Mangistaumunaigaz for $2.6 billion in a joint deal with KMG (Jiang and Sinton, 2011). After a number of other small and medium- sized investments in the upstream and downstream sectors in the following years, CNPC made another major investment in 2013, purchasing an 8.33% stake in the massive Kashagan oil field for approximately $5 billion and joining a large consortium of national and international oil companies (Reuters, 2013). It is worth noting that next to CNPC and Sinopec, a number of smaller Chinese companies have invested in Kazakhstan‘s upstream energy sector, including the Chinese International Trust and Investment Corporation (CITIC), Hainan Zhanghe, Xinjiang Guanghui and MIE Holdings (Jiang and Ding, 2014). The following table provides an overview of all investments Chinese-based firms have conducted in Kazakhstan‘s energy sector, mainly based on data derived from the American Enterprise Institute and the Heritage Foundation‘s China Global Investment Tracker. Based on this information, the total value of Chinese NOC investments in Kazakhstan is estimated to be at around $21.1 billion.

Table 3.3. Chinese investments in the Kazakh energy sector, 1997-2016.

Year Investor Million Assets and shares (if known) US$ 1997 CNPC 325 Purchased 60.3% of AktobeMunayGaz 2003 CNPC 150 Purchased 25% of AktobeMunayGaz 2003 CNPC Undisclosed Purchased 35% of North Buzachi Oilfield 2003 CNPC Undisclosed Purchased 65% of North Buzachi Oilfield 2004 Sinopec 150 Purchased 100% of First International Oil Company 2005 CNPC 4200 Purchased 100% of PetroKazakhstan (transferred 33% of assets to KazMunayGaz) 2006 CITIC 1910 Purchased 100% of National Oil‘s Kazakh assets 2007 CNPC 1540 2009 Xinjiang Guanghui 40 Purchased 49% of Tarbagatay Munay 2009 CIC 940 2009 CNPC/KMG 1700 Purchased 100% of MangistauMunaiGaz (Joint venture with KazMunayGaz) 2010 Gezhouba and Xin- 730 Construction of hydroelectric plant (Joint venture with jiang Kazakhstan Natural Gas) 2010 Sinopec 1.700 Construction of Petrochemical Complex 2011 CITIC 100 2011 Sinopec 850 Modernization of Atyrau Refinery 2011 MIE Holdings 170 Purchased 100% of EMIR Oil 2012 CNPC 900 2013 CNPC 5000 Purchased 8.33% of Kashagan oil field 2013 Hainan Zhanghe 500 Purchased 95% of Maten Petroleum 2015 Sinopec 1100 Purchased 50% of Caspian Investments Resources Ltd Total: 21.065

Sources: American Enterprise Institute and Heritage Foundation, 2016; Jiang & Ding, 2014; O‘Neill, 2014; Table by author.

In 2010, Kazakhstan was the resource-rich country with the highest share of Chinese overseas equity (Jiang and Sinton, 2011: 18), reflecting the significance the Chinese government and its NOCs have attributed to the Kazakh energy sector. More recent estimates state that Chi- na‘s share of total equity in the Kazakh oil and gas sector has surpassed that of Russia and the United States, the previously largest investors (Kissane, 2015: 368). Although official data is not available, several media sources have stated that China‘s share in the Kazakh oil and gas 50 was close to exceeding 40% in 2013 (Tengrinews, 2013). In 2014, total production of Chinese NOCs in Kazakhstan was estimated to be at 315.000 bbl/d (Jiang and Ding, 2014).

Figure 3.3. Chinese foreign direct investment in Kazakhstan, 2001-2012.

3 2,5 2 1,5

1 Billion USD Billion 0,5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: UNCTAD, 2016; Graph by author.

Next to acquisitions in the oil and gas sector, the second main pillar of Chinese investment in

Kazakhstan has been infrastructure. In 1997, the year of the first Chinese acquisition in the Kazakh energy sector, the two states agreed to construct a pipeline to allow direct overland imports of crude oil. Jointly run by CNPC and KazMunayGaz and financed by Chinese loans, the China-Kazakhstan oil pipeline became operational in 2006, connecting the Kazakh Caspian shore with China‘s Northeastern province of Xinjiang (Adolf, 2011). While the initial capacity was at 200.000 bbl/d, it has been expanded in 2013 to 400.000 bbl/d on the route between Central Kazakhstan and China (US EIA, 2015a:11). According to CNPC, the China- Kazakhstan oil pipeline has exceeded the annual transport amount of 10 million tons for five consecutive years since 2010 (CNPC, 2016). Furthermore, the Central Asia-China natural gas pipeline connecting Turkmenistan with China crosses Kazakhstan (Weitz, 2013).

Regarding infrastructural investment, Chinese and Kazakh economic policies overlap significantly. As discussed earlier, China views Kazakhstan as a key country for its ‗one belt, one road‘ or ‗Silk Road Economic Belt‘ strategy. Kazakhstan‘s President Nazarbayev, on the other hand, has announced a plan for creating an infrastructural boost to the Kazakh economy named ‗Bright Road‘ (Kazakhstan Ministry for Investment and Development, 2014). In their most recent bilateral agreement, China and Kazakhstan expressed their willingness to join efforts on infrastructural investments in Kazakhstan, stating in their Joint Declaration on New Stage of Comprehensive Strategic Partnership:

“The Two Sides will conduct cooperation together in the integration of the initiative of the „Silk Road Economic Belt‟ and the new economic policies of the „Bright Road‟ in line with the spirit of opening-up and the principles of negotiation, coordination and mutual benefit. (Chinese Ministry of Foreign Affairs, 2015)”

At the same presidential meeting, the two heads of state agreed on economic deals worth a total of $23 billion, covering a number of joint projects in a range of industries within and beyond the energy sector (Reuters, 2015b). Based on these development, it appears likely that China will continue its investment in Kazakhstan in the coming years. Furthermore, it is necessary to emphasize that Chinese energy investment has directly boosted bilateral trade, in particular energy exports from Kazakhstan. Since the opening of the China- Kazakhstan crude oil pipeline in 2006, the volume of petroleum exports has risen steadily, only slowed down by the recent drop in oil prices (see graph).

Figure 3.4. Volume of petroleum* exports from Kazakhstan to China, 2004-2014.

4 Billion USD Billion 2

0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: UN Comtrade, 2016; Graph by author. * Petroleum oils, oils from bituminous minerals, crude

Next to bilateral trade and investment, finance forms the third pillar of the Sino-Kazakh economic partnership. Since the breakout of the global financial crisis, Chinese state-owned banks have granted significant loans to Kazakhstan‘s national welfare fund Samruk-Kazyna, the Kazakhstan Development Bank (KDB) and a number of Kazakh state-owned enterprises. The following table provides an overview of Chinese loans to Kazakhstan since 2008, mainly derived from data published by China Aiddata (2016) and reports by international business publications. Based on this information, the total value of Chinese finance in Kazakhstan is estimated to be at $37.3 billion.

Table 3.4. Chinese loans to Kazakhstan, 2008-2016.

Year Creditor Value US$bn Recipient/Purpose 2008 CDB 0.3 Kazakhstan Development Bank (KDB) 2009 China ExIm 1.5 KDB 2009 CDB 5 Samruk-Kazyna (Kazakh Sovereign Wealth Fund) 2009 China ExIm 5 KazMunayGaz 2009 CDB 2.7 Kazakhmys (copper mining) 2011 China ExIm 0.5 Samruk Energy 2011 CDB 1.5 Kazakhmys (copper mining) 2011 undisclosed 5 Petrochemical complex 2011 CDB 1.7 Samruk-Kazyna 2011 CDB 1.9 Eurasian Natural Resources 2012 China ExIm 1.1 KazMunayGaz (refinery) 2012 China ExIm 10* *Split between SCO member states. 2012 CDB 1.8 KazMunayGaz 2013 CDB 3 Baiterek National Holding 2013 China ExIm 5 Baiterek National Holding 2014 China ExIm 1 Kazakhstan Development Bank (refinery) 2014 CDB 0.5 Kazakhstan Development Bank 2014 CDB 0.7 KazTransGas Total 37.3

Sources: Bohnenberger-Rich, 2015; china.aiddata.org, 2016; Financial Times, 2011; Kalyuzhnova and Lee, 2014; Reuters, 2012; Reuters, 2013; Reuters, 2015a; Wall Street Journal, 2009; Table by author.

