Is It Really CPEC? Or Is It China's Karakoram Corridor That Is Now Unravelling?-2

For securing its energy supplies through overland routes, China has since 2005 has been increasing its supply-linkages with Russia and the Central Asian Republics at breakneck speeds. SINOPEC was allowed to buy a chunk of Russian producer Udmurtneft in 2006. In 2013, China acquired 12.5% of Russia's Uralkali, the biggest producer of potash, and CNPC agreed to prepay OAO Rosneft about $70 billion as part of a $270 billion, 25-year supply deal. That was followed by Rosneft’s $85 billion, 10-year accord with China Petrochemical Corp and CNPC's purchase of 20% of an Arctic gas project from Novatek for an undisclosed sum. In September 2014, President Vladimir Putin, who has been seeking new markets in Asia for Russian energy exports to replace traditional customers in Europe, announced that he would welcome Chinese investment in Vankor, a vast new oil field in remote eastern Siberia owned by the state firm Rosneft. All of Vankor's output of 440,000 barrels per day of crude is already shipped east, via the East Siberia-Pacific Ocean pipeline, which includes a spur feeding China's northeast. A Russia-China pipeline will double capacity from 300,000 to 600,000 bpd by 2016. In fact, in 2014, China overtook Germany as Russia’s biggest buyer of crude oil, thanks to Rosneft securing deals to boost supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan. In Beijing on November 9, 2014 Russian President Vladimir Putin and Chinese President Xi Jinping signed a preliminary agreement under which the Kremlin-run monopoly Gazprom would eventually supply nearly one-fifth of the gas China is expected to need until 2020. All told, the deal, nearly as huge as the countries’ $400 billion gas deal signed in May 2014, meant that Gazprom would supply up to 1.3 trillion cubic feet of gas per year from western Siberia to China in the next 30 years through the new 2,500-mile pipeline, called the Power of Siberia-2. This pipeline will link Russia’s Altai Mountain region to the Xinjiang province of China and northern India. A contract between Russian natural gas company Gazprom and CNPC is for 30 years and calls for 1.3 trillion cubic feet of natural gas per year, starting from 2018. And CNPC in 2015 acquired 20% of a $27 billion LNG project in Russia’s far north. It has also been offered equity in oil licence blocks in the Arctic and East Siberia.

Then there is the high-speed rail link that will eventually connect Moscow to Beijing. Vladimir Putin’s vision of a ‘Greater Europe’ from Lisbon to Vladivostok, made up of the European Union and the Russia-led Eurasian Economic Union, is now being replaced by a ‘Greater Asia’ from Shanghai to St Petersburg. Putin agreed to give the planned Silk Road Economic Belt (a regional trade and transportation plan that has been President Xi’s foreign policy priority since 2013) the green light after Xi agreed to include Trans-Siberian and BAM railways in the scheme.

China is now the largest trading partner of Tajikistan, Kazakhstan, Turkmenistan, and Kyrgyzstan.  Beijing has been investing billions of dollars in the energy sector, which include a series of contracts with Kazakhstan worth $30 billion, 31 agreements of $15 billion value with Uzbekistan, and natural gas transactions with Turkmenistan in 2013, which reached about $16 billion. China has also provided loans and aid worth $8 billion to Turkmenistan and is expected to provide at least $1 billion to Tajikistan. In 2015, China upgraded relations with Kyrgyzstan to a strategic level. Presently, Turkmenistan is the largest supplier of natural gas to China, accounting for more than 50% of the total imports. Turkmenistan, which has the world’s fourth largest gas reserves, already supplies China 40 billion cubic metres every year, with exports rising following the opening of a 1,833km-long pipeline in 2009. Both nations had signed a deal in 2007 for the export of 30 billion cubic metres of natural gas annually for 30 years. Turkmenistan has since agreed to increase its planned supply of natural gas to China by 25 billion cubic metres. Under this deal, CNPC has also received the right to develop the Amu Darya gas fields. For ferrying gas from this area, a 8,700km-long natural gas pipeline, which is the world’s longest, was operationalised on June 30, 2011. The pipeline, which links Turkmenistan with southern China, starts in Huoerguosi on the China-Kazakhstan border, 670km northwest of Urumqi, capital of Xinjiang Uygur Autonomous Region.  It boosted supplies to China’s booming industrial zones in Shanghai, Guangzhou and Hongkong SAR. The pipeline has one trunk and eight branches. Three branches have been completed and the other five will be finished next year.

