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China: Separatist Crackdown Could Taint Foreign Companies

STRATFOR, The Global Intelligence Company
http://www.stratfor.com

29 May 2002

Summary

International criticism of China's crackdown on alleged ethnic Uighur separatists has not waned despite Beijing's insistence that its effort is vital to the success of the international anti-terrorism campaign. Beijing is willing to risk the criticism to attract foreign investment to its oil and gas sector, but companies such as Royal Dutch/Shell face the danger of being painted with the same anti-human-rights brush.


Analysis

At an international press conference May 27, Chinese regional officials once again explained the necessity of cracking down on alleged ethnic Uighur separatists in the northwestern Xinjiang Autonomous Region. Wang Lequan, secretary of the Communist Party Committee of Xinjiang, said only a "harsh crackdown" on separatist forces can ensure peace among different ethnic groups and promote continuous economic development. Wang added that China's campaign in Xinjiang was part of the global campaign against terrorism, and therefore also vital for the stability of China's neighbors and the world.

Despite Beijing's repeated attempts to tie its Uighur crackdown to the U.S.-led war against terrorism, China continues to face criticism for what some human rights and international groups consider an ethnic war in western China. Yet for Chinese officials, peace and stability in Xinjiang are vital for further development of oil and natural gas resources, which in turn will spur economic growth in that region.

This chicken-and-egg scenario of stability and economic growth has prompted Beijing to weather the international human rights criticism in the interest of ensuring the security of foreign investors. But Chinese officials must walk a narrow line to keep foreign companies from facing the same condemnation.

Xinjiang is one of the top oil- and gas-producing regions in China, and its development is a key part of Beijing's strategy for national unity and greater energy independence. Xinjiang is the largest crude oil production base in western China, and it stands fourth overall in the country after the eastern provinces of Heilongjiang, Shandong and Liaoning, according to China's Xinhua news agency. Also, Xinjiang currently boasts 526.7 billion cubic meters of proven natural gas reserves, of which at least 372.5 billion cubic meters are recoverable. Over the coming years, Chinese officials expect the proven reserves to rise to over one trillion cubic meters with additional exploration.

Although this represents a large storehouse of vital domestically produced natural gas and oil, Xinjiang is far from any industrial or population centers in China. To get the gas to the markets in the eastern coastal provinces, Beijing intends to build a gas pipeline from Xinjiang to Shanghai, nearly 2,500 miles away. This so-called West-East gas pipeline will be the second-largest infrastructure investment in China, after the massive Three Gorges dam project. It is expected to cost between $18 billion and $20 billion, a massive bill the government has been unable to foot alone.

PetroChina, China's largest crude oil and gas producer, in February signed an intermediate accord with a consortium led by Royal Dutch/Shell to build and operate the West-East pipeline. The Shell consortium, which will hold a 45 percent stake, comprises Shell International Gas, Gazprom, Stroytransgaz and Hong Kong China Gas Co., and it remains open to the inclusion of ExxonMobil. Of the total cost, $5.5 billion is earmarked for construction of the pipeline, $3.1 billion for gas extraction and $8.4 billion to $9.6 billion for construction of a gas distribution network.

Construction on the first section, running from Jingbian, in Shaanxi province, to Shanghai is scheduled for completion in 2004, with the second section from Lunnan, Xinjiang, to Jingbian expected to be operational by early 2005. By 2010, when it reaches full operational status, the pipeline will carry as much as 20 billion cubic meters of natural gas a year.

For Beijing, the pipeline not only will reduce the country's dependence on foreign oil and gas but also will serve as a way to vitalize western China, thus reducing tensions between the prosperous east coast and the languishing central and western provinces. Regional economic disparities have long been a source of instability in the country, and Beijing is banking on the pipeline's construction and several other large infrastructure programs in the west to spur international investment in China's interior.

But the threat of terrorism and social instability also weakens China's ability to attract foreign businesses to its Wild West- style regions. After a series of bombings and attacks by suspected Uighur separatists in Xinjiang and elsewhere in the mid-1990s, the government intensified its crackdown on the Uighurs. Although largely successful in quelling overt acts of subversion, Beijing has a new fear: that Uighur militants who were training in Afghanistan will now begin trickling back into China after the collapse of the Taliban regime.

With construction on the vital West-East gas pipeline just beginning and energy investment into Xinjiang on the rise, the last thing Beijing wants to see is a resurgence of the separatist-linked violence that hit the region from 1996 to 1998. Ironically, the same event that may force Uighur militants abroad to return to Xinjiang -- the U.S. war against terrorism -- at first appeared to offer the perfect opportunity for Beijing to intensify its crackdown in the region without endangering its international image.

But this calculation has proved inaccurate, as the United States has not recognized the Uighur separatist movement as having any links to international terrorism or al Qaeda. Beijing cannot even get Washington to hand over 300 alleged Uighur militants captured by U.S. forces in Afghanistan.

Despite the U.S. position, Beijing feels that it must continue to suppress separatist elements or any other potential challenge to the regime in Xinjiang. The West-East gas pipeline is vital for greater energy independence and for Beijing's ability to hold together the disparate regions of China.

But in ensuring the security of foreign investments, the government risks opening a new can of worms: Foreign investors like Shell could be targeted by the same groups criticizing China's human rights record. With the pipeline itself expected to yield minimal returns on the investment -- and that is over a long period of time -- such foreign oil and gas companies could find the potential costs of remaining in the project outweigh the benefits.

(c) 2002 Strategic Forecasting LLC. All rights reserved.


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