The cross-border expansion of Chinese NOCs across the globe has repeatedly been linked with financial support or loans granted by Chinese state-owned banks. Particularly since the start of the global financial crisis in 2008, China has granted significant amounts of energy- related credit to resource-rich countries across the globe, which are then repaid ―through oil sales, by selling upstream assets to Chinese oil and gas companies, or through supplying crudes to China‖ (Wu, 2013: 210). Having been widely discussed in the scholarly debate, this approach has been referred to as ‗loans-for-oil‘ or ‗loans-for-petroleum‘ and has been applied in Venezuela, Brazil, Ecuador, Angola, Russia, Kazakhstan and a number of other states around the world (Tunsjø, 2013: 80). The main Chinese institutions involved with state- backed finance are the China Development Bank (CDB) and the Export-Import Bank of Chi- na (China ExIm Bank). Both institutes are under direct supervision of the State Council. 53

While the CDB‘s main official function is to provide funds for large infrastructural projects within China and beyond, the China ExIm Bank is mainly concerned with the promotion of Chinese exports and foreign trade. Compared to their Western counterparts, these two Chi- nese state-owned banks are providing competitive packages, as ―they offer lower interest rates and longer repayment periods; […], and they do not impose policy conditions on the borrow- er. In return, however, they require procurement of goods and services from China‖ (Alves, 2013: 100). With its enormous foreign currency reserves, the strategy of granting loans to resource-rich countries has allowed China to diversify its investments while at the same time asserting control over energy resources outside its national borders. In her comprehensive study on CDB‘s ‗loans for oil‘ strategy, Downs (2011) has shown how Chinese state-backed finance directly benefits Chinese national oil companies by earmarking parts of the granted credit for the purchase of Chinese equipment, the employment of Chinese workers or the construction of pipelines to China.

Particularly since the late 2000s (decade), ‗loans-for-oil‘ deals have become a substantial element of the Sino-Kazakh energy partnership, exemplifying China‘s resource-backed finance strategy. In 2009, China ExIm Bank and CDB each granted a $5 billion loan to Kaz- MunayGaz and to the Kazakh sovereign wealth fund (Samruk-Kazyna), respectively, which led to CNPC and KMG jointly purchasing Mangistaumunaigaz from Indonesia‘s Central Asia Petroleum. Similarly, the acquisition of an 8.33% stake in the Kashagan oil field by CNPC in 2013 was accompanied by two loan guarantees of $5 billion and $3 billion from Chinese state-owned banks. Furthermore, both CNPC and Sinopec have been involved with modernization projects at Kazakh refineries, which have been conducted as joint ventures with KMG and financed by the China ExIm Bank. Finally, the China Development Bank has granted a total of $2.5 billion loans to KazMunayGaz and KazTransGaz for the construction of the Ka- zakh stretch of the Central Asia-China gas pipeline, a joint venture with CNPC (Kalyuzhnova and Lee, 2014). The following table shows selected energy-related loans from Chinese state- owned banks to Kazakh institutions and links them with investments in the energy sector.

Table 3.5. Selected energy-related loans from China to Kazakhstan, 2009-2014.

Year Creditor US$ Recipient Related investment in energy sector bn 2009 China ExIm 5 KMG CNPC acquisition of Mangistaumunaigaz (joint venture with KMG) 2009 CDB 5 Samruk-Kazyna CNPC acquisition of Mangistaumunaigaz (joint venture with KMG) 2012 China ExIm 1.1 KMG Modernization of Atyrau refinery (carried out partly by Sinopec) 2012 CDB 1.8 KMG Beinu-Shymkent gas pipeline (joint venture of CNPC and KMG) 2013 China ExIm 5 Baiterek N.H. Linked with CNPC acquisition of 8.33% share at CDB 3 Kashagan oil field 2014 CDB 0.7 KazTransGaz Beinu-Shymkent gas pipeline (joint venture of CNPC and KTG) 2014 China ExIm 1 KDB Modernization of Shymkent refinery (joint venture KMG and CNPC)

Source: china.aiddata.com, 2016; Kalyuzhnova and Lee, 2014; Table by author.

It becomes clear that Chinese loans are regularly linked to either major acquisitions of Chi- nese national oil companies or infrastructural projects jointly conducted by Chinese and Ka- zakh national oil companies. There is no doubt that China‘s ability to offer ―package deals‖ combining investment in the energy sector with finance for Kazakh state-owned enterprises or funds have facilitated the expansion of Chinese state-owned companies in Kazakhstan (O‘Neill, 2014). With the global financial crisis and low oil prices, Kazakhstan is suffering from lower oil export revenues. The resulting need for additional funds is accelerating Chi- na‘s expansion into the Kazakh energy sector.

To sum up, the Sino-Kazakh economic partnership has expanded rapidly since the early 2000s (decade). Sino-Kazakh economic relations are clearly focused on energy trade and energy- related investment, complemented by more recent Chinese efforts of diversifying the Kazakh economy and promoting economic integration as part of their ‗one belt, one road‘ strategy. Chinese NOCs are the main drivers of energy-related trade and investment and China‘s interest in Kazakh energy resources is reflected by the dominant share of Chinese NOCs in the Kazakh energy market. Through an increasing volume of bilateral trade and particular Kazakh 55 energy exports, China has been able to enhance its access to Kazakh markets and energy resources. This geoeconomic power projection is further asserted by China‘s loans-for-oil strategy, through which it has increased Kazakh political and economic dependence on China (see also: Bohnenberger-Rich, 2015).

3.3.3. Security relations

Next to their economic partnership, China and Kazakhstan have in recent years enhanced their cooperation on a number of issues related to security, emphasizing their commitment through the signing of, among others, the ‗Joint Statement on Developing Comprehensive Strategic Partnership‘ in 2011 and the ‗Joint Declaration on New Stage of Comprehensive Strategic Partnership‘ in 2015 (China Ministry of Foreign Affairs, 2015). Sino-Kazakh security relations are reflected by their strategic cooperation within the Shanghai Cooperation Organiza- tion, regular joint military exercises, the trade of non-lethal military equipment and joint efforts in counterterrorism. Both within and outside the framework of the SCO, Chinese and Kazakh forces have participated in several joint military exercises, most of which have focused on counterterrorism, drug trafficking and border security. China has repeatedly provided non-lethal military equipment to Kazakhstan (Weitz, 2012). Furthermore, Kazakhstan and China have also joined efforts on countering terrorism and separatism in China‘s northeastern province of Xinjiang, following Chinese concern about separatist claims by the Uyghur people. Since the mid-1990ies, Kazakhstan has agreed to support China in this matter, which has resulted in the monitoring of Uyghur on Kazakh territory, the marginalization of Uyghur civil society groups in Kazakhstan and the repeated extradition of Uyghur with Chi- nese nationality from Kazakhstan to China (Holdstock, 2015). Overall, security relations between China and Kazakhstan can be characterized as fruitful in a number of issues, although they remain limited to regional issues and counterterrorism.

3.4. Conclusions

This chapter has analyzed Sino-Kazakh energy relations based on conceptualizations of Ka- zakhstan‘s political economy and China‘s foreign policy towards Eurasia. Kazakhstan is an authoritarian state dominated by a small ruling elite which suppresses the development of a civil society and dominates state and market through a patrimonial network of patron-client relationships. As the Kazakh economy depends heavily on fossil fuel production and exports, securing foreign investment for energy-related infrastructure while fostering and bilateral energy trade are vital for the survival of the Kazakh petro-authoritarian and resource-

56 nationalist regime. Located in its Western neighborhood, China has vital political and economic interests in Eurasia, which are reflected by its leadership in the Shanghai Cooperation Organization and, more recently, by its ‗one belt, one road‘ strategy. Since the 1990ies, China and Kazakhstan have built a strong and vital partnership based on diplomatic, economic and strategic elements. Clearly, the main pillars of Sino-Kazakh relations are energy exports, investments in the Kazakh oil and gas sector, and more recently, loans from Chinese state- owned banks. As the legitimacy of the Kazakh ruling elite depends heavily on a thriving energy sector and fossil fuel exports, the rising significance of Chinese NOCs for Ka- zakhstan‘s energy sector has increased Kazakhstan‘s dependence on Chinese. The opening of the China-Kazakhstan crude oil pipeline in 2006 has further deepened economic relations and accelerated bilateral energy-related trade and investment. Although China and Kazakhstan also cooperate on several security-related issues, this chapter found that their partnership is predominantly focused on economic cooperation. Returning to the framework of critical geopolitics, this chapter has found that China utilizes a combination of diplomacy, energy- related investments, and loans by state-owned banks to strengthen its partnership with Ka- zakhstan and project power to assert its access to Kazakh energy resources. Overall, China‘s involvement in Kazakhstan appears to follow mainly geoeconomic motives.

