The Great (Pipeline) Game



by Vladimir Socor

Almaty, Kazakhstan The rapidly changing nation of Kazakhstan, and its despotic neighbor Turkmenistan, can help the West — in particular Europe — reduce its dependence on Middle Eastern and Russian oil and gas. To achieve that goal, these two eastern Caspian countries must be linked by pipelines to Europe, via the South Caucasus and Turkey.

Yet, at a conference of the West’s leading oil and gas companies here in Almaty this week, that strategic issue is hardly a topic of discussion. These firms have found and are extracting the oil and gas from Caspian countries, while Russia holds an as yet unchallenged monopoly on the transit routes to consumer countries.

This has no precedent and no parallel in the world of energy and geopolitics. Russia, the world’s second-largest producer and exporter of oil (behind only Saudi Arabia), and global No. 1 for gas, absorbs the oil and gas produced in the eastern Caspian basin. As a result, Europe — the main potential consumer of Caspian energy — is sliding into a dual dependence on Russia: for Russian supplies as well as Russian transit of supplies from this region. Such dependence on a single, powerful transit country is dangerous to the producer countries as well.

Three of the world’s richest hydrocarbon fields are in Kazakhstan. After the onshore Tengiz and Karachaganak supergiant fields came on stream, the Kashagan field became the biggest offshore oil discovery anywhere in the world in the last 30 years, and is due on stream before the end of this decade. Even without taking into account possible new discoveries on Kazakhstan’s continental shelf, oil output is projected to increase from some 50 million tons annually at present to at least 150 million tons per year by 2015, on the strength of Western technology and capital investment. The export routes out of Kashagan will be chosen soon. That choice can either reinforce or break Russia’s monopoly on the transit of Kazakhstan’s oil and gas to international markets.

Energy and Mineral Resources Minister Vladimir Shkolnik, a nuclear physicist by profession, has overseen oil and gas development in Kazakhstan in recent years. He is well received in Washington and Houston. As Mr. Shkolnik explains to me here, some 20 million tons of oil annually from the anticipated output of Kashagan can be exported by tankers across the Caspian Sea to Baku and then pumped into the pipeline that carries Azerbaijani oil through Georgia to Turkey’s Mediterranean port of Ceyhan, from where it goes to the world market.

Apart from these 20 million tons, however, international oil companies and Kazakhstan expect to continue using Russian pipelines to export the lion’s share of oil from the country between now and 2015 and even beyond. The line from Tengiz to Russia’s Black Sea port of Novorossiisk is projected to increase its capacity from 28-30 million tons annually at present to 60 million tons, provided that differences with the Russian government over tariffs and taxes are resolved. Karachaganak’s gas condensate output is scheduled to be exported partly to Russia’s Orenburg refinery and partly through the pipeline to Novorossiisk. And the line from Atyrau on Kazakhstan’s Caspian coast to Russia’s oil-refining center in Samara, on the Volga, is due for a capacity increase from 15 million tons annually at present to 25 million tons annually before the end this decade.

Whether these intentions are fulfilled or not, Kashagan can make the difference in terms of opening alternative export routes out of Kazakhstan. The optimal solution would be a trans-Caspian pipeline to carry the bulk of Kashagan’s projected annual output of 50 million tons to Baku. While part of that volume could be pumped into the Baku-Tbilisi-Ceyhan pipeline, another part could be routed to Georgia’s Black Sea coast for further shipment to Europe. For example, oil from Kazakhstan alone can ensure the viability of Ukraine’s Odessa-Brody pipeline and its linkup through Poland with EU oil markets.

Uzakbay Karabalin, chairman of Kazakhstan’s state oil and gas company Kazmunaigaz, tells me here that Presidents Nursultan Nazarbayev of Kazakhstan and Ilham Aliev of Azerbaijan plan to sign a framework agreement on trans-Caspian shipments of oil from Kazakhstan to Baku before the end of this year. At this point, the project envisages a tanker line — five tankers of the 60,000-tons class are to be built — to shuttle across the Caspian Sea, carrying up to 20 million tons of oil annually westward. That, however, is less than half of Kashagan’s anticipated output. For annual volumes above 20 million tons, a trans-Caspian pipeline becomes the most cost-effective mode of transport, according to projections in both Kazakhstan and Azerbaijan.

However, Russia and Iran have teamed up to oppose the construction of such a pipeline, just as they’ve opposed the American-initiated project of a trans-Caspian gas pipeline from Turkmenistan, the country whose gas export potential may almost equal Russia’s current export volume. In opposition to both of those projects, Moscow and Tehran invoke ecological arguments for public consumption. Behind that screen, Moscow resorts to political arm-twisting in order to retain a monopoly on energy transit from the eastern Caspian basin or at least the lion’s share of that transit.

It is high time, before it becomes past time, for the EU to develop a policy for direct access to eastern Caspian oil and gas. Such access is also a shared economic and strategic interest of the Euro-Atlantic community, as Washington realized long ago. The U.S.-backed East-West Caspian Energy Corridor has taken shape thus far only as a rump based in Azerbaijan.

The producer, transit, and consumer countries, from the Caspian Sea to the South Caucasus to Ukraine, Poland and other EU member countries aware of the stakes involved, might together focus the collective mind of Brussels on the eastern Caspian basin.

Mr. Socor is senior fellow of the Washington-based Jamestown Foundation, publishers of the Eurasia Daily Monitor.

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