The political and expert quarters will remain for a long time riveted on another summit of the Shanghai Cooperation Organization that was called in Yekaterinburg on the 16^th of June.

One could keep looking for quite some time for some fundamental ideas of the main document the summit has adopted, - the Yekaterinburg Declaration of the SCO Heads of State. But comparing some provisions of the Declaration with the practical activities in the central Asian region seems to prove more productive.

Item 5 of the Declaration sounds somewhat pathetically: “The SCO member states, noting the key significance of energy sector for successful economic development and creation of favourable preconditions for improving the living standards of their peoples, express determination to further advance mutually beneficial cooperation in this field on the basis of equality with the aim of ensuring effective, reliable and environmentally safe energy supplies”.

And now let’s take a look at how the SCO unconditional leader China implements its energy plans in the region. Let’s focus on the following two situations by way of an example. The first one has to do with China’s growing involvement in the production of hydrocarbons in Kazakhstan. Back in the 1990s Kazakhstan made easily available its mineral wealth to American, British, French and Italian companies, the companies that foisted disadvantageous or even downright crippling terms on Kazakshtan. The bulk of the profit generated was channelled to Kazakhstan’s new partners, while those were not liable for obligations under the contracts signed, specifically with regard to compliance with ecology-related standards. The situation was largely prompted by corruption that had corroded the Kazakh leaders, including top-echelon officials (a case to illustrate the point is the so-called “Kazakhgate”). A threat loomed large of Kazakhstan turning into a third-world country with a raw exports role to play for the highly-advanced states.

The West was perfectly content with the Kazakh leaders’ policy, since that policy both helped settle the economic problem of securing excess profits to western companies and was in line with the western nations’ political objectives, namely tearing Kazakhstan away from Russia and preventing any new-form revival of the alliance of the former Soviet republics.

However, Kazakhstan growing stronger economically, socially and politically, the internal destabilization risks being largely reduced due to the defeat of the Kazakh opposition and irredentist Slavic organizations and the world hydrocarbons market prices shooting up early this century made Kazakhstan leaders think better of their old stands. The new conditions prompted Kazakhstan to reconsider the earlier signed agreements, and Astana specifically proclaimed the objective of establishing state control over the oil and gas sector.

Astana began to gradually change the national legislation on subsurface resources management and environmental protection to coerce the western companies into greater compliance with Kazakhstan demands, and simultaneously provoked a conflict with the Italian company ENI, the operator of Kazakhstan’s most promising oilfield Kashagan, on the Caspian Sea shelf. Besides Kashagan, ENI’s contractual area in Kazakhstan’s sector of the northern part of the Caspian Sea also comprises the Aktoty, Kairan and Kalamkas oilfields. But Kazakshtan formally laid claims to its foreign partners for the failure to meet the deadlines for making the oilfields operational and producing large amounts of oil.

Kazakhstan made amendments to its Internal Revenue Code, to the law on its mineral wealth and subsurface resources management and to the ecology-related laws concerning foreign investor activities. The legal innovations provided for the consolidation of the State’s right to a 50% share of each new project on secondary markets, too; for a ban on re-selling licences for subsurface resources management for a two-year period following the registration of property rights; toughening control by the Ministry for Environmental Protection; a mandatory demand that foreign economic entities should attract the “Kazakh content” and also the right to use a reference to the need to guarantee national security as explicit justification of a refusal to grant licences for subsurface resources management.

Let us focus for awhile on the term “Kazakh content”, which implies not only an enlargement of Kazakhstan’s share of the authorised capital of consortiums, engaged in drawing up certain projects, but the idea that Kazakhstan’s foreign partners are bound to be geared to the use of Kazakhstan’s mineral wealth. For instance, the foreign partners should purchase no less than 30% to 35% of Kazakh-made materials and equipment, to use no less than 90% of labour and services; and some 90% of personnel. As of May 2009 the Kazakhs have introduced this sort of contractual obligations into 144 contracts.