Chapter IV – CNPC in Kazakhstan

4.1. Introduction

The previous chapter has provided an analysis of the Sino-Kazakh energy partnership, depict- ing the nature of China‘s geoeconomic power projection through energy-related trade, investment, and finance. With a total volume of around $21.1 billion, acquisitions and investments by Chinese energy companies have been the key driver for deepening the Sino- Kazakh economic relations. As part of their cross-border expansion, Chinese NOCs such as CNPC have partnered with Kazakhstan‘s main national oil company KazMunayGaz and several private international oil companies in the country. These new forms of alliances between national and international oil companies raise questions about the nature of Chinese NOCs‘ transnationalization and their implications for the global energy market.

Having discussed Sino-Kazakh energy relations on a state-to-state level in the previous chapter, this chapter focuses on the cross-border expansion of CNPC in Kazakhstan. Address- ing the question ‗What is the nature of Chinese NOCs‘ cross-border expansion in Kazakhstan with regards to other national and international energy companies?‘, the following sections will (1) analyze the relationship of CNPC with the Kazakh national oil company KMG and (2) with other international oil companies in Kazakhstan. Based on these findings, it will (3) attempt to identify implications of these developments for the global energy market.

The mentioned issues will be analyzed through a case study of CNPC‘s activity in Ka- zakhstan, focusing on the company‘s relationship with the Kazakh national oil company KazMunayGaz and with the Dutch-British-based IOC Shell. Based on primary resources from the corporations under study as well as articles from specified energy journals, international business publications and specified regional sources such as the Jamestown Foundation‘s Eurasia Daily Monitor, the goal of this chapter is to develop a profound understanding of the drivers, strategies and implications of the cross-border expansion of Chinese NOCs in Kazakhstan.

4.2. Relationship with Kazmunaygaz

The previous chapter has shown the triangular structure of Chinese involvement in Ka- zakhstan, consisting of energy diplomacy, investment by Chinese NOCs and finance by Chi- nese state-owned banks. One of the main partners of Chinese NOCs and major recipients of Chinese resource-backed finance has been Kazmunaygaz (KMG), Kazakhstan‘s main national

58 oil company. Under full governmental control, KMG represents the interests of the Kazakh government in the energy sector. In this section, the relationship between KMG and the Ka- zakh ruling elite on the one hand, and CNPC and the Chinese ruling elite, on the other hand, will be assessed by analyzing the 2013 sale of ConocoPhillips‘ 8.33% share in the Kashagan oil field. Overall, it illustrates how China has been facilitating the cross-border expansion of its NOCs by strengthening its cooperation with the Kazakh ruling elite.

As the tables in the previous chapter have shown, CNPC and Sinopec have been following a strategy of conducting large acquisitions and infrastructural investments jointly with KMG, often with financial support from Chinese state-owned banks. One year after its 2005 acquisition of PetroKazakhstan, for instance, CNPC transferred a 33% stake in the company to KMG, following an agreement between the two companies. In 2009, CNPC and KMG jointly purchased MangistauMunaiGaz, while in the same year, Chinese state-owned banks granted $10 billion in loans to KMG and the Kazakh sovereign wealth fund Samruk-Kazyna. Similar- ly, modernization projects at the Atyrau refinery by Sinopec in 2011 and at the Shymkent refinery by CNPC in 2014 operated as joint ventures with KMG and financed by the China ExIm Bank.

Table 4.1. Major joint ventures of CNPC and KMG in Kazakh upstream oil sector.

Name of company/field Shares CNPC/KMG Annual Production 2014 PetroKazakhstan 67%/33% 113.000 bbl/d* Mangistaumunaigaz 50%/50% 110.000 bbl/d** Kashagan 8.33%/16.81% Start expected in 2017

Sources: china.aiddata.org, 2016; O‘Neill, 2014; Reuters, 2013; Table by author. *petrokazakhstan.kz; **estimate by author for 2012.

As discussed in chapter III, increasing resource nationalism has been a major impediment for foreign energy companies investing in Kazakhstan. New legislation passed in the late 2000s (decade) has further increased the control of the Kazakh government over its energy resources and allowed it to amend any contract made with a foreign energy company (Sarsenbayev, 2011). Based on these developments, it has been argued that China‘s strategy of involving the Kazakh ruling elite through joint ventures and finance is aimed at countering the political risks of their investments, as ―Chinese aid, loans and partnerships with Kazakh oil companies enhance the Kazakh leadership‘s ability to stay in power‖ (O‘Neill, 2014: 147). Similarly, the joint construction and operation of transnational pipelines are in China‘s best interest, ―be- 59 cause [as] the pipelines are there and are jointly owned, they need to be operated at capacity to maximize the economic benefits for both parties‖ (Kalyuzhnova and Lee, 2014: 216). As discussed earlier, the Kazakh leadership depends on a thriving energy sector as well as a steady inflow of foreign investment to maintain its petro-authoritarian system.

The acquisition of CNPC at Kashagan is one of the largest acquisitions ever conducted by a Chinese NOC (Jiang and Ding, 2014: 35-39). In 2012, US-based IOC ConocoPhillips announced its intention to withdraw from Kashagan, which had been jointly developed by several national and international oil companies (Eni, ExxonMobil, Inpex, KMG, Shell, To- tal). Soon after, ConocoPhillips agreed to sell its share to the Indian-based Oil and Natural Gas Corporation (ONGC), India‘s main national oil company (Wall Street Journal, 2013). However, as a shareholder of the consortium, KMG used its pre-emptive right to buy the stake, thus blocking the agreement made between ConocoPhillips and ONGC and resold the stake to CNPC (Bloomberg, 2013). In return, the China ExIm Bank and the China Develop- ment Bank agreed to grant loans $5 billion and of $3 billion, respectively, to the Kazakh Bai- terek National Holding, a Kazakh fund promoting industrial development, in the same year (Reuters, 2013). Furthermore, CNPC agreed to pay up to $3 billion of KMG‘s share in the coming finance round. The following figure shows the involved actors in the 2013 Kashagan deal and illustrates their interdependence.

Figure 4.1. CNPC’s acquisition at Kashagan in 2013.

Sources: Reuters, 2013; Socor, 2013; Voloshin, 2013; Wall Street Journal, 2013; Figure by author.

Considering the deliberate intervention of KMG for CNPC to gain access to the Kashagan stake, it appears that China was able to create a favorable condition of its NOC against its Indian competitor. This view is shared by Vladimir Socor (2013), senior fellow at the Jamestown Foundation and regular contributor to the Eurasia Daily Monitor, who suggests that Kazakhstan‘s decision was supported by Sino-Kazkah infrastructural interdependence, as India‘s ONGC would have exported its oil through Russia while CNPC is expected to use its pipeline which it jointly runs with KMG. Moreover, as the Kazakh ruling elite depends heavily on a thriving energy sector with sufficient foreign investment, China‘s willingness to share assets and control in its oil projects follows the Kazakh objective of maintaining a high-level control over its energy sector which the regime considers crucial for its survival. At the same time, the Kashagan deal was combined with Chinese loans worth $8 billion, providing Ka- zakhstan with significant funds needed to compensate revenue shortfalls from falling oil exports and declining oil prices. Overall, the deal exemplifies the benefits of cooperation between the Chinese and Kazakh ruling elite in energy questions, as O‘Neill (2014: 154) points out:

“The Chinese government secures access to much-needed resources and potential profits for Chinese state-owned firms. The Kazakh government receives financial resources from China that leaders can use to provide public goods for the people of Kazakhstan or private goods for key members of the government and their families and supporters”.

