June 09 - 15, 2008

After the first Gulf war, Islamabad realized the need of constructing a deep-sea port at Gwadar that would have the potential of handling traffic from the ports of Bangladesh, Sri Lanka, East Africa, Oman, UAE, Qatar, Bahrain, Saudi Arabia, Kuwait, Iran, Iraq and the land-locked countries of Afghanistan, Tajikistan, Kyrgyzstan, Uzbekistan, Turkmenistan and Kazakhstan. Today, first phase of the port construction project at Gwadar has been completed and Pakistan has planned a mega oil city in Gwadar to make it the biggest crude and refined oil storage base in the region. In 2001, China had pledged $50 billion investment for two-phased mega seaport project at Gwadar. The lion share of the investment had been planned for the petrochemical industry.

An oil city in Gwadar is of strategic importance. Strategically located Gwadar has greater scope as a free oil port in the region. It has become the China's most favorable choice for oil trade and the Beijing has planned for bringing at least five oil and gas pipelines to Gwadar from Central Asian Republics (CARs). It shows that Central Asia's oil and gas reserves have become the focus of energy-hungry China, which is increasingly looking to Pakistan for oil and gas supplies. A major oil refinery at Gwadar would further facilitate China's oil imports, as China actually wants to turn Gwadar into a transit terminal for Iranian and African crude oil imports. China wants to build a refinery and petrochemical complex with an initial 10m tons per year (200,000bpd) capacity, later expanding to 21m tons.

Pakistan has already allocated 12,500 acres of land in Gwadar for the proposed oil city. The land would be given on lease at nominal rates to the parties interested in establishing the refineries or investing in oil logistics and storage facilities. The petrochemical city is the part of the proposed mega oil city. The petrochemical city is a two phased project. In the first phase, the petrochemical city will be set up. In the second phase, the biggest refinery along with petrochemical logistics and storage complexes will be set up in the city. In the first three years, the refinery will be able to refine 10.5 million tpa of oil. In the first phase its capacity would be increased in 7-9 years to refine up to 21 million tons of crude oil. In the second phase, the capacity of the refineries would be enhanced in 15 years to refine 63 million tons of crude oil.

Great United Petroleum Holdings Company Limited (GUPC) of China is carrying out the feasibility study of the strategic project of petrochemical city in Gwadar. The project involves an initial investment of US$12.5 billion. The Chinese company had started the work on the project in December 2006. Prior to initiating the construction of the oil city, another Chinese company will initiate the project for power generation and water desalination. The GUPC would also build 1,000-2,000 service stations in Pakistan as service terminals for the petrochemical city.

Under a memorandum of understanding (MOU) signed between Pakistan and the China, the GUPC is committed to conduct the feasibility study and preparation work for the project, followed by a formal agreement between both the countries to materialize the petrochemical city project. GUPC is the China's first private petroleum group that was established in June 2005. GUPC, the largest private petroleum enterprise of China, is actually the conglomerate of nearly fifty private petroleum enterprises as shareholders and a capital of about US$603.9 million. China's petroleum industry has been monopolized by large state- owned enterprises such as the China National Petroleum Corporation (CPNC), China Petrochemical Corporation (Sinopec) and China National Offshore Oil Corporation. The establishment of GUPC through unification of private enterprises has given impetus to breaking the monopoly of China's petroleum industry and brings more competition to the market.

The implementation phase of the first five-year trade and economic cooperation action plan between Pakistan and China also includes the incentive package for Chinese companies to invest in petroleum exploration and production sector and re-positioning of the over-capacity of Chinese petroleum services industry in Gwadar Port Energy Zone (GPEZ). Islamabad is finalizing the incentive packages to attract Chinese companies to facilitate relocation of Chinese petroleum services industry in GPEZ. The incentives may include free land for refinery construction, unlimited duty-free import of crude for processing, sales tax exemption for refined product exports and infrastructure. A Pak-China Energy and Trade Co-operation Promotion Association has been proposed to be established for steering these plans. The association would be broad based and include members from the oil and gas sector and the power sector. Pak-China Joint Investment Company has to finance the projects. The two countries have already announced establishment of Pak-China Joint Investment Company last year.

The Chinese petroleum chamber has also shown keen interest in the $12.5 billion investment plan for materializing the petrochemical city in Gwadar. It has indicated shifting of energy-related industry and its access capacity to GPEZ. The two countries will set up a joint venture consortium to finalize the preferential policy and tax incentives package for the establishment GPEZ. It has also been estimated that GPEZ can attract investment of around $13 billion. The proposed zone will comprise of an oil refinery, LNG terminals and petrochemical industry. Beijing has already expressed its willingness to construct an oil refinery in Gwadar, which would refine 60,000 barrels of oil per day.

Why does China want shifting of energy-related industry to Gwadar? In fact, Gwadar offers a 'trade corridor' to meet Beijing's energy requirements. The deep-sea port of Gwadar will pave the way for Chinese to make inroads into energy rich Central Asia. The southern Chinese province of Xingjian is only 2,500 kms from Gwadar port in Balochistan. This makes it feasible and cost-effective for China to carry out trade through this port, which is close to the Gulf, Central Asia, Europe and Africa.

Chinese stakes become 'strategic' in Gwadar, as it would be the endpoint of all the gas pipelines from Central Asian states including multibillion dollar gas pipelines reaching either from Daulatabad's fields in Turkmenistan, South Pars fields in Iran or from Qatar. China needs Gwadar port facilities for future oil and gas import. Pakistan and China have also held talks on the construction of the strategic pipeline from Gwadar to China's borders enabling it to import oil from Saudi Arabia.