Earlier in December 2014, the Presidents of Iran, Kazakhstan and Turkmenistan inaugurated a railway line that runs from western Kazakhstan to northern Iran. The main goods to be transported via the railway will be oil and other energy products, Kazakh grain and agricultural products, Turkmen cotton and cheap China-origin consumer goods for markets in Central Asia, Iran and beyond. Estimates suggest that by 2020, 10% of trade between China and Europe will be transported via inland rail and road routes. Negotiations on the China-Kyrgyzstan-Uzbekistan railway line, the ‘Silk Road Railroad’ that was initially proposed in 1997, have seen significant progress in recent years.

In Kazakhstan, CNPC beat India by agreeing to pay $4.18 billion in August 2005 for PetroKazakhstan, then China’s biggest overseas oil deal. CNPC had trailed India’s ONGC and its partner Lakhsmi N Mittal’s $4 billion bid at the close of bidding on August 15, 2005. But post-close of bidding, it was allowed to raise the offer price to $4.18 billion, which saw PetroKazakhstan, a Canadian oil firm operating in Central Asia, go to CNPC. Kazakhstan, home to 3% of the world’s recoverable oil reserves, has moved in recent years to exert greater management control and secure bigger revenues from foreign-owned oil and gas projects. Kazmunaigas entered the Kashagan consortium as a shareholder in 2005 and has since then doubled its stake to 16.81%. Kashagan (a Caspian Sea field set to produce 370,000 barrels of oil a day), with reserves estimated at 35 billion barrels of oil in place, produced its first oil in September 2013. It was in July 2013 that the Kashagan project—which contains some of the largest oil discoveries made in the world in the past 40 years—was operationalised. CNPC had then entered the scene with the help of the China Development Bank and the China Export-Import Bank. KazMunaiGaz bought a US-based oil company’s 8.4% interest in the project, and this stake in turn was sold to CNPC for a reported $5.4 billion. The Kashagan project took off eight years later than initially planned and with costs nearing $48 billion, double the early estimates.

In Tajikistan, CNPC and France’s TOTAL in June 2013 completed an agreement with Tethys Petroleum Ltd to develop oil and gas assets under the. Bokhtar project. CNPC’s China National Oil and Gas Exploration and Development Corp subsidiary and Total each took a one-third stake in the concession, which Tethys has said may contain 3.22 trillion cubic metres of gas and 8.5 billion barrels of oil. Tajikistan imports more than 90% of the oil and gas it uses, and Dushanbe is eager to develop its domestic resources, much of which lie in the southwest of the country in an extension of the Amu Darya basin, which feeds huge gas fields in neighbouring Uzbekistan and Turkmenistan. Tajikistan’s reserves could meet China’s natural gas consumption for an estimated 24 years. 

The CPEC Conundrum

It is now known that just 6% of what China had promised Pakistan in terms of aid, assistance, and investment between 2001 and 2011 was delivered ($66 billion was pledged in total). And this is because there is no economic rationale to the Kashgar-Gwadar China-Pakistan Economic Corridor (CPEC). For, it is physically impossible to maintain year-long connectivity between China and Pakistan through the Karakoram Highway (KKH), which links Kashghar in Xinjiang with Gilgit and Abbottabad through the Khunjerab Pass. Today, the KKH is functional for five months a year at best because of adverse weather. A landslide and flooding in 2010 blocked the highway for more than one year. China and Pakistan have discussed the possibility of building a parallel highway that will feature extensive tunnels that cut through the Khunjerab Pass, rendering landslides irrelevant, but still making it highly vulnerable to earthquakes. Therefore, this idea of extensive tunnelling seems fanciful-and expensive, estimated by Pakistan to cost more than $11 billion