Overall, CNPC‘s Kashagan deal of 2013 illustrates the cooperation scheme between the Chi- nese and Kazakh ruling elites and the commitment of the Kazakh ruling government to deepen its cooperation with Chinese national oil companies by giving them preferable access to assets in its energy sector. Firstly, it shows how previous joint investment between Chinese NOCs and KMG, in particular in jointly-run infrastructure such as the China-Kazakhstan oil pipeline, facilitates Chinese acquisitions today. Secondly, it exemplifies China‘s loans-for-oil strategy as a support mechanism for its NOCs. In other words, the year-long commitment of cooperating with KMG appears to give Chinese NOCs a competitive advantage over other oil companies which lack, among other things, jointly run infrastructure and the ability to provide additional support in terms of diplomacy or finance.

4.3 Relationship with IOCs

Next to several joint ventures with KMG, CNPC has entered partnerships with private-based international oil companies (IOCs) in Kazakhstan. Kazakhstan‘s largest oil field Kashagan,

61 for instance, is being jointly developed by KMG and CNPC, on the one hand, and several European, U.S. and Japanese-based IOCs, on the other hand. This section will present a detailed case study on the cooperation and competition between CNPC and the Dutch-British- based international oil company Shell, analyzing their joint activity at the Kashagan oil field in Kazakhstan and across the globe. Firstly, it will briefly compare the key data of the two companies. Then, it will provide a detailed analysis of the cooperation based on all joint ventures, production sharing agreements, acquisitions, and sales. Finally, it will address the competition between Shell and CNPC by reviewing possible conflicting interests and competitive advantages. The findings will add to a better understanding of CNPC‘s activity abroad, the transnationalization of Chinese NOCs in Kazakhstan and the changing nature of the global oil market.

This section focuses on the relationship CNPC and Dutch-British-based Shell. Since 2013, the two companies have been part of a larger consortium involved with the development of the massive Kashagan oil field in the Caspian Sea. Next to their engagement at Kashagan, Shell and CNPC, as well as its international subsidiary PetroChina, have been working together at several energy projects within China and beyond since 1999. The focus of this case study will be the Kashagan oil field located in the Northern Caspian Sea, where Shell and CNPC own stakes of 16.81% and 8.33%, respectively. It was discovered in 2000 and is considered, along with the nearby Tengiz field, to be the largest oil discovery in the past 30 years (Yenikeyeff, 2008). Due to technical difficulties, production start has been postponed several times. For the end of 2017, an output capacity 370.000 bbl/d is expected (Reuters, 2015c).

Figure 4.2. Shareholders at Kashagan oil field.

Inpex 7.56% ENI 16.81% CNPC 8.33%

Shell16.81% ExxonMobil 16.81%

Total 16.81% Kazmunaygaz 16.81%

Source: Reuters, 2013; Graph by author.

At first, it is necessary to review key data on the performance of the companies under study. While Shell and CNPC have similar revenue and profit structures, CNPC owns nearly double the value in assets and employs more than 15 times more employees than Shell. In 2015, Shell‘s revenue per employee was at an impressive $4.5 million in 2015, while the figure of CNPC was only at $260.000, matching with the findings of Eller et al. (2011) who suggest that NOCs are usually less efficient than IOCs.

Table 4.2. Shell and CNPC in numbers.

Revenue 2015 Profits 2015 Assets Employees US$ billion US$ billion US$ billion Shell 431.344 14.874 353.116 94.000 CNPC 428.620 16.359 634.811 1.636.532

Source: CNPC, 2015; Fortune, 2015; Shell, 2016; Table by author.

The cooperation between CNPC and Shell began in 1999 when the two companies agreed on a production sharing agreement (PSA) to develop the Changbei gas field in the northwest of China (Oil and Gas Journal, 1999). Eleven years later, 2010 marked the start of rapidly strengthening cooperation between the two companies, as another PSA was signed on the development a tight gas field in China‘s Sichuan basin (Oil and Gas Journal, 2010a). Both projects are located in difficult terrain where CNPC benefits from Shell‘s expertise while Shell gains access to the Chinese market. The year of 2010 also marks the first joint acquisition of the two companies, as Shell and PetroChina, the international subsidiary of CNPC, purchased the assets of Australian seam coal gas company ‗Arrow‘ in a 50/50 joint venture for US$3.15 billion (Wall Street Journal, 2010). According to news reports on the deal, Shell noted that it was likely to sell its share of produced gas to China (Reuters, 2010). This approach has been coined as a ‗market-for-resources‘ strategy ―by which limited access to Chi- na‘s vast market is granted to the resource holder in exchange for imports of that resource to China‖ (Jiang and Sinton, 2011: 16). The same year, CNPC purchased a 35% share in Syria Shell, which owns interests and production licenses in several Syrian oil fields (Oil and Gas Journal, 2010b). In 2011, the two companies signed a ‗Global Alliance Agreement‘, emphasizing their intention of pursuing cooperation both in China and internationally. Furthermore, they decided to establish a well manufacturing joint venture. At the signing ceremony in Bei- jing, Shell‘s CEO Peter Voser stated:

“CNPC and Shell are collaborating in a variety of projects globally with the aim of investing for profitable growth, and to meet the world‟s growing demand for cleaner, affordable energy. The Shareholders Agreement for the Well Manufacturing JV un- derscores how Shell and CNPC are working together to develop gas resources using innovative and cost competitive technologies”(Shell, 2011).

In 2012, cooperation between Shell and CNPC increased further as they signed a PSA for the development of the Fushun-Yongchuan shale gas field in China (Oil and Gas Journal, 2012). Shell‘s CEO Peter Voser commented the deal stating: ―We are delighted about this new mi- lestone in our strategic cooperation with CNPC‖ (Shell, 2012). The same year, PetroChina purchased 20% of Shell‘s shale gas assets in Canada, which Shell‘s CEO Voser said was ―part of our global partnership to optimize our business working environment inside and outside China‖ (Bloomberg, 2012). Mao Zefeng, senior assistant secretary to the board at PetroChina, commented the deal stating that his company hoped ―to gain experience in the exploration and development of unconventional gas resources through its cooperation with Shell‖ (Financial Times, 2012). With large unconventional gas reserves in China, acquiring the expertise necessary to develop shale gas would enable CNPC to significantly increase its domestic output. In 2013, CNPC joined Shell and several other IOCs at the Kashagan consortium in Kazakhstan. When the sealing of the deal approached, the Azerbaijani news agency ‗Trend‘ (2013) re- ported that members of the international consortium of IOCs at Kashagan were holding talks with China on future oil exports via the China-Kazakhstan oil pipeline. Clearly, the participation of CNPC facilitates the IOCs‘ access to Chinese infrastructure, which in turn provides CNPC with a better use of its pipeline and China with increased oil imports. Finally, the two companies signed another agreement to deepen their strategic partnership in 2014 (Oil and Gas Journal, 2014).

Table 4.3. Cooperation and sales between CNPC/PetroChina and Shell since 1999.

Country Year Sector Type Activity China 1999 Gas PSA Development of Changbei gas field China 2010 Gas PSA Development of Sichuan tight gas field Australia 2010 Gas JV Joint purchase of seam coal gas company ‗Arrow‘ Syria 2010 Oil Sale CNPC purchases 35% in Syria Shell China 2012 Gas PSA Development of Fushun-Yongchuan shale gas field Canada 2012 Gas Sale CNPC acquires 20% of Shell‘s shale gas assets in Canada Kazakhstan 2013 Oil JV CNPC joins Shell at Kashagan consortium Sources: Oil and Gas Journal, 1999, 2010a, 2010b, 2012; Reuters, 2013; Table by author.

Overall, the 17-year-long partnership between Shell and CNPC stretches across three conti- nents and exemplifies the transnationalization of Chinese national oil companies. Shell and CNPC have built a global network of cooperation based on mutual interest and the exchange of knowledge, resources and market access. When analyzing the projects and agreements between the two companies, it appears that CNPC‘s main objective is to gain access to Shell‘s experience and expertise, particular in developing unconventional oil and gas resources. Shell, on the other hand, is interested in seeking access to the Chinese market and diversifying its sale of equity oil and gas.

While Shell and CNPC cooperate in several ways, their relationship also contains elements of competition. Clearly, IOCs and internationalizing NOCs are equally seeking access to limited resources, as Downs (2010: 78) points out that ―[like] all other oil companies, China‘s NOCs need to continuously acquire new reserves to replace what they deplete‖. The key microeconomic difference between NOCs and IOCs lies in their accountability towards their shareholders. While national oil companies mainly enact their state‘s energy policy, IOCs as publicly listed companies are pressured to make profits for their shareholders. Referring to this disparity, Houser (2008) argues that Chinese NOCs gain a competitive advantage by ac- cepting higher risks and lower returns on investment than their private-based competitors. Similarly, Downs (2010: 92) suggests that:

“the Chinese government probably is willing to settle for rates of return that are unacceptable to the shareholders of IOCs because, unlike those shareholders, the Chi- nese government has objectives other than profit maximization, such as securing access to energy resources abroad.”

