1.THREE PRESIDENTS ON THE CASPIAN SEA. On May 12, Presidents Vladimir Putin (Russia), Nursultan Nazarbayev (Kazakhstan) and Gurbanguly Berdymukhammedov (Turkmenistan) signed a trilateral declaration in the city of Turkmenbashi on the construction of the Caspian Pipeline, to be launched in 2008. The three countries’ governments are to draft and sign the necessary agreements by September 1, 2007. The agreements envisage modernizing the gas pipeline on the Caspian Sea, which goes from Turkmenistan to Kazakhstan and on to Europe via Russia, building a new one, and expanding the capacity of the Central Asia-Centre pipeline in the section going to Uzbekistan.
The new pipeline will allow Turkmenistan to pump about 90bn cu m of gas via the Russian pipeline network. The current capacity allows pumping no more than 50-60bn cu m from Central Asia.
The agreement has almost fully eliminated the possibility of implementing the trans- Caspian project that is being lobbied by Western energy companies, which want to reduce their dependence on Russia as the largest natural gas supplier to Europe.
In April 2007, President of Turkmenistan Gurbanguly Berdymukhammedov offered Putin to discuss the transit of Turkmen gas across the Caspian Sea. The project stipulates the construction of a gas pipeline with an annual capacity of 30bn cu m along the sea bottom to deliver gas to the Baku- Tbilisi-Erzerum pipeline and on to Europe via the Nabucco pipeline. The project was proposed by the United States back in 1996, but it is not acceptable for Russia, or Kazakhstan, for that matter.
At the end of April, Kazakh Foreign Minister Marat Tazhin said his country refused to take part in the project.
The Russian delegation won, insisting on an alternative project. Moscow can guarantee Turkmenistan stable supply across its territory, rather than along the dangerous route along the Caspian bottom and across the Caucasus. The project is also beneficial for Kazakhstan. After the reconstruction, the existing pipeline will pump at least 10.5bn cu m of gas, and its capacity will be further increased by 20bn cu m by 2012, the Russian president said. Nazarbayev said: “Kazakhstan is always willing to provide oil and gas transit opportunities and now supports the expansion of the gas pipeline network’s capacity.” He also pointed to the transportation issues, saying that a new level of cooperation was necessary to develop such transport corridors as the North-South, which would go from Russia to Iran and the Gulf.
The proved and estimated natural gas reserves on the Caspian shelf of Kazakhstan, including newly discovered fields, may reach 3.3trn cu m, while potential resources amount to 6-8trn cu m. Kazakhstan plans to boost its output by 150% by 2015, from 14.4bn cu m to 36bn.
The Turkmen leader said a solid foundation had been laid for joint projects in the energy sector. He said his country guaranteed gas supply in the agreed amount and within the timeframe, and is also willing to give Kazakh and Russian companies access to its offshore hydrocarbon fields. Turkmenistan plans to increase its gas exports by 25%, to 58bn cu m, this year and is studying ways to diversify supply.
Berdymukhammedov also proposed setting up a railway corridor to connect Russia, Kazakhstan, Turkmenistan and Iran. It “will give us access to Turkey and the Gulf countries,” he emphasised. He came up with yet another initiative: to set up a ferry service between Aktau (Kazakhstan), Turkmenbashi (Turkmenistan) and Astrakhan (Russia).
At present, Turkmenistan does not have much choice with regard to supply routes.
But then there is China, with its projects to redirect part of the exports.
The Chinese state-owned company CNPC plans to begin the construction of the Chinese section of the gas pipeline that will pump Turkmen gas to the Chinese province of Guangzhou in August-September 2008.
The planned length of the new pipeline is 6,500 km, more than two times longer than the West-East pipeline. Investment in the project has been estimated at $10.35bn, all of it to be made by China.
In April 2006, Turkmenistan and China signed an agreement whereby Beijing undertook to buy 30bn cu m of Turkmen gas annually. In compliance with the document, CNPC will explore the part of the Turkmen territory on the right bank of the Amudarya River and launch gas production there, and also build a pipeline to China by the end of 2008.
Earlier this month, Kazakhstan’s Energy and Mineral Resources Minister Bakamount in 2008. Kazakhstan’s stateowned company Kazmunaigaz and US Chevron have expressed interest in exploring and developing Turkmen fields. Both of themhave Ashgabad’s principal agreement.
Many experts point out that it was economic expediency that was the key factor in the Kazakh and Turkmen governments’ choice of the Russian variant. So foreign companies are unlikely to put their stakes on a route that may not be built at all.
