Central Asia politics: Moscow's pipeline coup

May 14, 2007 02:00 AM

Russia has secured deals with Turkmenistan and Kazakhstan that, if signed, go some way to ensuring that Russia will maintain its stranglehold on exports of Turkmen gas, in the face of rising interest from China and the EU.
At the heart of this deal is a reciprocal arrangement with Kazakhstan -- a country that is proving much more reluctant to embrace non-Russian options for its oil and gas exports than many in the EU had hoped.

The presidents of Turkmenistan, Kazakhstan and Russia -- respectively Gurbanguly Berdymukhammedov, Nursultan Nazarbayev and Vladimir Putin -- on May 11th announced a deal to build a new gas pipeline along the shore of the Caspian Sea, to increase exports of gas from Turkmenistan to Russia. A formal agreement is due to be signed on September 1st.
Last year Turkmenistan exported 42 bn cm of gas to Russia, via the Central Asia-Centre (CA-C) pipeline that links the countries of Central Asia with Russia. The new gas pipeline, which will run close to the Caspian shoreline and thus will not cross Uzbek territory, is to have a capacity of “at least” 20 bn cm by 2012, according to Mr Putin. His energy minister, Viktor Khristenko, says that the eventual capacity could reach 30 bn cm.

Turkmen tie-up
The projected pipeline will link to the CA-C pipeline, which currently has a capacity of 56 bn cm per year; this will be increased, perhaps by 10 bn cm a year by 2009, and by an additional 20 bn cm a year after 2010. As a result, CA-C could by the middle of the next decade have a capacity of over 80 bn cm per year.
If the project is signed and built, it will represent a coup for Russia in its efforts to see off Chinese and EU efforts to claim a portion of Turkmenistan’s gas. This is vitally important for Russia, which is relying on cheap Central Asian gas to make up the shortfall between domestic Russian production on one hand, and demand from Russia and Europe on the other. Although Mr Berdymukhammedov continues to insist that his country has enough gas to justify all export projects, including for routes to China and to Europe via the Caspian Sea, the increased capacity for exports to or via Russia will probably be more than enough to accommodate rising Turkmen gas output, even on an optimistic scenario.

Nazarbayev’s trade
The Kazakh aspects of the agreements reached in the Turkmen capital have received less attention than those concerning Russian-Kazakh relations. Yet Kazakhstan is critical for Russian efforts to secure Turkmen gas. It seems that Mr Nazarbayev has exploited this in order to further his country’s oil interests, which are dependent on Russia assent.
In effect, the Kazakh president has assisted Russia in its quest to tie-up Turkmen gas for the next decade -- by agreeing to the new pipeline and to upgrading CA-C -- in return for Russia agreeing finally to a major increase in the capacity of the Tengiz-Novorossiysk oil pipeline owned by the Caspian Pipeline Consortium (CPC), and for involvement in the proposed Burgas-Alexandroupolis pipeline; that project will allow oil shipments to bypass the bottleneck of the Turkish Strait.

Kazakhstan has for some time been lukewarm in its approach to EU proposals in the energy transit sphere -- unlike Azerbaijan, which has become much more assertive towards Russia since mid-2006, when it gained direct access to Western markets with the opening of the Baku-Tbilisi-Ceyhan (BTC) oil export pipeline. Kazakhstan is dependent on Russia for almost all of its oil exports and 100 % of its gas exports. So it seems logical that the country would welcome the opportunity to establish new export routes, such as a trans-Caspian project.
However, in early 2007 the Kazakh energy ministry on several occasions publicly stated that it would not support any trans-Caspian pipeline in the absence of a five-way agreement on the status of the sea -- in effect supporting Russia's position.

In a further snub to the EU, Kazakhstan indicated recently that it would not attend a Polish summit this month on non-Russian transit routes, to which Ukraine, Azerbaijan and Georgia have already accepted invitations.
Kazakh non-participation renders the event almost meaningless.

Oil first, gas unplaced
Kazakhstan’s refusal to embrace EU plans is partly due to the unresolved status of the Caspian Sea, which gives Russia and Iran -- themselves large energy exporters and competitors for EU markets -- the right to oppose any pipelines connecting Central Asia with Azerbaijan via the seabed.
Some proponents of the trans-Caspian routes have expressed optimism that bilateral agreements could be drawn up between participating states -- linking Kazakhstan and Azerbaijan, for example, for an oil pipeline, and Azerbaijan and Turkmenistan for a gas pipeline -- in the same way that bilateral deals have enabled the north Caspian countries to explore hydrocarbons fields on their mutual sea borders.