Addressing the concrete case of Kashagan, Farkhad Sharip (2011), a Kazakh-based journalist and regular contributor to the Eurasia Daily Monitor, suggests that increasing pressure of the Kazakh regime on the consortium of international oil companies enhanced China‘s chance of entering the project, as earlier that year, Shell‘s plans for the development of the field had been rejected by the Kazakh oil and gas ministry. Furthermore, the author argues that China‘s direct pipeline link with Kazakhstan would give it a clear advantage in a future bid for a stake in Kashagan. With regards to the findings of chapter III, it appears that China‘s ability to combine acquisitions with jointly-run infrastructure while reducing pressure by the Kazakh regime through energy-related finance, it gains an advantage over private IOCs which do not enjoy the same level of governmental support. This assumption is backed by the findings of the previous section, which showed how the combination of diplomacy and finance create a favorable situation for Chinese NOCs. At the same time, it is clear that CNPC does not have 65 the expertise and efficiency of private IOCs, which is reflected by their significantly lower efficiency.

To sum up, the cross-border expansion of Chinese NOCs is to be viewed part of a wider trend in which non-Western energy company increasingly expand beyond their national borders, ―generating more hybrid forms of cooperation, new alliances and dynamics, and a blurring of categories‖ (De Graaff, 2012). This section has shown different possibilities of cooperation between Chinese NOCs and private-based IOCs as well as key elements of competition. Goldstein (2009: 52) states that the ―balance of power between producing countries and IOCs is rapidly changing, opening the way to contract renegotiations and hence to the entry of new players.‖ Overall, the cross-border expansion of Chinese NOCs appears to have significant implications for the global energy market, as the analyses of this chapter have shown.

4.4. Conclusions

This chapter analyzed the cross-border expansion of CNPC in Kazakhstan with regards to their relationship with KMG and Shell. To secure their investment and counter the political risks of increasing Kazakh resource nationalism, Chinese NOCs have been following a strategy of entering joint ventures with the Kazakh national oil company KMG in order to share profits and strengthen ties with the Kazakh ruling elite. An analysis of the 2013 purchase of CNPC at the Kashagan oil field suggests that these efforts have led to a preferable access of Chinese NOCs to the Kazakh energy market, reflecting the geoeconomic power of China in Kazakhstan. The possibility of cooperation between Chinese NOCs and private-based IOCs is reflected by the relationship of CNPC and Shell, which have built a global network of alliances through joint ventures, PSAs and sales. Shell‘s main interest in the partnership appears to be gaining access to the Chinese market and while CNPC‘s is looking to benefit from Shell‘s expertise and resources. With regards to Kashagan, there is some evidence suggesting that the IOCs of the consortium expressed interest in utilizing CNPC‘s midstream infrastructure. Their backing by the Chinese government and state-owned banks, as well as their ability to grant or deny access to the massive Chinese energy market, enhances their competitive position against other energy companies. Returning to the theoretical framework of transnationalization, the findings of this chapter reflect the increasing significance of Chinese NOCs on a global level. The next chapter will discuss the geopolitical implications of Chinese NOC investment in Kazakhstan.

Chapter V – Implications for geopolitics and energy security

5.1. Introduction

The previous chapters have given a detailed account of Chinese cross-border investment in the Kazakh energy sector. Following the ongoing transnationalization of Chinese NOCs, Chi- na‘s rising presence in resource-rich countries has been viewed with great attention in capitals around the world. Due to its geostrategic importance and its Caspian energy resources, the area of Central Eurasia has been a region of geopolitical rivalry. Therefore, the rapid expansion of Chinese NOCs in Kazakhstan raises questions on possible implications for geopolitics and energy security.

Based on the previous findings of this research, this chapter will analyze the geopolitical and geoeconomic implications of Chinese NOC investment in Kazakhstan, discussing (1) the domestic risks of Chinese energy investment in Kazakhstan, (2) the implications on a geopolitical and geoeconomic level and (3) the consequences of Chinese NOC investment for the global energy market. Overall, the chapter addresses the following two questions:

- What are the geopolitical and geoeconomic implications of Chinese NOC investment in Kazakhstan? - To what extent has Chinese energy investment in Kazakhstan contributed to the transnational integration of the global energy market?

The analysis in this chapter will be based on the findings of the previous chapters as well as on secondary data and scholarly literature. After an analysis of domestic risks, the geopolitical implications of Chinese energy investment will be assessed by studying interests, strategies and pipeline projects of other major powers in the region, namely the United States and Rus- sia. Returning to the framework of critical geopolitics, this chapter will attempt to present prospects for future conflict and cooperation between, on a state-level, China and other major powers in the region and, on a company level, Chinese NOCs and IOCs. Furthermore, implications for the global energy market will be discussed.

5.2. Domestic impediments

As previously shown, the increasing cross-border investments of Chinese national oil companies across the globe are a reflection of China‘s effort to strengthen its access to fossil fuels in resource-rich countries such as Kazakhstan in order to maintain economic growth and credibility at home. Chinese NOCs today dominate the Kazakh energy sector with a suspected 67 share of total equity at more than 40 percent. However, Chinese investment in the Kazakh energy sector has been subject to several domestic risks which threaten China‘s energy supply security from Kazakhstan. The following paragraphs will analyze the main impediments of Chinese energy investment in Kazakhstan and discuss possibilities to address these issues in order to secure the long-term sustainability of its NOC investments and its energy supply security.

Firstly, a major risk for Chinese energy investment can be linked to Kazakhstan‘s petro- authoritarian regime. With resource-nationalist tendencies on the rise, the weak rule of law and lack of democratic accountability pose a major impediment for foreign investment in the country. In its 2015 Investment Climate Statement on Kazakhstan, the U.S. Department of State (2015: 3) expresses concern about the ―government's tendencies to challenge contractual rights to legislate preferences for domestic companies, and to create mechanisms for government intervention in foreign companies‘ operations‖. In 2015, for instance, the Kazakh government studied the possibility of imposing a $2 billion penalty on the Karachaganak consortium for violating certain contractual agreements (Bloomberg, 2015). Aware of possible risk of resource nationalist measures, China has been attempting to counter this risk by granting substantial amounts of loans through its state-owned banks as well as by entering joint ventures with Kazakhstan‘s KazMunayGaz, as chapter III and IV have shown. Furthermore, the increasing dependence of Kazakhstan on China in terms of bilateral trade and energy export appears to lower the political risk of their NOCs‘ investment in Kazakhstan.

Next to political uncertainty and resource nationalism, Chinese investors in Kazakhstan face the risk of societal unrest, labor movement and public opposition against their involvement in Kazakhstan. In late 2009, an announcement of President Nazarbayev stating that China was interested in renting large areas of Kazakh farmland caused demonstrations with over 1000 participants, a rare sight in authoritarian Kazakhstan (BBC, 2010). In 2011, a protest of oil workers demonstrating against their layoffs in the Kazakh town of Zhanaozen led to the kill- ing of at least 14 protesters by Kazakh police forces (Reuters, 2011). The involved oil company Karazhanbasmunai is jointly owned by KMG and CITIC, China's largest state-owned investment company. In an analysis of the Zhanaozen events and their aftermath, Satpayev and Umbetaliyeva (2015) suggest that the Kazakh government has further increased its suppres- sion of oppositional movement in order to prevent any future protest. In April 2016, a proposed reform that would give foreigners the right to rent agricultural land for 25 years again triggered public protest, the first major demonstration since the 2011 Zhanaozen killings

(BBC, 2016). Overall, it appears that increasing Chinese influence is viewed with skepticism by the Kazakh population. According to the CNPC website, the company provides natural gas to local Kazakh communities as well as crude oil to local refineries and farmers at a reduced price. Furthermore, the CNPC emphasizes that it has been purchasing high amounts of locally produced goods, invested in public infrastructure and donated money to regional governments (CNPC, 2016).

Figure 5.1. GDP Growth in Kazakhstan, 2011 - 2016.