The KKH presently runs approximately 1,300km (915 miles) from Kashgar, following the valley of the Chez River, the Khunjerab Pass (at an elevation of 4,693 metres or 15,397 feet), Hunza (known as the original Shangri-La) for 310km along the Indus River Valley, and along the (Gilgit and) Kunhar Rivers to Islamabad in the Chillas District of Pakistan. Roughly 494km of it lies in Chinese territory, while the remaining 806km traverse through the highest mountains in Pakistan. An extension of the KKH meets the Grand Trunk Road at Raikot, west of Hassanabdal in Pakistan. On June 30, 2006, an MoU was signed between the Pakistani Highway Administration and China’s State-owned Assets Supervision and Administration Commission (SASAC) to rebuild and upgrade the KKH. According to SASAC, the KKH’s width will be expanded from 10 metres to 30 metres (33 feet to 98 feet), and its transport capacity will be increased three times its current capacity. In addition, the upgraded KKH will be designed to particularly accommodate heavy-laden vehicles in extreme weather conditions. On January 4, 2010, the KKH was closed in the Hunza Valley, thereby eliminating through traffic to China except by small boats. A massive landslide 15km (9.3 miles) upstream from Hunza’s capital of Karimabad created the potentially unstable Attabad Lake, which reached 22km (14 miles) in length and over 100 metres (330 feet) in depth by the first week of June 2010 when it finally began flowing over the landslide dam. Eventually, a new 24km route along the southeastern side of the lake was completed in 2015 and opened to the public on September 14, 2015. The route comprises 5 tunnels and several bridges. The longest tunnel is 3,360 metres in length, followed by 2,736 metres, 435 metres, 410 metres and 195 metres. The Attabad Tunnel was completed on September 14, 2015. 

Had the intent been to ensure all-weather, year-long road connectivity between China and Pakistan, then logically the Khunjerab Pass should have been discarded as an option, and instead focus should have been laid on five other passes of the Karakoram mountain range. These include the Mintaka Pass at over 4,700 metres above sea level just west of Khunjerab, which was used by travellers on the ancient Silk Route; the Shimshal Pass at 4,735 metres that leads to the Shimshal Braldu River Valley; the Kilik Pass (elevation 4,827 metres or 15,837 feet), 30km to the west of Mintaka Pass, which is a high mountain pass between Gilgit-Baltistan and Xinjiang; the eastern or ‘Old’ Mustagh Pass (altitude of about 5,422 metres);  or the 5,600 metre-high ‘New’ Mustagh Pass, about 16km to the west. 

The Silk Road Fund Co Ltd was established in China in December 2014 to extend investment and financing support worth $45.69 billion in commercial loans to all the envisaged CPEC projects and to promote industrial cooperation with Pakistan. This fund management company—set up as a consortium of leading Chinese banks, including the China Exim Bank and the China Development Bank—had initial funds of $10 billion, which have now been raised to $40 billion. The money being offered by China is thus project financing, not aid and not concessionary loans. The Silk Road Fund is injecting the capital into a subsidiary of China Three Gorges Corp. The concessionary nature of the proposed investments comes in when one considers the fact that hardly anybody else is willing to invest in Pakistan. Foreign direct investment into large infrastructure projects in Pakistan is not feasible since no private investor is ready to acquire large stakes in this country, given its internal instability realities. So one has a bilateral commitment from China instead, which is part governmental in that the Silk Road Fund and the China Three Gorges South Asia Investment, a subsidiary of the China Three Gorges Corp.

