Energizing Central Asia: Caspian Partnerships Will Pay Off

The Caspian Basin’s large oil and gas reserves have not only been long coveted by the United States, Europe, China and India, but are also seen as the means by which the region can be lifted out of poverty. At the same time, the desire for influence in the Trans-Caucasus and Central Asia due both to oil and gas as well as concerns about Islam have led various commentators to call the competition among major countries a new version of the 19th century Great Game. A glance at a map reveals the problems of developing and exporting the region’s natural resources – and the key role played by Russia.

Russia’s relations with the other three former Soviet republics on the Caspian Sea have been greatly affected by legal disputes over the continental shelf and deeper basin, as well as the territorial waters. The littoral countries have appealed to international law regarding the status and legal regime governing the Caspian Sea in their attempts to bolster their own economic, commercial and security interests as well as to secure access to its subsurface resources. Even the legal regimes governing ownership of, and access to, the Volga Delta and the River Volga/Baltic Sea Canal and waterway have been contested.

Some of these have been resolved. For example, in May 2002, the presidents of Russia and Kazakhstan agreed to a protocol to a treaty signed four years earlier that had delineated the northern part of the Caspian seabed with regard to the countries’ sovereign rights to subsurface use. The protocol opened the way for the development of the Kurmangazy field, which fell under Kazakhstan’s jurisdiction. Oil and gas reserves at Kurmangazy could be anywhere between 0.55 and 1.8 billion tons (4 to 13 billion barrels) depending on the data source.

The protocol determined that exploration and production at the field would be carried out by fully authorized organizations of both countries on an equal footing. In 2003, the two governments appointed Rosneft-Kazakhstan, a subsidiary of Russian state-owned Rosneft, and KazMunaiTeniz, a subsidiary of Kazakh state-owned KazMunaiGaz, to the task and in July 2005, a Production Sharing Agreement (PSA) on the Kurmangazy structure was signed by Rosneft-Kazakhstan, KazMunaiTeniz and Kazakhstan’s Ministry of Energy and Mineral Resources.

But while territorial disputes between the five littoral states of the Caspian held up research, exploration and development after the collapse of the Soviet Union, various technical problems also had to be overcome. In the 1990s, exploration bottlenecks existed because drilling rigs could not be brought in easily and quickly to the landlocked Caspian Sea, and some modern rigs were too large to negotiate the rivers anyway. But now more emphasis is placed on exporting the oil and gas from those fields already developed, and this is raising all sorts of geopolitical as well as commercial problems. Moscow would clearly like to retain economic and political control over the Caspian region’s energy by exporting oil and gas through pipelines running across Russian territory, largely reflecting the status quo, but Moscow is also concerned that it may lose its influence in the years and decades ahead.

Turkmenistan’s huge natural gas reserves are currently exported to Europe via pipelines running north through Russia, thus allowing Russian energy giant Gazprom to impose its own prices, which are below world levels, on Ashgabat. Gazprom is keen to access Central Asian gas, not least because it wants to expand gas exports to Europe, but also because in recent years it has failed to invest enough in developing Russia’s own huge gas reserves. Buying cheap and selling on at a higher price is clearly an easy option.

On the other hand, new southern routes to the Persian Gulf and international sea lanes are ruled out by political considerations. Turkmenistan cannot export gas through Iran because of the Iran-Libya Sanctions Act (ILSA), which was originally passed in 1996 and renewed in 2001. While the sanctions on Libya have been rescinded following Muammar Gaddafi’s renunciation of his country’s nuclear program and rapprochement with the United States and the UK, ILSA still applies to Iran and allows Washington impose sanctions on companies investing there.

As a result, international companies and investors are reluctant to get involved in the region, although the U.S. position looks ambiguous. Speaking at an event in Washington in March, David Merkel, Director for Aegean, Caucasus and Central Affairs on the National Security Council from 2005 until February 2007, said that while any firm that helps build a pipeline to Iran could face sanctions under U.S. law, pumping the oil itself might be exempt.

The other option for Turkmenistan is a pipeline to the south through Afghanistan, but this hardly looks feasible for the foreseeable future given the ongoing conflict in that country.