8 7,5 7 6 6 5 5 4,4 4 3 2 1,2 Annual growth in% growth Annual 1 0,1* 0 2011 2012 2013 2014 2015 2016

Source: IMF; 2016a; World Bank, 2016b; Graph by author. (*predicted by IMF)

Finally, the third domestic risk for Chinese investment in Kazakhstan is the country‘s undiversified economic structure. As a ‗rentier state‘, Kazakhstan‘s economy remains heavily dependent on the export of natural resources, in particular crude oil. Despite a rapid rise in GDP since the early 2000s (decade), Kazakhstan has failed to diversify its economy. While in 2000 petroleum accounted for 50% of Kazakh exports, the number rose to 77% in 2013 (UN Comtrade, 2016), as during times of high oil revenues, government programs officially aiming at economic diversification focused on sectors increasing public support rather than innovation and industrial development (Felipe and Hidalgo, 2015). Consequently, the recent drop in oil prices has caused a major budget decline, a decrease in domestic purchasing power and rising inflation, as Kazakhstan had to float its currency in August 2015. Annual real GDP growth has slowed down from 4.4% in 2014 to 1.2% in 2015 and is predicted to grow at a mere 0.1% in 2016 (IMF, 2016a; World Bank, 2016b).

These figures show the vulnerability of Kazakhstan‘s undiversified economy, which poses a risk to its economic and political stability, and consequently for Chinese NOC investment, as the Kazakh regime‘s credibility is, as previously discussed, predominantly based on their abil- 69 ity to maintain a high level of economic growth. China is attempting to counter these risks by the promotion of its ‗one belt, one road‘ strategy which aims at the economic integration of Central Asia by enhancing infrastructure and industrial development in the region.

Overall, the Sino-Kazakh energy partnership is exposed to political, societal and economic risk on a domestic level. Clearly, these factors are interconnected. The current slowdown of the economy due to a lack of diversification, for instance, clearly increases the probability of societal unrest. Pressure from public protest could, in turn, force the Kazakh government to change its stance on energy policy which could affect, for instance, Chinese FDI. Next to the mentioned domestic impediments, Chinese NOCs acting outside national borders are con- fronted with geopolitical risks. Therefore, the following section will discuss the geopolitical interests of major powers in Kazakhstan in order to identify the main geopolitical implications of Chinese NOC investment.

5.3. Interests of other major powers

Since the early 1800s (century), Central Eurasia has been a core region of geopolitical competition and conflict. Originally referring to the 19th-century rivalry between the British and Russian Empires for dominance in Afghanistan, the term ‗Great Game‘ has been continuously used informally to describe the geopolitical struggle for influence between great powers and major states in the region. While much of the attention during the Cold War was focused on Iran and Afghanistan, the dissolution of the Soviet Union in 1991 created a new geopolitical reality in Central Asia. With vast amounts of untapped fossil fuel resources located in the newly independent Caspian littoral states (Kazakhstan, Azerbaijan, and Turkmenistan), a ‗New Great Game‘ for geopolitical influence and access to natural resources appears to have emerged in Central Asia (Edwards, 2003; Kleveman, 2007). While the United States and Rus- sia have long been considered the two main geopolitical players in the region, recent years have seen increasing presence of China and, in terms of energy trade, of the European Union (Stegen and Kuznir, 2015).

5.3.1. United States

Unlike most other world regions, Central Asia ―is not incorporated into the territorial sphere of the security institutions of any one of the major powers and its allies‖ (Amineh and Houweling, 2007). Remaining closely connected with Russia after their independence from the Soviet Union, the five Central Asian littoral states have looked towards the U.S. to reduce Russian influence. In the 1990ies, the U.S. played the key role in dismantling Kazakh nuclear 70 weapons that the country had inherited from the Soviet Union. In the 2000s (decade), Central Asia was of major strategic importance for the U.S. due to its operations in Afghanistan. Since 2001, the U.S. the operated two military bases in Uzbekistan and Kirgizstan, which it vacated in 2005 and 2014, respectively (Mankoff, 2013). On a geostrategic level, the withdrawal of U.S.-led forces from Afghanistan, the strategic importance of Central Asia has become smaller (Rumer et al., 2016).

The overall strategy of the U.S. towards Central Asia must be understood in relation to its geographical proximity to the Persian Gulf, a key region of U.S. interest. In response to the Soviet invasion of Afghanistan in 1979, U.S. President Jimmy Carter (1980) announced the ‗Carter Doctrine‘, stating that:

“The region which is now threatened by Soviet troops in Afghanistan is of great strategic importance: It contains more than two-thirds of the world's exportable oil. […] An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force”.

Furthermore, it has been the United States‘ clear objective to prevent the emergence of regional hegemon anywhere in the world. Addressing the Southwest Asian region, a 1992 Pen- tagon policy document declares that ―it remains fundamentally important to prevent a hegemon or alignment of powers from dominating the region‖ (U.S. Department of Defense, 1992). Consequently, maintaining the independence and territorial integrity of the five Central Asian states remains paramount to U.S. interests. Considering Central Asia‘s vast and untapped oil and gas resources, it is clear that energy remains a decisive factor for U.S. foreign policy towards Central Asia, as the U.S. continues to ―identify the free flow of oil onto international markets as a core element of national security interest‖ (Raphael and Stokes, 2014: 187).

After Kazakhstan had become independent, U.S. corporations were among the first to invest in the country‘s energy sector when in 1993, Chevron entered a joint venture with Kazmu- naygaz for the development of the Tengiz field. Today, U.S.-based IOCs are operating at all three major oil fields in Kazakhstan. However, all Western-based IOCs in Kazakhstan depend on Russian infrastructure for their energy exports. In 2005, the Baku-Tiflis-Ceyhan oil pipeline (BTC) opened, connecting Azerbaijan with the Mediterranean coast of Turkey. However, plans to create a trans-Caspian connection to Kazakhstan have so far not been realized. With regards to natural gas, the U.S. has been supporting the construction of Southern Gas Corridor

71 and Nabucco pipelines which would circumvent Russia, although both projects have not been realized (Stegen and Kuznir, 2015). Despite a high share of U.S. foreign direct investment in Kazakhstan, bilateral trade has not risen significantly since the mid-2000s (decade). In 2014, the combined volume of Kazakh imports and exports with the United States was at $2.3 billion, as exports to have declined on an overall scale and the U.S. did not import any crude oil from Kazakhstan in 2014 (UN Comtrade, 2015).

Figure 5.2. Kazakh bilateral trade volume with the United States, 2005-2014.

1,5

1 Billion USD Billion 0,5

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Import Export

Source: UN Comtrade, 2016; Graph by author.

In 2011, the U.S. announced its ‗New Silk Road‘ program which aims at the promotion of regional economic development and cooperation to security stability after the withdrawal of U.S. led troops from Afghanistan. The initiative includes a proposed gas pipeline from Turk- menistan through Afghanistan, Pakistan and India and a number of infrastructural projects in the region (U.S. Department of State, 2014). Without a doubt, the project shows clear similarities to China‘s ‗one belt, one road‘ framework.

To sum up, the main U.S. interests in Central Asia are territorial integrity, the prevention of a regional hegemonic power and the free flow of energy from the region. U.S.-based IOCs are important investors in the Kazakh oil and gas sector, although bilateral trade between the U.S. and Kazakhstan has not increased significantly over the past ten years. Also, the U.S. has failed to successfully promote pipeline infrastructure that would allow Kazakh energy exports to Europe that circumvent Russia. Through its ‗New Silk Road‘ program, the U.S. is attempting to enhance its geoeconomic influence in the region.

5.3.2. Russia

Historically, Russia has been a strong force in Central Asia through its historical, cultural and political ties dating back to the Soviet era (Zhang, 2015). Russia‘s interests in Kazakhstan include safeguarding the local ethnic Russian population, preventing destabilizing movement and limiting the influence of other external actors such as the U.S. Through the Collective Security Treaty Organization (CSTO), Kazakhstan is part of Russia‘s military alliance in the region. Furthermore, Russia is Kazakhstan‘s main supplier of weapons (Stegen and Kuznir, 2015).

In economic terms, Russia remains the single most important trading partner of Kazakhstan and the main transit country for crude oil exports from Kazakhstan to Europe, as the vast majority of Kazakh oil exports run through the Caspian Pipeline Consortium (CPC) which connects the oil fields in Western Kazakhstan with the Russian Black Sea port of Novorossiysk. Due to the lack of alternative routes, Kazakhstan‘s dependence on Russian pipeline infrastructure is likely to continue in the future (Kubicek, 2013). Furthermore, Russia is among the main investors in the Kazakh energy sector.

