As China continues its impressive economic growth, access to natural resources and raw materials is becoming increasingly vital, and will feature more prominently on the policy agenda of the decision makers in Beijing. If China seeks to maintain its economic growth rate of 1985-2000, it will face a major raw materials shortage and will be forced to focus on Eurasia as a source of major energy resources, water and food. This is likely to lead to growing economic and political involvement in Russia and Central Asia.

BACKGROUND: The Chinese government has designated oil, grain and water as strategic commodities with maximum influence on economic development. While China is the world's fifth largest oil producer, demand is outgrowing economic production. By 2020, China will not be able to supply itself with oil, iron, steel, aluminum, sulfur, and other minerals. Official Chinese statistics show China's oil production growing at the rate of 1.7% a year, while demand is growing at 5.8%. China is a net importer of oil since 1993. The current deficit is about one third of its total consumption of 300 million tons a year. Imports totaled 30 million tons in 1999, growing to 65 million tons by 2001 and likely to continue growing. A third of imports will come from Russia, some from the Caspian and Central Asia, and the rest from the Middle East, Indonesia, Vietnam, and the South China Sea. Economic cooperation is already a high priority in the Sino-Russian partnership, and is increasingly important in Beijing's relations with Central Asia. Neighboring Siberia boasts the large oil fields in Kovykta in the Irkutsk oblast; natural gas fields in Yakutia (Sakha); and coal basins and millions of acres of pristine forests. YUKOS, the fastest growing Russian oil company, has championed plans to build a gas pipeline to Daiqin in North-Eastern China. Kazakhstan, with 2.2 billion tons of oil and 1,8 trillion cubic meters of natural gas on land (not counting Kazakhstan's Caspian reserves), is planning to produce 49 million tons of oil and 12 billion cubic meters of gas in 203. By 2010, its production of oil will double and its production of natural gas may triple. Already in 1997, the China National Petroleum Co. (CNPC) acquired development rights for two oil fields in Kazakhstan, outbidding European and U.S. competitors, and is conducting a feasibility study for a 3,000 km gas pipeline from Turkmenistan. From the purely economic point of view, these projects looked unviable in the late 1990s when oil was cheap, but calculations may change with oil remaining above $30 a barrel, especially if the full financial muscle of the Chinese government is put behind the projects. Looking even further into the future, these East-West pipelines may be connected with the pipeline grids of Russia and Iran, creating the "Pan Asian Global Energy Bridge." 

IMPLICATIONS: Trade between China and its Eurasian neighbors is developing at a high pace, primarily involving Eurasian raw materials and Russian weapons in exchange for Chinese low-quality consumer goods and food. Some aspects of this trade are off the books and unregulated, as the illegal cutting of forests in Siberia. It is energy resources, however, which are going to dominate China's trade with Eurasia in the foreseeable future. In May of last year, the Kazakhstani energy company Kazmunaigas and CNPC have started to develop a gas pipeline from Keniak to Atyrau, which may become a part of the future Kazakhstan-China main gas export pipeline. China itself is prospecting for oil and natural gas in the Tarim basin in Xinjiang, and constructing a 2,600 mile long East-West oil and gas pipeline which may cost as much as $18 billion. By 2005, these pipelines will supply up to 25 million tons of oil and 25 billion cubic meters of gas to Eastern China. Both the Tarim pipeline. A possible Central Asian follow-up will contribute to the viability of the gigantic project. CNPC has also acquired a 50-percent stake in the Salyan Oil operating company in Azerbaijan, previously owned by Delta-Hess company, which, in turn, was recently acquired by CNPC. Salyan, which is 50 percent owned by the State Oil Co. of Azerbaijan (SOCAR), is planning to invest $80 million into rehabilitation of old oil wells in the Kursangi-Qarabagli field. This is likely to be the first step in the expansion of Chinese oil interests in the Caspian area. CNPC's plan of a major breakthrough into the Russian oil sector was blocked, at least temporarily, on December 28, 2002, when the Russian government declined a higher Chinese bid for the state-owned Slavneft company in favor of politically connected Sibneft. This appetite for natural resources will open doors for major capital projects aimed at supplying China, such as oil, gas and water pipelines. China and other Pacific industrial powers such as Japan and Korea, form the largest oil-consuming region in the world. It is likely to boost domestic prospecting, develop its own (particularly offshore) reserves, but will increasingly have to rely on imports. Chinese experts predict that Russia will be able to export annually 25 to 30 billion cubic meters of natural gas to China annually; 15 to 18 billion kilowatts of electricity from hydroelectric power stations in Siberia, and 25 to 30 million tons of oil from the Kovykta oil field in Eastern Siberia. In addition, Russia can pump oil produced in Kazakhstan to Irkutsk and then supply it to China. Furthermore, Russia is willing to build six nuclear reactors in China to generate up to 1.5 trillion kilowatts. In addition, there are numerous projects for developing free economic zones along the Chinese-Russian border, and an international port in the mouth of the Tuman river (Tumangan), where the Russian, Chinese, and Korean borders meet. That port has been on the drawing boards for 15 years, but renewed tensions over the North Korean nuclear weapons program are likely to delay it again.

CONCLUSIONS: Russia and China are planning to cooperate in developing a network of railroads and pipelines in Central Asia, building a pan-Asian transportation corridor (the Silk Road) from the Far East to Europe and the Middle East. Ambitious Chinese plans, however, to build the longest pipeline in the world - from Western Kazakhstan to China at a cost of $10 billion - are running into financing difficulties. Thus far, the target of $20 billion in trade established by Presidents Jiang Zemin and Yeltsin in 1997 has not been reached. For the foreseeable future, the West will remain China's leading investment and manufactured goods trading partner - while Eurasia will become an important source of raw materials. The race for resources - and for capital investment to develop them - is also likely to put Chinese energy corporations and their Western allies into competition with their Japanese and Korean counterparts. The ability of Eurasian governments and transnational corporations to work cooperatively to develop resources and operate energy markets will greatly influence the pace of economic development in Asia in this century.

Ariel Cohen, Ph.D., is a Research Fellow in Russian and Eurasian Studies at the Heritage Foundation. His expertise includes international energy issues.