Out of the pledged $45.69 billion, $33.79 billion has been earmarked for energy projects, $5.9 billion for road construction, $3.69 billion for railway network construction, $1.6 billion for the Lahore Mass Transit, $66 million for Gwadar Port, and a fibre-optic network project worth $4 million. The prioritised, short-term projects involve more than $17 billion in investment. Apart from the 720mW Karot hydropower project between the China Development Bank Corp, EXIM Bank of China and Karot Power Company (Private) Ltd, they include the upgrading of the 1,681km Peshawar-Lahore-Karachi railway line ($3.7 billion); 1,980mW Thar coal-fired powerplants ($2.8 billion); development of two Thar coal mining blocks ($2.2 billion); the Gwadar-Nawabshah natural gas pipeline ($2 billion); imported coal-based 1,320mW power plants at Port Qasim worth ($2 billion); a 900mW solar park in Bahawalpur ($1.3 billion); the Havelian-Islamabad road-link of the KKH ($930 million); a 260mW wind farm at Jhimpir ($260 million); 870mW hydro-electric Suki Kinari project between EXIM Bank of China, Industrial and Commercial Bank of China Ltd and SK Hydro (Private) Ltd; Sahiwal coal-fired powerplant project between industrial and Commercial Bank of China Ltd, Huaneng Shandong Electricity Ltd and Shandong Ruyi Group; and the Gwadar International Airport ($230 million). The Sindh Engro Coal Mining Company, a joint venture of Engro Powergen Ltd and the Sindh government, holds the lease of Thar Block-II coalfields, while its Thar Power Company will construct a series of mine-mouth power plants. In May 2015, Pakistan concluded the implementation and the power purchase agreements for two 330mW projects, which are scheduled to begin commercial operations by December 2017. And the China Development Bank has finalised the terms and conditions for financing a 3.8 million tonnes per annum coal-mining project as well as a power project. On June 25, 2015, Pakistan approved another Thar coal-based mine-mouth power project of 1,320mW capacity, which is being developed by the Shanghai Electric (Group) Corp in partnership with Sino-Sindh Resources, a subsidiary of Global Mining (China) Ltd. Sino-Sindh Resources will receive $1 billion from the Industrial and Commercial Bank of China. This mine-mouth power project, originally planned to start power generation in 2016, has now been rescheduled for commissioning by 2018. A Letter of Intent from the Chinese banks was issued in March 2015 for 75% project financing of the $2.6 billion project, 25% of which will be equity. In addition, Chinese banks will provide financing for two 660mW imported coal-fired power plants at Port Qasim. A financing cooperation agreement was recently signed by the China Exim Bank and the Port Qasim Electric Power Company for the under-construction project. Pakistan’s National Electric Power Regulatory Authority had approved the upfront tariff on February 13, 2015. The other 660mW project at Port Qasim is being developed by the Lucky Electric Power Company. The two projects are scheduled to begin commercial operations within four years. But they are likely to be delayed as a dedicated jetty for each project has to be constructed for unloading the imported coal, and the contracts for them have not yet been awarded. Meanwhile, the Punjab state government has leased 4,500 acres of land to Chinese investors for the development of Phase-2 of the 900mW Quaid-e-Azam Solar Park, to be commissioned in 21 months. The China Development Bank, Exim Bank of China and Zonergy Co Ltd are involved in it. Likewise, the draw-down agreement for the Jhimpir wind project between UEP Wind Power (the borrower) and the China Development Bank Corp (the lender) has been concluded. The project, having achieved financial closure, is scheduled to begin commercial operations in 2016. Given the timelines for completion, these power projects could possibly add reasonable generation capacity to Pakistan’s national grid by 2018, but they would hardly provide any relief to the nation in terms of the fast-growing demand for electricity. And there is no silver lining for consumers as far as the cost of the electricity is concerned. All the Chinese loans will be insured by the China Export and Credit Insurance Corp (Sinosure) against non-payment risks, and the security of the loans is guaranteed by the state. A framework agreement for energy projects under CPEC was recently signed between Sinosure and Pakistan’s Water & Power Ministry to provide sovereign guarantees. Sinosure is charging a fee of 7% for debt servicing, which will be added to the capital cost of a project. For instance, the capital cost of a 660mW project at Port Qasim is $767.9 million. But it goes up to $956.1 million by adding Sinosure’s fee of $63.9 million, its financing fee and charges of $21 million, and interest during construction of $72.8 million; a 27.2% return on equity is guaranteed. Ironically, interest during construction is allowed at the rate of 33.33% for the first year; 33.33% for the second; 13.33% for the third; and 20% for the fourth year. This scenario therefore presents a bleak picture, as the availability of affordable energy will likely remain a pipedream.

