How Shah-Deniz is changing the equation -- Part 2

Jul 10, 2000 02:00 AM

by Dr. Robert M. Cutler

The fall-out from the Shah-Deniz gas find in Azerbaijan's offshore zone continues. Part one of this series examined developments related to the Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan and Iran's problems with Turkmenistani gas imports. The evident withdrawal of PSG from the TCGP has brought to the surface many subterranean possibilities that have been silently percolating. A few weeks ago, by contrast, it was generally thought that Turkmenistan would be left only with Gazprom as a gas-buyer and would have to take whatever price it was offered, other suitors have presented themselves.

TCGP "Redivivus" and its Alternatives
Most prominently, Royal Dutch Shell, which joined the TCGP consortium in late 1998 about a year after PSG was created by Bechtel and the GE Capital Group, has gone back to President Sapurmurad Niyazov of Turkmenistan with several new proposals of its own for the pipeline's construction. The contents of these proposals have not been publicly discussed, but it is known that they are multiple and of sufficient interest to retain Ashgabat's interest. Shell's public declarations in favour of proceeding can only be described as eager.
At the same time, Niyazov again discussed in Ashgabat, with President Jiang Zemin of China, a project first suggested in the mid-1990s and then reanimated in 1997 when the Chinese National Petroleum Company (CNPC) made its first and most striking forays outside the country in search of properties to feed China's growing, perhaps soon to be insatiable, energy thirst. This gigantic project proposes construction of a pipeline stretching 5,730 km (longer than the distance from New York City to Los Angeles), passing from the right bank of the Amu-Darya River in Turkmenistan across Uzbekistan and Kazakhstan to China.
This pipeline would cost about $ 11 bn to construct for delivery of 28 bn cm of gas annually. In fact, this is clearly a long-term idea that is still only in the stages of preliminary study by an international consortium including US, Chinese, and Japanese companies. The Chinese leadership considers it as an alternative to a proposed Russian gas pipeline from East Siberia. Given the increasing co-operation between Russia and China, the East Siberian option must be considered more promising at present. It is also slightly less immense.
The remainder of this article will focus on an issue related to Chinese co-operation with Turkmenistan but will concern Shah-Deniz only indirectly. This issue is the increasing intrusion of China into Central Asian's growing energy industry. Jiang's just-completed diplomatic tour of Central Asia offers an opportunity to review aspects of this rapidly evolving development. In particular, China's role in Kazakhstan's difficult search for oil export routes will be examined. It will be clear at the end of the article how this theme links back up to Shah-Deniz.

Turkmenistan's Chinese Option
In early July, when Jiang visited Ashgabat on a Central Asiantour, a gas pipeline from Turkmenistan to China was on the agenda. This project first came up for discussion in late 1997 and early 1998, as CNPC made its first forays into Central Asia in a quest to slake China's growing energy thirst, which is sure to increase over the first decade of the 21st century.
If Beijing's entry into the World Trade Organisation (WTO) is successfully accomplished, then energy demand can be expected to accelerate still more rapidly than heretofore expected. That is because WTO membership will probably facilitate the entry of the global automotive industry into China, including both imports into China and the eventual construction of automotive plants on the mainland. This in turn would likely create wide demand for automobiles, particularly since market saturation is quite low. This will only increase pressure on energy supplies in the country, particularly since it is the burgeoning transportation sector that already is anticipated to outstrip other sectors in rate of growth ofenergy demand. What this will do to global warming, in turn, can only be guessed at.

