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New Silk Road to bind China and Central Asia with rail and pipelines

Rising gas supplies are at the centre of a burgeoning new regional relationship

China's president Xi Jinping has put the development of the so-called New Silk Road – aimed at reviving the historic trade and cultural ties between China and its western neighbours in Central Asia – at the centre of his foreign policy. Where traders once beat a path between China and Europe by foot and caravan in search of wealth and adventure, Beijing envisions a 21st century version of the route where roads, high-speed rail lines and pipelines link the economies of China and its neighbours. 

It would be easy to dismiss it all as little more than a geopolitical gimmick aimed at winning new friends for Beijing, but Xi has thrown considerable political and economic weight behind the project. The Chinese president has showered Central Asian leaders with praise and promises of tens of billions of dollars in investment during repeated trips to the region over the past two years.

Central Asia’s leaders, wary of Russia and with few other options for new markets and investment, have eagerly hitched their wagon to the new regional power. In November, Xi said China would put up $40 billion to set up a Silk Road Fund, which would help fund new projects. “Asian countries are just like a cluster of bright lanterns. Only when we link them together can we light up the night sky in our continent,” he said.

The New Silk Road

Nothing has done more to turn the vision for this New Silk Road into reality than the booming energy trade between China and Central Asia.
In December 2009, the presidents of China, Turkmenistan, Kazakhstan and Uzbekistan turned on the taps of the first Central Asia-China Gas Pipeline. The 1,830 km link system starts in Gedaim, near the Turkmen-Uzbek border, and runs through Uzbekistan into southern Kazakhstan to the border of China’s Xinjiang province. From there it feeds into China’s huge west-east pipeline system that transports gas from the lightly populated west to China’s big cities in the east. It was a complicated and costly affair, but the first pipeline took just two years to build.

Since then, the pipeline network has expanded quickly, largely thanks to funding from Beijing. Line B started flowing in late 2010 and Line C started up earlier this year. By the end of 2015, when Line C is completed, the pipeline network will have capacity of 55bn cubic metres per year (cm/y), equal to around a third of China’s natural gas consumption. 

China National Petroleum Corporation’s (CNPC) Amu Darya gasfield in Turkmenistan pumps 13bn cm/y through Line A and Line B, while the remaining 17bn cm/y of capacity is filled with gas from other Turkmen fields. Line D, which unlike Lines A, B and C will pass through Tajikistan and Kyrgyzstan, will have a capacity of 25bn cm/y and is expected to be fed by a mix of 10bn cm/y from Turkmenistan, 10bn cm/y from Uzbek and 5bn cm/y of Kazakh gas.

The expansion has quickly made Central Asia, and Turkmenistan in particular, China’s most important natural gas supplier. Turkmenistan accounted for 48% of China’s natural gas imports in 2013, while Uzbek gas made up 6% of the total.

China paid around $9.60 per million British thermal units (Btu) in 2013 for Turkmen gas under the countries’ oil-linked contract, including transit fees paid to Uzbekistan and Kazakhstan. Uzbek gas is slightly cheaper because of the lower transit costs, while Kazakh gas cost China only around $5.00/m Btu in 2013.

That makes Central Asian gas more expensive than domestically produced gas and China’s existing liquefied natural gas (LNG) contracts from Australia and Indonesia. But it is significantly cheaper than spot LNG purchases, newly contracted LNG supplies and the expected cost of Russian pipeline imports.

Diversify

China is moving to diversify its supply with more LNG imports from Australia, East Africa and possibly North America as well as its pipeline deal with Russia, but Central Asian countries will continue to be its most important gas suppliers.

CNPC started construction on the 30bn cm/y Line D pipeline this year. It will be fed by gas from Turkmenistan’s Galkynysh project, formerly known as South Yolotan, one of the world’s biggest gasfields, where CNPC is investing $10bn in a first-phase development. The pipeline is expected to start flowing gas in 2016.

By the end of this decade, Central Asia could be supplying China with around 85bn cm/y, 65bn cm/y of which will be coming from Turkmenistan alone, meeting nearly a quarter of China’s total expected gas consumption. 

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