Figure 5.3. Kazakh bilateral trade volume with Russia, 2005-2014.

10 Billion USD Billion 5

0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Imports Exports

Source: UN Comtrade, 2016; Graph by author.

Russia has been attempting to deepen bilateral trade relations with its neighbors through its leadership in the Eurasian Economic Union (EEU), a free-trade association between Russia, Kazakhstan, Armenia, Belarus and Kirgizstan (Pastukhova and Westphal, 2013). However, it

73 is worth noting that several scholars have questioned the ability of Russia to enhance its geoeconomic influence in the region due to its lack of competitiveness and economic growth (Ku- bicek, 2013; Spechtler and Spechtler, 2013; Stegen and Kuznir, 2015). As recent economic data suggest a decline in Russian GDP by 3.7% in 2015 and an expected decline by 1.9% in 2016 (World Bank, 2016c), this statement appears plausible.

Overall, Russia remains Kazakhstan‘s most important strategic partner with broad geopolitical interests in the region. While Russia‘s geoeconomic influence is predominantly based on its monopoly on pipeline infrastructure connecting Central Asia with Europe, it appears that it lacks the economic power to counter geoeconomic competition in Kazakhstan.

5.4. Geopolitics and energy security

As the previously shown, Chinese NOC investment since 1997 has changed the landscape of the Kazakh energy sector. Parallel to the expansion of its NOCs, China has built a strong bilateral partnership with Kazakhstan based on energy-related trade, investment, and finance. As concluded in chapter III, this research assumes that Chinese involvement in Kazakhstan follows mainly geoeconomic interests. The following paragraphs will review the interests of China, Russia, and the United States in order to draw conclusions on the geopolitical implications of Chinese investment.

Firstly, as both the U.S. and Russia are interested in limiting the influence of other major powers in the region, this research assumes that China‘s presence contributes to a more stable power balance between the three main players in the region. Kim and Indeo (2013: 284) point out that on the one hand, ―Moscow continues to profess an identity of global interests with China because its main focus is on the United States and defense of its political system, outlooks it shares with China‖, adding that on the other hand, ―an active U.S. presence will ensure Central Asia‘s strategic autonomy between Russia and China‖. As chapter III of this research has found that Sino-Kazakh security cooperation is limited mainly to regional issues and border management, it does not appear that China is seeking to create a hegemonic position in Central Asia. Overall, Kubicek (2013: 180) predicts that ―perhaps more than any other region in the world, the Caspian and Central Asia will be the site for geo-political pluralism.‖

Regarding geostrategy, it has been argued that the opening of the China-Kazakhstan crude oil pipeline has enhanced China in terms of energy supply security. However, it is necessary to note that China still relies on the Malacca Strait for the vast majority of its crude oil imports, which the U.S. could easily block through its naval power (Zhang, 2011). Furthermore, chap- 74 ter IV of this research has found that Chinese involvement in Kazakhstan has created an increasing cooperation between Chinese NOCs and Western-based IOCs, which indicates the possibility of cooperation between competing powers, a claim which is shared by Raphael and Stokes (2014: 198), who argue that:

“Despite an aspect of great power rivalry in the region, investments in energy production by strategic rivals do not, per se, pose a threat to US interests. In this re- gard, Chinese state-owned companies have at times invested in multinational ventures in the region alongside Western IOCs, operating clearly within the free-market model, and they do not pose a threat to US strategic interests at this point.”

At the same time, it is clear that the past two decades have brought a clear shift in geoeconomic influence in Kazakhstan from the U.S. and Russia towards China. As the presented data in the previous section shows, bilateral trade between the U.S. and Kazakhstan has not increased significantly since 2005. Unlike the U.S., China has been able to create a pipeline link with Kazakhstan, which has enhanced its access to Kazakh energy resources (see chapter IV). Furthermore, China‘s ‗one belt, one road‘ framework appears more ambitious and better funded than the U.S. ‗New Silk Road‘ initiative. Russia, on the other hand, is unable to com- pete with China economically, as Kim and Blank (2013: 773) point out:

“China is already outpacing Russia, which is encountering ever more difficulties in trying to arrange a continental bloc of satellite states. While it may not be possible for China to organize its own version of such a bloc given the deep-rooted regional fears and apprehensions about Chinese objectives, in the coming years it will probably be the primary foreign economic presence in Central Asia”.

With regards to energy security, chapter IV of this research has found some evidence that China‘s growing geoeconomic influence in the region has brought it preferable access to Ka- zakh energy resources. Through energy diplomacy and state-backed finance, China has created a strong interdependence with the Kazakh ruling elite. Through its centralized power structure and full control of its national oil companies, the Chinese government can pursue an effective energy policy outside its national borders. The European Union, as the current main importer of Kazakh oil, lacks the political unity to effectively project power in Central Asia (Umbach, 2006). Based on these developments, Kalyuzhnova and Lee (2014: 217) suggest that ―China effectively competes for Kazakhstan‘s hydrocarbon resources, diverting them from other energy markets (including Europe) by occupying a leading place (second or third) in the ranking of Kazakhstan‘s leading foreign investors.‖

At the same time, it is necessary to note that the European Union and China have a common interest in maintaining a stable and steady flow of energy from Central Asia through enhancing investment and regional stability in order to ensure a secure supply of crude oil from resource-rich countries (Amineh and Yang, 2012). Therefore, Chinese investment may help to increase the output of the Kazakh energy sector and enhance the quality of its infrastructure, an assumption that is shared by Alon et al. (2015: 309).

“The oil industry of early and late 2000 lacked the necessary continued investments that would keep oil prices down. The major wave of Chinese investments in oil resources have not only been a major contribution, but they also bring more oil to international markets”.

Furthermore, China and the European Union face some similar risks in their energy investments in Kazakhstan, for example caused by resource nationalism, as the Kazakh ruling elite has ―shown willingness to play rough with both Western and Chinese companies‖ (Kennedy, 2010: 132). Overall, the increasing integration of the global energy market, reflected by the cooperation between Chinese NOCs and Western IOCs, shows the possibility of cooperation between import-dependent states in Europe and East Asia. Based on these findings, this research questions the view of Stegen and Kuznir (2015) whose analysis focuses primarily on elements of geostrategic competition while neglecting the existence of common interests in terms of energy supply.

5.5. Conclusions

This chapter has analyzed the domestic impediments and geopolitical implications of Chinese NOC investment in Kazakhstan. Chinese investment in Kazakhstan is exposed to political, societal and economic risk, which are mainly related to, firstly, Kazakhstan authoritarian, resource nationalist regime, secondly, popular opposition, and thirdly, a lack of economic diversification. Both the United States and Russia have vital interests in Central Asia. In terms of geopolitics, this chapter found that Chinese energy investment in Kazakhstan does not threaten key strategic interests of the United States or Russia. At the same time, there has been a clear geoeconomic shift of power from the U.S. and Russia towards China. While the U.S. and the European Union have failed to construct a pipeline link with Kazakhstan that circum- vents Russia, China has consolidated its access to Kazakh resources through the China- Kazakhstan pipeline. Russia, on the other hand, lacks the economic power to counter China‘s increasing geoeconomic influence. At the same time, it is necessary to consider the shared interest between China and the European Union who equally depend on a steady flow of

76 energy from the Caspian Region while facing similar risks in terms of resource nationalism and economic instability. The cooperation between Western and Chinese energy companies in Kazakhstan reflects the possibility of cooperation between the EU and China in energy questions in the future. At the same time, it reflects the ongoing integration of the global energy market.

Chapter VI – Conclusions

This research has provided a comprehensive analysis of Chinese NOC investment in Ka- zakhstan. Addressing the research question „What are the geopolitical and geoeconomic implications of Chinese national oil company investments in Kazakhstan and what is the nature of their cross-border expansion?‟, this study has utilized a variety of data sources and research methods to assess the nature of Chinese cross-border energy investment as well as the relationship of Chinese NOCs with other energy companies in Kazakhstan. Applying the theoretical framework of critical geopolitics, the aim of this research was to contribute to a better understanding of Chinese NOCs‘ transnationalization and the implications of their cross-border expansion for geopolitics and energy security.