China's Problems in Western Kazakhstan
China is continuing to experience difficulties in other projects in Kazakhstan. Despite winning privatisation contests for the regional oil producers Aktobemunaigaz (AMG) and Uzenmunaigaz (UMG) nearly three years ago, the process of finalising the take-over agreements have proven difficult. Nor would China's experience be unique in this. The US energy company LaTex Resources tried in the mid-1990s to work with UMG to rehabilitate the latter's wells with Western capital, technology, and expertise. However, UMG informed LaTex that it considered the latter to be in breach of contract after receiving that investment, declined to advance the 1.5 mm barrels of crude agreed and informed one of LaTex's partners of its intention to alter further the terms of the service contract.
Moreover, Chinese management policies continue to sow ethnic resentment in Kazakhstan. Two thousandKazakhstani workers, laid off en masse in 1999, have held social protests at the AMG-UMG complex, demanding their jobs back or financial compensation from CNPC. Despite reassurances from CNPC's deputy chairman in April of this year, it is not clear that the matter has been resolved. Indeed, it is not at all clear where the capital would come from, insofar as CNPC has been told by the Chinese government to operate on a strict for-profit basis and that original Chinese investments contracted in the take-over deal, apparently still not realised, were to have covered wage arrears and other debts, ecological rehabilitation and other social costs as well as personnel training, all on top of investments in production.
Little if any progress seems to have been made on the $ 3.5 bn project to build a pipeline from western Kazakhstan to Karamai (Xinjiang), highly touted three years ago with a projected annual volume of three mm barrels, which was an integral part of the contract signed by CNPC in the AMG-UMG acquisition. Last year, China accelerated construction of its part of the pipeline in Xinjiang, reaching to the border with Kazakhstan, but it appears that not a single kilometre of pipe has been laid in Kazakhstan itself.
China did experiment with rail shipments from these fields in western Kazakhstan to western Xinjiang in 1997. But the shipment costs were excessive, and the only question was how long China would continue to subsidise the loss in order to keep its hand in the game. China's enthusiasm for the project declined as production problems at AMG became evident in 1998. The projected 1998 level of approximately 700,000 barrels was not attained because of problems finalising the terms of the take-over contract. Earlier this year CNPC, citing high transportation costs, declined to purchase any oil at all from AMG.

Kazakhstan's Alternatives to the China Option
Despite the problems with the AMG-UMG field, Kazakhstan and China have begun co-operating recently to test a different rail route, one originating at the Kumkol field, which is being developed by a joint venture mostly owned by Hurricane Hydrocarbons, a Canadian firm that recently came out of bankruptcy protection. Hurricane's oil had previously been shipped by the Shymkent refinery, which is now jointly owned by Hurricane and CNPC. Following this test, another Hurricane affiliate, the Canadian-Kazakhstani joint venture Hurricane Dostyk, sought to open a terminal at the Druzhba railway station on the border with China with a projected annual handling capacity of a little under 200,000 barrels.
Kazakhstan is still exploring the China option only because Russia is hesitating to increase the country's quota access to the Russian pipeline system. This hesitation comes despite Kazakhstan's readiness to upgrade the Atyrau-Samara line from 1.5 to 2 mm barrels per year and despite ready financing and throughput guarantees already obtained by Kaztransoil from major producers in Kazakhstan.
Russia's reluctance to upgrade the Atyrau-Samara pipeline is generally overlooked. Yet its significance lies in the fact that it encourages consideration of plans for the building of a spur from Atyrau to Baku that could take oil from the Vostochny Kashagan offshore field in the North Caspian. President Nursultan Nazarbayev asserted that the primary task of his government has now become to securing stable export routes. Not only did Nazarbayev advocate signing a long-term contract with Russia for the Caspian Pipeline Consortium (CPC) link from Tengiz to Novorossiisk, but also he asserted the need, even in addition to expanding the Atyrau-Samara pipeline, to join the Baku-Ceyhan project. This would mean building a link from Aktau on Kazakhstan's east Caspian shore across the sea to Kazakhstan.
This hesitation by Russia also means that a line from Atyrau could take North Caspian oil to Baku. The mere idea of such a connection makes both possibilities (from Vostochny Kashagan and from Aktau) more feasible. Also, both these possibilities enjoyan advantage not shared by a still unrealised export route through Iran, about which there has for years been continuing talk (but only talk). This is the fact that any route for Kazakhstani oil through Iran would have to transit Turkmenistan. This is significant because President Niyazov's recent actions have thrown the TCGP project into doubt at the next-to-last minute, even after a great deal of effort by all parties concerned. While there is no shortage of investors interested in Ashgabat's gas, this pattern (together with Niyazov's on-again, off-again claims to the oil field that Azerbaijan calls Kyapaz and Turkmenistan calls Serdar) has served to persuade an increasingly large segment of the international energy industry not to count on Ashgabat too heavily. It should also be mentioned that Niyazov has alienated high government officials in both Azerbaijan and Turkey.

Once More on Shah-Deniz
So what does all this have to do with Shah-Deniz? Shah-Deniz makes the Turkmenistan-China gas pipeline more likely; but it would be difficult at this stage to make it less likely. But this in turn sheds light on China's increasing involvement in energy politics in Central Asia and provides perspective on Kazakhstan's export possibilities by highlighting the organisational and logistical problems of routes to China, as well as the political and financial problems of a route through Turkmenistan into Iran. That is how Shah- Deniz, while making the TCGP less likely yet not impossible, also increases the feasibility of the Baku-Ceyhan MEP being extended across the Caspian Sea to Kazakhstan.

Source: NewsBase
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