2. KAZAKH OIL TO GO VIA RUSSIA Nursultan Nazarbayev’s decision to transport all Kazakh oil across Russia, announced at his meeting with Russian President Vladimir Putin, may be the death of the alternative route across the Caspian Sea bottom, the Caucasus and Turkey.
Moreover, it jeopardizes the construction of an oil pipeline from Central Asia along the same route. This, of course, has brought gloom to Azerbaijan and all other countries that hoped to ship Kazakh oil “bypassing Russia.” Their hopes are now vested in foreign firms developing oilfields in Kazakhstan.
Sabit Bagirov, head of the Centre of Political and Economic Research, Baku, commented on Nazarbayev’s statement as follows: “The oil produced is divided into the contractor’s (foreign companies’) share and the government’s share.” “The government of Kazakhstan may dispose only of its share, while it is said his country was interested in laying a Turkmenistan- China gas pipeline across its territory. One of the possible routes goes via Uzbekistan and southern Kazakhstan.
Russia would not object if the new pipeline were based on the existing line of the Bukhara-Urals pipeline controlled by its as monopoly, Gazprom. However, judging by the agreements reached in April 2006, a new pipeline will be built in Uzbekistan and Kazakhstan that will not include the Bukhara-Urals line.
The Uzbek party has not yet commented on the signing of the trilateral joint declaration on development of gas transportation capacities in Central Asia. Ashgabad has yet to decide howmuch it can boost its gas exports. Russia will buy from Turkmenistan up to 50bn cu m this year, and a similar foreign companies’ prerogative to dispose of theirs and they can ship their oil along a route that is profitable for them,” he said referring to the Baku-Tbilisi-Ceyhan (BTC) pipeline.
This seems to show that these companies do not have to obey Nazarbayev’s decision and may ship their oil where they want.
Baku cannot make any other forecasts, because the capacity of the reconstructed BTC pipeline is, according to our estimates, 1mn barrels per day (bpd).
However, Mukhtar Babayev, general manager of the marketing and economic operations department with the State Oil Company of Azerbaijan (GNKAR), said: “Azerbaijan does not have the necessary amount of oil yet”, and so “the pipeline is not filled to capacity for the time being.” It is now pumping 800,000 bpd. This means that as its hopes for Kazakhstan and Turkmenistan have been dispersed, Baku has to admit that money on the reconstruction was wasted.
Azerbaijan is actively lobbying US interests in the dialogue of energy security in the Caspian region. If all went as it wanted, supply from the region would make up 5%-10% of the global energy market.
Azerbaijan fully ceased oil transit across Russia at the end of 2006. Asia’s growing demand for new energy sources is in line with Azerbaijani President Ilkham Aliyev’s desire to use the country’s oil and gas leverages and revenues to reinforce its “independence” from Russia. This is why he was all for the construction of another pipeline bypassing Russia, the trans- Caspian pipeline that would connect Azerbaijan to Turkmenistan and Kazakhstan.
The latter two were also interested in alternative routes at first. On March 13, Turkmen President Gurbanguly Berdymukhammedov said in a phone conversation with Aliyev that he was willing to develop Azerbaijani-Turkmen relations. If the parties had managed to solve the problems of the Caspian Sea demarcation and Azerbaijan’s debt for Turkmen gas supply before 1998, trans-Caspian gas transit could have become a reality. But Kazakhstan and Turkmenistan eventually gave up that variant.
Now Russia is obviously getting the upper hand in Central Asia over the US, whose intentions in the region are apparent.
A relevant example is Turkmenistan, which preferred neighbours to the promises from overseas .
The unexpected fast-formed alliance of Russia, Kazakhstan and Turkmenistan, which can also embrace another energy-rich Central Asian republic – Uzbekistan – cannot but tilt the balance of forces in Russia’s favour even in the Caucasus, at least economically.
By the way, it was economic expediency that was the key factor that influences the Kazakh and Turkmen governments’ decision to choose the Russian variant, experts recall.
3. GAZPROM BEYOND COMPETITION Before and after the signing of the agreement between Turkmenistan, Kazakhstan and Russia on the construction of a pipeline along the eastern coast of the Caspian Sea to export Central Asian gas to Europe, some experts said it was inexpedient.
They based their assessments on economics, recalling the alternative route along the Caspian Sea bottom, Azerbaijan, Georgia, and Turkey.
At the same time, their opinion was influenced by a purely political aspect – the desire of some European countries and the United States to end what they call “energy dependence on Russia.” Yet most experts, and not only Kazakh, Turkmen and Russian government analysts, are unanimous that the transit route across Russia proposed by Gazprom offers numerous economic and political advantages even for Western Europe.