Gwadar Port’s Importance To China

Pakistan had identified Gwadar as a naval base site as far back as 1954 when Gwadar was still under Omani rule. Pakistan's interest in Gwadar started when, in 1954, it engaged the United States Geological Survey (USGS) to conduct a survey of its coastline. The USGS deputed the surveyor, Worth Condrick, who in turn identified Gwadar as a suitable site for a seaport. After four years of negotiations, Pakistan purchased the Gwadar enclave from Oman for $3 million on September 8, 1958 and Gwadar officially became part of Pakistan after 200 years of Omani rule. It was offered to the USA for development in the early 1970s, but the US refused to do so. It was only in 2001 that China agreed to co-develop the Gwadar Port by providing $198 million in financial assistance. Gwadar Port was eventually developed by China Harbour Engineering Company at a cost of $248 million between 2002 and 2006. Phase-I covered the building of three multipurpose berths and related port infrastructure and port handling equipment. This phase was completed in December 2006 and commissioned inaugurated on March 20, 2007. Under this phase, the following were constructed: 3 multipurpose berths each with a length of 602 metres and with a combined capacity of bulk carriers of 30,000 DWT) and container vessels of 25,000 DWT, an approach channel 4.5km-long dredged to 12.5 metres depth; a turning basin 450 metres in diameter; one 100-metre service berth; and related port infrastructure and handling equipment, pilot boats, tugs, survey vessels, etc. At the same time, a $200 million Makran Coastal Highway connecting Gwadar to Karachi was completed. Phase-2 of the project, now being built at a cost of $932 million. Will see the construction of 4 container berths, one bulk cargo terminal with a capacity of 100,000 DWT ships, one grain terminal, one ro-ro terminal, two oil terminals (capacity: 200,000 DWT ships each), and one approach channel to be dredged to 14.5 metres depth. Also to be built was a China-supplied oil refinery, plus roads linking Gwadar to Quertta in Balochistan and Ratodeo in Sindh. None of these, however, were implemented, nor was the promised 584 acres of land in Gwadar handed over by the Pakistan Navy to PSA.

Gwadar Port is presently owned by the government-owned Gwadar Port Authority and operated by the China Overseas Port Holding Company (COPHC). Earlier, between 2007 and 2012, it was operated by Singapore’s PSA International. Following the completion of Phase-I, Pakistan had on February 1, 2007 signed a 40-year agreement with PSA International for the development and operation of the tax-free port and duty-free trade zone. PSA International was the highest bidder for the Gwadar port after Dubai’s DP World backed out of the bidding process. In a highly competitive environment, in order to enable Gwadar to compete with its regional peers, the port fees was kept low by allowing a wide range of tax concessions to PSA International to cut operational and business costs. These included complete exemption from corporate tax for 20 years, duty-free imports of materials and equipment for construction and operations of the port and a free economic zone; and zero rate of duty for shipping and bunker oil for 40 years. In addition to these incentives, the provincial government of Baluchistan was also asked to exempt PSA International from the levy of provincial and district taxes. According to this agreement, the Gwadar Port Authority and Pakistan were to get a fixed share i.e. 9% of the revenue from cargo and maritime services, and 15% of the revenue earned from the free-trade zone. PSA International was expected to invest US$550 million in the next five to ten years on creating the operational facilities. The first commercial cargo vessel ‘Pos Glory’ berthed at Gwadar Port with 70,000 metric tonnes of wheat on March 15, 2008. However, by 2011 Gwadar was doing little business as a commercial port, and Pakistan had then asked China to take over the operation. A year later, China confirmed that it would be taking control of Gwadar for a period of 43 years. Pakistan on February 18, 2013 formally awarded a contract for the further construction and operation of Gwadar Port to China. Under this contract, COPHC also won the right to acquire more than 2,000 acres of land.

Work on the port development aspects of Gwadar picked up steam after 2008, when China began sending its warships to the Gulf of Aden for anti-piracy operations. In addition, it had become clear to Beijing in 2011 that it desperately required a dedicated naval logistics support base and an air base for supporting the staging operations of People’s Liberation Army’s (PLA) non-combatant evacuation operations (NEO), such as the one in 2011 that saw China evacuating 35,000 of its citizens from Libya. This is when Beijing started serious work on acquiring such facilities in Djibouti and Gwadar that will support the PLA’s future NEOs that may need to be undertaken in either the Gulf of Aden, or the Mediterranean Sea, or the Persian Gulf.