Analysis: Caspian energy in 2009
by John C.K. Daly
While making predictions, especially about energy issues, is a murky business at best, the general outline of the
themes surrounding the ongoing development of Caspian energy assets is already broadly emerging.
Russia will attempt to reverse the economic decline brought about by the recent implosion of oil and, to a lesser extent, gas prices over the last several months as the global economic recession deepens. To that end, the Kremlin will attempt to increase its control over the former Soviet Caspian nations of Kazakhstan, Azerbaijan and Turkmenistan and their hydrocarbon assets, first by offering them prices more in line with global ones and secondly by promoting their use of existing pipelines, many from the Soviet era, that traverse Russian territory, while dangling the possibility of significant upgrades to handle increased output.
With the new administration in Washington, expect to see the Caspian's southernmost state, Iran, press forward on
many fronts to eitherevade or, better yet, have lifted the US sanctions regime that since 1979 has largely precluded
the development of the country's natural gas reserves, the world's second largest. While many inside the Beltway are
committed to continuing the sanctions until at least Iran abandons its civilian nuclear energy program, the reality
is that Tehran seemingly holds an ace in the West's pet Caspian energy project, the $ 10.7 bn, 2,050-mile Nabucco
natural gas pipeline.
Nabucco's proposed annual carrying capacity is 30 bn cm, but its backers thus far have managed to secure a commitment of only 8 bn cm from Azerbaijan's offshore Caspian Shah Deniz Two field when it comes on stream in 2013, leaving a potential deficit of 22 bn cm.
While investors are hoping to cover the shortfall with 8 bn cm a year from Iraq by the end of 2015, the hope remains
problematic as are possible volumes of Turkmen gas. Tehran already has clearly articulated its interest in supplying
Nabucco, a possibility that, although currently adamantly opposed by Washington, is much less an article of faith in
European capitals, especially as the European Union seeks to reduce its dependency on imports of Russian natural
The EU's interest in downsizing its dependency on Russian gas has been given added urgency by the Russian-Georgian five-day war last August and the Kremlin's more recent gas pipeline politics hardball with Ukraine.
For Kazakhstan, the global turmoil in energy prices has the possibility to wreak havoc with the economy, as oil
exports generate 40 % of the country's total revenue. Furthermore, Kazakhstan's oil sector has attracted more than $
40 bn in foreign investment, second only to Russia among Commonwealth of Independent States members. Kazakhstan
currently produces around 1.3 mm bpd.
The government has downsized its fiscal predictions of record-high energy prices continuing indefinitely, while last September Kazakh Energy and Mineral Resources Minister Sauat Mynbayev said Kazakhstan would boost its oil production to more than 100 mm tons, or 2 mm bpd, by 2015. The new reality is reflected in the fact that while the month after Mynbayev spoke, the government nearly doubled its export duty on crude oil to $ 203.8 per ton from $ 109.91. Earlier, Kazakhstan officially announced the abolishing of the oil export duty for all oil companies operating in Kazakhstan as of Jan. 26.
Of the five states bordering the Caspian, Turkmenistan is the best poised to prosper in 2009. Since the sudden death
of President for life "Turkmenbashi" Saparmurat Niyazov in December 2006, European, American, Chinese and Japanese
energy executives, to name but a few, have been jetting into Ashgabat to curry favour with Niyazov's successor,
Gurbanguly Berdymukhamedov, for an opportunity to develop Turkmenistan's natural gas reserves.
Niyazov often boasted that his country's reserves contained up to 24 tcm of natural gas, exceeded only by those of the world's top gas producer, Russia, with 47.65 tcm of gas reserves, followed by Iran's 28.13 tcm. BP tut-tutted such assertions as hyperbole, last estimating Turkmenistan's reserves at a much more modest 2.9 tcm in its annual statistical review.
So, in 2008 Berdymukhamedov hired the British firm Gaffney, Cline & Associates to conduct an independent audit of
Turkmenistan's South Iolotan-Osman gas field. The results gave Niyazov's spirit the last laugh. On Oct. 14 the
company announced its conclusion that the South Iolotan-Osman gas field alone held between 4 tcm and 14 tcm of
Leading GCA Business Development Manager Jim Gillett commented, "This makes South Iolotan-Osman the world's fifth- or fourth-largest field. Production at South Iolotan-Osman can be built up gradually to 70 bn cm a year."
To put the field in perspective, South Iolotan-Osman's eventual output would effectively double Turkmenistan's production.
As this production remains in the future, Berdymukhamedov is in the enviable position of watching his new energy
buddies trample each other in their efforts tomake the best pitch. Turkmen gas could be critical to making Nabucco
viable. Berdymukhamedov has been playing his ardent Western courtiers like a Stradivarius, but the major carrot that
the West dangled in Ashgabat was higher prices, which in 2008 Gazprom in essence agreed to match. But 2009 will not
see Turkmenistan limit its gas exports to solely going northward, as it continues work on a joint pipeline to
The potential final nail in Nabucco's coffin, which Western energy executives largely overlook in their relentless enthusiasm, is that, 18 years after the collapse of the Soviet Union, the division of the Caspian's seabed and waters has yet to be agreed between Iran and the Soviet Union's successor states. As an undersea Trans-Caspian pipeline is envisaged to bring Turkmen gas to Azerbaijan for westward transmission via Nabucco, the lack of a definitive agreement remains perhaps the biggest single obstacle to the line's construction, quite aside from the Kremlin's distaste for the project.
While Azerbaijan remains firmly in the Western orbit, using the Baku-Tbilisi-Ceyhan pipeline for oil exports and the
Baku-Tbilisi-Erzurum pipeline for gas exports, which could link up with Nabucco in eastern Turkey, the economic
downturn, along with Gazprom's generous offer to buy its future gas production at European rates, seem to indicate
that for the foreseeable future Russia will call the shots in the former Soviet states ringing the Caspian.
If Washington is truly concerned about blunting Russia's increasing dominance of its former Soviet republic neighbours and remaining a major potential player in the Caspian, then the new administration could do worse than President Barack Obama following through on his campaign remarks about talking to Tehran.
In the meantime, the only Caspian producer with a smile on his face about 2009's prospects is Turkmenbashi's successor.