Up to 85% of its total length, including Kazakh and Turkmen regions on the Caspian coast, is made up of existing pipelines that only need partial reconstruction; it will only be necessary to build connecting lines between the countries.
The project will spur the development of Russia’s rolled steel production, because Russia will be responsible for the technological part of its implementation.
Besides, the transit route across Russia is almost two times shorter than the one across the Caucasus and Turkey. And it has almost no political risks, as opposed to the unstable Caucasian region.
The project will also eliminate competition between the gas-rich countries in the CIS on the European and post-Soviet gas markets. The pipeline’s annual capacity (up to 90bn cu m) will ensure transportation of the entire export output from the coastal areas of Turkmenistan, Kazakhstan, western Uzbekistan and some Russian regions.
Uzbekistan and, later, Iran will almost certainly join the project for geographical, technological and political reasons.
Meanwhile, the project of a trans-Caspian pipeline bypassing Russia – across the Caspian Sea, the Caucasus and Turkey – proposed by the US, the European Union and Turkey is less profitable and less politically secure.
Up to 80% of its length will require expensive construction, as most of it will be laid in seismically unstable areas, along the Caspian Sea bottom and the Bosphorus.
Almost one third of the route is to be laid in east and southeast Turkey, where Kurd insurgents are growing stronger and there are territorial disputes with Armenia. Many analysts view the current developments in Turkey as the harbinger of a civil and ethnic war, which, of course, increases the project’s political risks.
The route’s average annual capacity – 50bn cu m – is not enough to pump all export gas from the Caspian region, and its profitability will depend on the growth rate of gas production in Azerbaijan and Turkmenistan.
Due to technological reasons and deteriorating relations between Uzbekistan and, especially, Iran with the West, their participation in this project is impossible. It is quite likely that Ankara will demand faster admission in the European Union and insist that the EU leadership “forget” its requirements to the country in exchange for a larger amount of Central Asian gas transited to Europe.
4.WILL RUSSIAN OIL SUFFICE? A year has passed since the groundbreaking ceremony at the East Siberia-Pacific Ocean oil pipeline. “About 1,000 km of the pipeline has been laid,” the Russian president’s plenipotentiary in the Siberian federal district, Anatoly Kvashnin, said at a meeting at the Natural Resources Ministry in May.But he immediately asked, “Will we be able to fill it on time?”Here are expert answers: Transneft: “About one third of the first pipeline has been built; we have yet to build seven oil pumping stations, an oil rail loading in Skovorodino, and an oil terminal near Nakhodka. All of them are to be completed by December 2008. The management of the project’s operator is positive that the plans are plausible: the construction is proceeding as scheduled. The resource base of the project includes the supply of 24mn metric tons of crude from West Siberia and 56mn metric tons from East Siberian and Yakutian fields, most of which, however, are not being developed yet. The Chinese offshoot is expected to pump 30mn metric tons of oil a year and the Skovorodino- Kozmino Bay, 50mn. The aggregate capacity of the pipeline will be 80mn metric tons annually.”
Pyotr Sadovnik, deputy head of the Russian Agency for Subsoil Use: “There will be enough reserves for the first line of the project. East Siberia’s explored oil reserves allow producing about 20-25mn metric tons a year. Geological exploration will significantly increase the reserves.”
Dmitry Lukashov, an analyst with the Aton brokerage: “East Siberia’s oil will certainly not be enough to fill both pipelines of the project. According to optimistic estimates, it can yield only about 50mnmetric tons a year, which will be enough only at the initial stage.” German Khan, executive director, TNK-BP: “By 2015, TNK-BP will be producing up to 6mn metric tons of crude in East Siberia annually. It plans to conduct large-scale seismic and geological exploration in 2007-2012. It will allocate $500mn for the purpose, expecting to increase its reserves by 90mn metric tons (the current reserves are 450mn).”
Alexei Kuznetsov, vice president for research, Rosneft: “Rosneft’s output will reach 20mn metric tons by 2010 and about 40mn by 2015.”
Alexei Zhagrin, vice president for oil production and geology, Slavneft: “Slavneft has promised to produce 5mn metric tons for the pipeline by 2013. RussNeft’s president has promised to ensure 26mn metric tons by 2011. Given that there may be some help from West Siberian fields, the required amount seems to be ensured.”
Alexei Varlamov, Deputy Natural Resources Minister: “East Siberia’s resource potential allows ensuring an oil output of 25mn to 50mn metric tons.”