Legal problems are not the main factor, however. For Kazakhstan, oil is a much more important export thangas. Even if a trans-Caspian oil pipeline linking Kazakhstan with Azerbaijan could be built, it would still be insufficient to cope with the surge in oil exports that is anticipated once the offshore Kashagan field reaches peak production of 1.9 m bpd in 2019.
Russian export routes will therefore remain vital to Kazakhstan. Hence Mr Nazarbayev’s determination to increase the capacity of the CPC pipeline connecting the Chevron-run Tengiz oilfield with the Russian Black Sea port of Novorossiysk.

Currently the pipeline, which is operating at full capacity, can ship some 664,000 bpd. The Tengiz consortium hopes to raise this to around 1.4 mm bpd.
Precisely what agreement was struck in Ashgabat is not clear: Mr Nazarbayev said that annual capacity would rise from 23 mm tons (approximately 466,000 bpd) to 40 mm tons (800,000 bpd). He explicitly mentioned that an additional 17 mm tons of Kazakh oil would be crossing the Black Sea each year.

CPC blockage
Russia, which has the largest single stake (24 %) in the CPC, has dragged out negotiations over a capacity upgrade. Increasing Kazakhstan's access to Western markets is not in Russia's interest. Moreover, the Tengiz-Novorossiysk line is the only one crossing Russian territory that is not fully owned by state pipeline monopoly Transneft.
This too sits poorly with the Kremlin, as infrastructure is one of its main levers for the controlling the (still mostly privately owned) oil sector.

For Kazakhstan, increasing the capacity of the CPC line is only part of the solution. Once on the Black Sea, Kazakh crude faces the bottleneck of the Turkish Strait and the Bosporus in particular. According to Mr Nazarbayev, Russia has also agreed to give Kazakhstan a stake in one of the Bosporus bypass projects -- the Burgas-Alexandroupolis route. The project has been discussed for over a decade, and in March 2007 the governments of Bulgaria, Greece and Russia finally signed an agreement in Athens to build a pipeline from the Bulgarian Black Sea port of Burgas to the Greek Aegean port of Alexandroupolis.
Russian companies will control 51 % of the equity, with the remainder held by Bulgaria and Greece. These two countries are expected to sell parts of their shares to oil companies that will commit themselves to pipeline throughput; annual capacity would be around 30 mm tons.

Mr Nazarbayev said explicitly that the CPC upgrade will allow for 17 mm tons of Kazakh oil to pass through the Burgas-Alexandroupolis route each year.
Whether Kazakhstan’s equity stake will come from Russia, or (more likely) the participating EU states, remains to be seen.

Russia’s big picture
The advantage for Russia of conceding an increase in the capacity of the CPC line, and of tying Kazakhstan to the Burgas-Alexandroupolis project, is that it deals a setback to two non-Russian pipeline projects. The first is the Odessa-Brody-Plotsk scheme, to bring Caspian oil into Europe via the Black Sea and Ukraine. The Odessa-Brody portion, which is already built, was initially conceived for this purpose but currently it is operating in the reverse direction, sending Russian crude on to the Black Sea.
However, Ukrainian President Viktor Yushchenko is interested in restoring the project to its original purpose, with the support of the Polish authorities, who could extend the line to Plotsk and thus link Odessa-Brody to Druzhba oil pipeline, which is the main overland route into Europe for oil from the former Soviet Union. Without Kazakh participation, there will not be sufficient oil to fill Odessa-Brody-Plotsk.

The position regarding the other project, BTC, is less clear cut. That pipeline is already transporting around 1 mm bpd from Azerbaijan's Caspian oilfields to Western markets, and is the largest export route from the region that is not part of the Russian network. Kazakhstan is due eventually to supply oil to the pipeline (whose capacity can be increased to around 1.7 mm bpd), with two options for transporting the oil from its fields to Baku under consideration -- a pipeline or a fleet of barges.
The Kazakh government's subsequent comments about the Caspian Sea appear to rule out the pipeline option. Moreover, Russia's opposition to Kazakh participation in BTC is likely to remain intense. Yet even a doubling of the CPC route is not sufficient to give Kazakhstan the export capacity it will need once Kashagan starts producing in earnest.

Only words
For Russia and Kazakhstan, the agreements reached in Turkmenistan are highly encouraging. Yet the gains promised are far from secure. In particular, it is prudent not to rely on the gas pipeline along the Caspian shore becoming a reality until an agreement is signed and construction has started. The justification for this depends not only on Turkmenistan being able to increase gas output by a third in the space of five years, but also on Russia and Turkmenistan agreeing a price for that gas.
Mr Berdymukhammedov is yet to say no to any of Turkmenistan’s suitors, but at some point presumably he will have to. If complications emerge in the Russia-Turkmenistan agreement, this could put Mr Nazarbayev’s hard-won oil deals into doubt.

Source: ViewsWire / The Economist Intelligence Unit
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