The national company “KazMunaiGaz” was made responsible for advancing Kazakhstan’s state interests in the oil and gas field institutionally. In autumn last year the company was in control of 18% of oil production in the republic, 80% of oil transportation, half of oil refining and only 6% of oil product retail sale. It was just last year that many things indicated that Kazakh President was trying to shore up the “KazMunaiGaz” Company’s positions. According to the data available, “KazMunaiGaz” is in control of 615 million tonnes of oil reserves, however the greater part of these is believed to be hard to recover; besides, the oil production peak period is over in many oilfields. Given the situation, “KazMunaiGaz” is naturally keenly interested in boosting its oil and gas assets, an objective it tried to attain through the use of state red tape, which helps adjust the earlier signed contracts.

The Kazakh authorities brought pressure to bear on the foreign companies in a bid to force the latter to accept changes to the earlier signed contracts. This was the case of the Canadian company “PetroKazakhstan”, which was compelled to pay major fines for ecological disruptions and temporarily bring the production process to a halt, until the company’s top managers agreed to sell a certain share of implemented projects to Kazakhstan. The transaction looked perfect, with the Canadians selling their business to the new owner, CNPC International Ltd., which “waived” a 33% share of the “PetroKazakhstan” oil refinery to “KazMunaiGaz” and a 50% share to the affiliated company “Kazgermunai”.

Kazakhstan’s government resorted to similar tactics against the British company “BG Group” to oust it from the North-Caspian project, and against the “Aqip KCO” consortium, which taps the largest oilfield Kashagan. Although, of course, in the case of the consortium Astana chose, in the wake of a protracted struggle amid accusations of “resource nationalism” hurled at Kazakhstan leaders, not to exacerbate the situation and meet the consortium halfway. “Aqip KCO” agreed to boost “KazMunaiGaz’s” share of the Production-Sharing Agreement from 8.3% to 16.8% for 1.78 billion dollars. Formally Kazakhstan’s claims to the consortium boiled down to disagreement with pushing back the date of industrial-scale production in the Kashagan oilfield to 2011, while simultaneously increasing the project target costs from 57 billion dollars to 136 billion dollars.

Initially Kazakhstan leaders applied much the same tactic to pursue the same objective to one of Kazakhstan’s three oil refineries, the Pavlodar refinery, which is located by the Russian border and technologically oriented to Russian oil refining. The facility was privatized in January 1997 and the government’s stake placed in management by the US CCL Oil Ltd. Company on the terms of a public-private partnership agreement. But the Kazakh government prematurely terminated the agreement a few years later and handed over a 51% stake to the OAO “Mangistaumunaigaz”. The company later brought its stock of shares to 58%, with 42% of the Pavlodar oil refinery’s stock capital owned by the state.

After that the national company “KazMunaiGaz” bought 51% of the “Mangistaumunaigaz” stock of shares from Indonesia’s Central Asia Petroleum and consequently gained control over the facility. Meanwhile the Russian gas giant GAZPROM made futile attempts to buy 49% of the “Mangistaumunaigaz” stock of shares. The Kazakh authorities have preferred China to Russia. It was reported on the 16th of April 2009 that amid the world economic crisis Kazakhstan borrowed from China 10 billion dollars during N. Nazarbayev’s visit to Beijing. The Chinese CNPC Company bought a 50% stake of “Mangistaumunaigaz” for 1.4 billion dollars. The details of the transaction remain unknown, but Astana claims that the Pavlodar oil refinery has been dropped from the deal and will now become property of “KazMunaiGaz”. But experts estimate “Mangistaumunaigaz” at 3.6 billion dollars. The company owns 36 fields, with drilling under way in 15 of those. Experts claim that “Mangistaumunaigaz” has oil reserves of 1.32 billion barrels. It is safe to assume that it is the above-mentioned Chinese loan to Kazakhstan that made Astana decide in favour of China, rather than GAZPROM, on the sale of “Mangistaumunaigaz”.

In other words, Kazakhstan leaders are ousting western partners from the hydrocarbons market and refusing to meet Russian companies halfway, while losing ground to China. Chinese companies already own a third of Kazakhstan-produced oil, or more than 20 million tonnes per year. The purchasing of Kazakhstan’s “Mangistaumunaigaz” assets by China’s CNPC further tightens China’s grip on the Kazakh oil market and weakens the positions of Russia and the West in Kazakhstan’s fuel and energy complex. China is coming to possess major resource amounts that enable it to reverse Kazakhstan’s oil strategy in Beijing’s favour. Now, Kazakhstan’s authorities’ assurances that they will seek to regain control over the economy’s fuel sector do sound hollow against that backdrop.