China‘s rapid industrialization process in the past decades has created a condition of demand- induced energy scarcity. In order to maintain economic growth and credibility at home, the Chinese government is forced to seek access to energy resource from outside its national borders. Dominated by the top leaders of the Chinese Communist Party, the Chinese ruling elite fully controls its national oil companies and utilizes them for the pursuit of its foreign energy policy. Through energy-related diplomacy and state-backed finance, the Chinese government facilitates the cross-border expansion of its NOCs. Kazakhstan‘s rich energy resources and geostrategic location on the Western border of China have made it a key country of focus for Chinese NOCs investment. As the Kazakh authoritarian leadership relies on the steady inflow of foreign direct investment and energy export revenues to ensure popular support, China has been able to establish a strong political and economic presence in the country. Through an increasing volume in bilateral trade, investment, and finance, China projects geoeconomic power in Kazakhstan in order to assert its access to Kazakh energy resources.

Since 1997, Chinese NOCs have rapidly increased their cross-border investment in Ka- zakhstan and today own major upstream, midstream and downstream assets in the country‘s oil and gas sector. In 2006, the China-Kazakhstan crude oil pipeline was opened, enabling China to receive its first overland imports of crude oil in history and consolidate its energy partnership with Kazakhstan. Through its alliance Kazakh national oil companies KMG and its backing by Chinese state-owned banks, CNPC appears to enjoy favorable access to Ka- zakh resources. The relationship between Chinese NOCs and Western-based IOCs contains both elements of cooperation and competition. Shell and CNPC work side-by-side at several oil and gas projects in Kazakhstan and across the globe. This reflects the changing nature of

78 the global energy market caused by the ongoing integration of Chinese NOCs into the circle of international oil companies through joint ventures, production sharing contracts as well as joint acquisitions and sales. At the same time, their difference in shareholder structure and technical expertise constitutes key elements of competition between Shell and CNPC.

This research views Chinese energy investment in Kazakhstan mainly in geoeconomic terms, concluding that it does not threaten key strategic interests of the United States and Russia in Central Eurasia. Instead, China‘s increasing involvement in Kazakhstan contributes to a more balanced and stable region. However, there has been a clear shift in geoeconomic influence, as Russia lacks the economic strength and the European Union lacks the political unity to counter China‘s increasing economic presence. Unable to create a direct pipeline link through the Caspian Sea, the EU continues to depend on Russian infrastructure for its crude oil imports from Kazakhstan. With regards to energy security, the United States, European Union and China share the key interest of maintaining a free flow of energy from the Caspian Re- gion while countering the risks of resource nationalism and economic instability. This research views the increasing cooperation between Chinese NOCs and Western-based IOCs as well as the ongoing integration of the global energy market as an indicator for the possibility of future cooperation in energy questions between the energy import-dependent European Union and China.

Returning to this work‘s initial line of argument, the following paragraphs will review the hypotheses laid out in chapter I and, based on the findings, rectify or falsify them.

Hypothesis 1: As China faces increasing energy scarcity, Chinese national oil companies serve as tools for the Chinese government to enact its energy policy abroad.

Chapter II of this research has found that through control mechanisms and the staffing authority by the CPC‘s Central Organizational Department, the Chinese ruling elite effectively controls its national oil companies. As Chinese NOCs depend on diplomatic and financial support in their cross-border activity, scholarly arguments suggesting their increasing independence from the government are not convincing. Facing increasing demand-induced scarcity of crude oil, the Chinese government utilizes its NOCs to enhance its access to fossil fuels outside its national borders and facilitates their cross-border expansion through diplomatic and financial support. Therefore, hypothesis 1 can be accepted.

Chapter III of this research has found that bilateral relations between China and Kazakhstan have deepened steadily since 1997. The main drivers of the partnership have been energy- related investment and, more recently, energy-related finance. Continuous acquisitions of Chinese NOCs and the opening of the China-Kazakhstan oil pipeline have boosted crude oil exports from Kazakhstan to China and increased bilateral trade. Furthermore, there is evidence suggesting that China has surpassed Russia and the United States as the previously largest investors in Kazakhstan‘s energy sector. Therefore, hypothesis 2 can be accepted.

Hypothesis 3: It is expected that during the period under study there has been an increase in cooperation between Chinese NOCs, other NOCs and Western-based IOCs in Kazakhstan.

Chapter IV of this research has found that since 1997, Chinese NOCs have entered a number of joint ventures with Kazakhstan‘s national oil company Kazmunaygaz, including several major upstream projects and the China-Kazakhstan oil pipeline. In 2013, CNPC joined a consortium consisting of KMG and several Western-based IOCs at the Kashagan oil field. The increase in alliances with other energy companies appears to take place parallel to the overall increase of Chinese energy investment in Kazakhstan. Therefore, hypothesis 3 can be accepted.

Hypothesis 4: It is expected that during the period under study, Chinese investment in the Kazakh energy sector has accelerated the integration of the global energy market.

As previously mentioned, Chapter IV of this research has found that the cross-border expansion of Chinese NOCs in Kazakhstan has been accompanied by an increase in alliances with other energy companies. The results of the case study on the relationship between CNPC and British-Dutch-based Shell suggest that the two companies have built a global network of alliances, indicating that CNPC‘s cooperation with Western-based IOCs in Kazakhstan is part of a wider global trend. In addition, chapter V has found some evidence pointing at an increasing interdependence between Chinese and Western energy importers due to the cross- border expansion of Chinese NOCs. While it is clearly necessary to conduct further research on the interaction and relationship between Chinese NOCs and other energy companies, hypothesis 4 can be accepted based on the results of chapters IV and V.

Hypothesis 5: It is expected that the increasing interaction between Chinese NOCs and IOCs in Kazakhstan increases the future possibility of cooperation between China and other major powers.

Based on the assumption that China‘s involvement in Kazakhstan follows mainly geoeconomic motives, chapter V of this research has found that Chinese NOC investment does not pose a geostrategic threat to U.S. and Russian interests. As a major net-importer of fossil fuels, Chi- na shares a number of mutual interests with the European Union and the United States with regards to energy supply security. Chapters IV and V have found some evidence suggesting that the increasing partnerships between Chinese NOCs and Western-based IOCs enhance the possibility of cooperation between China and other major powers on energy security. Based on the results of this research, hypothesis 5 can be accepted. However, it is necessary to conduct further research on the relationship between Chinese NOCs and Western-based IOCs to better understand the implications of their interaction.

To summarize, the Chinese government utilizes its national oil companies for gaining access to energy resources outside its national borders and promotes their cross-border expansion through political and financial support. Along with the increasing presence of Chinese NOCs in the Kazakh energy sector, China has built a strong economic partnership with Kazakhstan. New alliances between Chinese NOCs and Western-based energy companies indicate an ongoing integration of the global energy market and the possibility of cooperation between major energy importers in the future. While this research has attempted to provide a better understanding of Chinese energy investment in Kazakhstan between 1997 and 2016, one must not forget that the transnationalization of Chinese NOCs is an ongoing and global phenomenon. Considering the rising demand for fossil fuels in all of the world‘s major economies, further research must be conducted on the issue in order to better understand its implications for the global energy market, energy security and geopolitics.

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Yenikeyev, S. M. (2008) Kazakhstan's Gas: Export Markets and Export Routes. Oxford Insti- tute for Energy Studies Available from: http://www.oxfordenergy.org/wpcms/wp- content/uploads/2010/11/NG25-KazakhstansgasExportMarketsandExportRoutes-Shamil Yenikeyeff-2008.pdf [Accessed: 19th January 2016].

Databases

AidData Open Data for International Development (2016) China Aid Data. Available from: china.aiddata.org [Accessed: 29 May 2016].

American Enterprise Institute and Heritage Foundation (2016) China Global Investment Tracker. Available from http://www.heritage.org/research/projects/china-global-investment- tracker-interactive-map/china-global-investment-tracker-interactive-map [Accessed: 29 May 2016].

UN Comtrade (2016) United Nations Commodity Trade Statistics Database. Available from: http://comtrade.un.org/data/ [Accessed: 20th June 2016].

UN Conference on Trade and Development (2016) FDI Statistics Division on Investment and Enterprise. Available from: http://unctad.org/en/Pages/DIAE/FDI%20Statistics/FDI- Statistics.aspx [Accessed: 28 May 2016].