Kazakhstan and the BTC pipeline

Oct 15, 2008 02:00 AM

by John C.K. Daly

The August Russian-Georgian military conflict highlighted the vulnerability of Western-funded export routes through the Caucasus region for Caspian oil. Even before the confrontation effectively locked in Azeri crude, an explosion on Aug. 5 on the Turkish section of the 1,094-mile, $ 3.6 bn Baku-Tbilisi-Ceyhan pipeline, opened in May 2006, effectively closed the pipeline two days before the outbreak of hostilities.
If the armed confrontation made Western investors nervous about future Western-running pipeline projects, Kazakhstan has drawn its own conclusions about the need to diversify export routes. In a gesture of support that will gladden both Baku and BP executives, Astana later this month will begin pumping Kazakh oil from its massive Tengiz field into BTC, according to BP-Azerbaijan executives.

It is perhaps mere coincidence that the announcement follows the Oct. 5 visit by US Secretary of State Condoleezza Rice to Kazakhstan. During her flight from India to Kazakhstan, Rice was at pains to assure reporters accompanying her that the United States is not interested in playing a "zero-sum game" in Kazakhstan by insisting Kazakhstan side with the United States at the expense of its ties with its traditional ally Russia.
"Kazakhstan is an independent country. It can have friendships with whomever it wishes," Rice said.

Rice's visit to Astana was preceded by Kazakh Foreign Minister Marat Tazhin visiting New York, where in September he delivered a speech at the 63rd UN General Assembly session and held a bilateral meeting with Rice. Tazhin followed that up with an Oct. 1 and 2 visit to Washington for what the Kazakh media described as "regular friendly consultations with top US officials."
Among those who Tazhin met while in Washington were former Secretary of State Madeleine Albright, Vice President Richard Cheney, national security adviser Stephen Hadley and World Bank President Robert Zoellick.

Oil from the Tengiz field will be delivered by tankers across the Caspian Sea to the BP-led consortium's Sangachal Terminal on Azerbaijan's Absheron Peninsula for pumping into the BTC pipeline for transmission to Ceyhan. While BP-Azerbaijan coyly declined to produce specifics about the volume of Kazakh oil to be shipped through the BTC pipeline, earlier Azeri media reports claimed that up to 5 mm tons of Tengiz oil is to be transported annually to Sangachal as throughput for BTC.
The commitment is more impressive for its diplomatic than economic value, as it works out to a little less than 98,000 bpd, or slightly less than 10 % of BTC's 1 mm bpd throughput capacity.

What is critical is that Kazakhstan has made a gesture of good will toward the future of the BTC pipeline. After the Aug. 5 BTC pipeline explosion at Yurtbasi village, valves 29 and 31 were closed as officials waited for the oil contained in the 4-mile segment to burn out and BTC operator BP declared force majeure.
When BTC resumed operations 20 days later, Azerbaijan had been blocked from shipping approximately 17 mm barrels of crude, while the US Department of Energy estimated that Azerbaijan's final cost for the lost shipments was more than $ 1 bn.

If Astana will be paying transit fees to Azerbaijan, Georgia and Turkey for using BTC, it will manage to keep all of its tanker revenues, as in 2002 Kazakhstan's state-owned oil and gas company KazMunaiGaz subsidiary Kazmortransflot and Mobilex in 2002 signed a contract, largely underwritten by the European Bank for Reconstruction and Development, with Russia's Vympel Ship Design Co. to construct three Caspian tankers.
In 2005 Kazmortransflot took delivery of its first tanker, the $ 18.75 mm Astana, which now plies the Aktau-Baku and Aktau-Makhachkala routes, carrying oil from Kazakhstan's Tengiz and Buzachi fields, making seven to eight voyages per month, hauling a mm tons of oil annually. Since its launch, the Astana has been joined by sister ships Aktay, Abaj, Kazakhstan and Almaty.

Observers might question why Kazakhstan has now taken the step of showing solidarity with Azerbaijan in using a pipeline known to make the Kremlin unhappy. Part of the answer to the question might be found at NATO's 59th annual gathering held April 2 to 4 in Bucharest, Romania.
The meeting was dominated by Washington promoting Ukrainian and Georgian membership in the 26-nation alliance, which was shelved by the participants. Following the summit NATO's special representative for the Caucasus and Central Asia, Robert Simmons, visited Almaty. Enumerating Kazakh efforts viewed favourably by NATO, Simmons noted that Kazakhstan agreed to participate in developing the NATO-led International Security Assistance Force logistical transport corridor for operations in Afghanistan, and cited as an example of "successful military cooperation" with NATO the creation of KazBrig (the "Kazakh Brigade" peacekeeping unit), compatible with NATO standards, which since 2003 has been involved in demining activities in Iraq.

In retrospect, and at the time picked up only bythe Russian press, Simmons tantalizingly told journalists that the alliance intended to include partnering in the protection of Kazakhstan's energy infrastructure in its program of collaboration with Kazakhstan. In a most adroit piece of statecraft, the West gets a sip of Kazakh crude while Kazakhstan gets energy security issues discussed with NATO, though not at such a level to alarm the Kremlin.
The last word on the triangular Russia-Kazakh-US relationship belongs to Foreign Minister Tazhin, who commented during Rice's visit, "I think that it's very important that these working relations with the United States and with Russia have a good and very solid base and perspectives."

It is an understated piece of even-handed diplomatic wisdom delivered too late to benefit Georgian President Mikhail Saakashvili, who in his eagerness to be embraced by NATO and Washington damaged his own "working relations" with the Kremlin for no appreciable benefit.

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