Kazakhstan faces similar constraints, since its pipelines to the West also run through Russia. During his official visit to Moscow in March, President Nazarbayev said that Kazakhstan exported 43 million tons of crude oil and 24 billion cubic meters of gas through Russian pipelines. Nearly a year before, in April 2006, Moscow and Astana signed a transit agreement under which oil from Kazakhstan would be piped to Europe through Russia. This agreement will see deliveries of crude oil through the Baku-Novorossiisk pipeline owned by the Caspian Pipeline Consortium (CPC) increase to some 67 million tons per year, more than double the present throughput.

Azerbaijan, on the other hand, has a common border to the north with Russia, but the construction and operation of the Baku-Tbilisi-Ceyhan pipeline has given it an alternative export route that avoids Russia completely.

However, the death last year of Saparmurat Niyazov, the president of Turkmenistan, has opened up another long-considered option, that of an underwater pipeline across the Caspian Sea. Long favored by Azerbaijan, Baku is now trying to persuade Ashgabat and Astana to make a firm commitment to constructing the pipeline. But Astana is fully aware that Moscow is firmly opposed, and will therefore proceed cautiously. Kazakhstan has a long common border with Russia, a large Russian population as well as many trade ties with Moscow, so antagonizing Russia is hardly in its interest.

Kazakhstan also has another option, which is to export its energy to China. In fact, Kazakhstan began exporting Caspian oil to China by rail as far back as 1993, and in 2005 exported about 30,000 barrels per day (bpd) to China via the Alashankoy rail crossingСbut this volume is obviously a far cry from the 200,000 bpd Russia exported to China in the same year. The proposed construction of pipelines to China, however, will introduce a whole new ball game that could lead to friction between Moscow and Astana.

This is true, up to a point. While Moscow has been pursuing increasing resource nationalism, major Russian energy companies are not only working on developing oil and gas fields in the Caspian basin, but are also involved in various infrastructure projects, for instance by holding stakes in the Caspian Pipeline Consortium. So even if Kazakhstan does increase its exports to China in the years ahead, Russia will still benefit.

KazMunaiGaz, Kazakhstan’s national oil and gas company, is working on a study together with the China National Petroleum Company to assess the feasibility of a gas pipeline to China capable of pumping 30 billion cubic meters a year. The first phase, due to become operational in 2009, will carry 10 billion cubic meters a year, with the second phase due to begin in 2012.

With regard to oil, CNPC, China’s biggest oil producer, and the Kazakhstan National Petroleum and Natural Gas Company (KMG), are already in the midst of financing and building a pipeline from Kazakhstan to China. The first section was completed in 2003 and runs across Western Kazakhstan from the Aktobe oil fields to the oil hub at Atyrau. Construction began on the second segment of the Kazakhstan-China pipeline in late September 2004 and was completed in November 2005. The Chinese side is responsible for filling the pipeline from its own oil fields in Kazakhstan. However, the crude exported through the Kazakhstan-China pipeline will account for less than 5 percent of China’s total needs. In June 2005, a Kazakh official admitted that, in spite of the Kazakhstan-China and Baku-Tbilisi-Ceyhan pipelines, Kazakhstan would still need additional export capacity of some 300,000 to 400,000 barrels per day by 2011. But further expansion eastwards seems to have been ruled out, since Nazarbayev said in June 2004 that he would prefer an export pipeline running through Iran to the Persian Gulf.

Of the three other former Soviet republics on the Caspian Sea, it is Turkmenistan that suffers most from its geographical position. Kazakstan and Azerbaijan have other options that they are exploiting and will explore further in the future.

On the other hand, Baku, Astana and Ashgabat have good ties to Moscow and know that Russia’s economic growth – and hence its clout generally – looks set to continue. This understanding will temper their own resource nationalism and also render U.S. policy to encourage these countries to go their own way at the expense of Russia much weaker.

The geopolitics of energy in and around the Caspian basin in the years ahead are thus likely to be characterized by a combination of resource nationalism, interdependence vis-a-vis Moscow, commercial gain and cooperation on a wide range of projects from exploration and production to building the infrastructure required to transport oil and gas over huge distances to thirsty markets in Europe and Asia.

Ian Pryde is the CEO of Moscow-based Eurasia Strategy and Communications.

Special to Russia Profile, an online and monthly print magazine dedicated to Russia and published jointly by RIA-Novosti and Independent Media, Moscow.

 

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