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 KAZAKHSTAN International Business Magazine №4, 2007
 Caspian Gambit:Gas and Geopolitics
Caspian Gambit:Gas and Geopolitics
By Sergey Smirnov
Russia’s almost single-handed domination on the Central Asian and Caspian gas market seems to be nearing its end. Both EU member countries and China are also trying to play on this pitch on a large scale. That is why the events that have taken place this year can be regarded as the beginning of a new round of the Great Game for the control of the region’s gas resources.
There are three rival export projects in the region now – a project to build a Caspian gas pipeline (along the Caspian Sea through Russia), a project to build a trans-Caspian pipeline (to bypass it) and a gas pipeline from Turkmenistan to China. It is clear that all of them have the right to exist if there is gas to pump into these pipelines. However, no-one has an answer to this crucial question. No-one knows for sure how much gas the main potential supplier of it – Turkmenistan – has. The country’s president has given the assurance that “there is enough gas to fulfil all international agreements reached – with Russia, Iran and China and other countries, if they wish so”. However, Ashgabat does not specify exact figures. Possibly, the Turkmens themselves do not know them and are deliberately causing a hullabaloo to boost their “gas” significance. At the same time, no-one is concerned that the proven reserves of “blue fuel” are not quite enough for all of the projects under consideration. As a result, a new situation is emerging in the Caspian Sea region, providing Central Asian countries with greater possibilities for manoeuvring their deals.
The Old Song about the Main Thing
Analysts note that the West’s strategy towards the region has been enviably consistent. On the political horizon from time to time the idea of building a trans-Caspian gas pipeline resurfaces, which would make it possible to export gas to Europe, bypassing Russia. However, since Washington does not even want to hear about cooperation between Europe and Tehran, Astana and Ashgabat are being actively invited to take part in this project. A four-lateral agreement on building a trans-Caspian gas pipeline was signed by the presidents of Turkmenistan, Turkey, Azerbaijan and Georgia back in November 1999. Moreover, world-renowned companies such as General Electric, Bechtel and Shell have even set up the PSG consortium. However, the sides failed to coordinate their interests, so all work on this project has been scaled down.
A growth in energy prices, the completion of the South Caucasus gas pipeline and the desire to reduce gas dependence on Russia have led to the EU and GUAM (Georgia, Ukraine, Azerbaijan and Moldova) countries lobbying the designing of a trans-Caspian project (logistically, a continuation of the Nabucco gas pipeline, initiated by gas companies from Austria, Hungary, Romania, Bulgaria and Turkey).
Turkey, Turkmenistan and Azerbaijan returned to discussing the idea of building this gas pipeline last year. Kazakhstan, which showed some interest in this project (this topic was discussed at a governmental level), lost interest in it a year later: President Nursultan Nazarbayev spoke in an interview with the El Pais newspaper in spring 2007, and later Kazakh Foreign Minister Marat Tazhin, about it being unpromising.
Of course, there are more than enough reasons for that assessment. A number of obstacles on the way of building the pipeline turn it into a project for the very distant future. Among these obstacles are those relating to resources (Turkmenistan is expected to be the main supplier, but since there are no reliable data about its proven gas reserves, one can only talk theoretically about its stable and long-term supplies via this pipeline), technical problems (an undersea pipeline will demand serious scientific study of the seabed along the pipeline’s route and huge construction and pumping (under great pressure of up to 200 standard atmospheres) costs), legal issues (uncertainty around the legal status of the Caspian Sea), financial problems (the project will cost up to $6bn, and this figure may easily grow by 40-60% over the course of construction) and other problems.
The main obstacle is that this project is not economically feasible, and this fact cannot be replaced by political support from either Washington or Brussels. For example, gas (let us say, Kazakh supplies) pumped through the trans-Caspian pipeline and a number of countries will become absolutely uncompetitive at the selling point because of transit tariffs (the Istanbul Declaration unambiguously stipulates the inherent rights of transit countries to setting transit and other tariffs in return for their permission to transport energy resources through their territories).
All this serves to prove the view of Prof Jonathan Stern from Britain’s Oxford Institute for Energy Studies that in order to build a trans-Caspian pipeline there should be three things – gas, market and money. He also said that at the moment the West did not have either of these resources. This leads to one obvious conclusion that this project is prompted only by political ends, not economic expediency.
And this is understandable. For example, the fulfilment of the trans-Caspian gas pipeline will make the USA an important player on the European gas market, where the Americans do not play any role now. Moreover, Washington regards this project as a factor of moving Turkmenistan away from Russia and weakening the latter’s positions on the Eurasian continent. That is why the USA will do everything possible to attract investment in the project and speed up measures to build the trans-Caspian gas pipeline. In particular, the US Trade and Development Agency has already allocated a grant worth $1.7m to the State Oil Company of Azerbaijan (SOCAR) for drafting a feasibility study for this project.
On the other hand, the gap between drafting a feasibility study and implementing a project may drag on for a long time because this route for transporting Central Asian gas also demands protracted political, legal and economic coordination, especially when in this project technical tasks are less problematic than economic and, specifically, geopolitical aspects. For example, Azerbaijan is undergoing speedy militarisation and does not rule out applying force to solving the Karabakh problem, while Georgia is not giving up its attempts to “deal” with unrecognised republics of South Ossetia and Abkhazia and is staging various provocations against Russia. Another serious problem is the threat of a US military operation against Iran. All this significantly increases the political risks of the project.
Russian Aspect
Official Ashgabat signed a 25-year agreement with Russia’s Gazprom in 2003 on gas supplies of up to 90 billion cu m a year, which is practically the entire amount Turkmenistan can export. Therefore, it is not surprising that the presidents of Russia, Kazakhstan and Turkmenistan agreed in May 2007 (having signed a declaration so far) to build a Caspian gas pipeline with a capacity of 40 billion cu. m. a year along the Caspian Sea by 2014 that will transport Central Asian gas through Russia to European markets. The implementation of this project will sharply reduce the chances of the trans-Caspian project and will significantly strengthen the ability of the countries involved to jointly demand higher prices for their gas from all consumers without any exceptions.
However, the sides had not managed to prepare intergovernmental agreements on building the gas pipeline by the date specified in the declaration (by 1 September). These agreements should define deadlines for fulfilling the project and envisage drafting a feasibility study. According to the Kommersant newspaper, the process was slowed down by Ashgabat’s desire to increase the price of gas by 50% from 2008.
Turkmenistan explained its position by a global growth in the price of hydrocarbons and Gazprom’s desire to significantly increase the price of gas for CIS countries. However, the existence of the agreement with Gazprom on supplying 162 billion cu m of gas at a fixed price of $100 per 1,000 cu m in 2006-2009 makes Turkmen President Gurbanguly Berdymukhamedov’s position, to put it mildly, a little strange. Moreover, these intentions of Turkmenistan may damage its own reputation. Trying to break international contracts, it will automatically end up in the category of unreliable suppliers that freely interpret provisions of contracts.
Of course, Ashgabat cannot particularly strictly dictate its demands to Moscow, because Russia is still an important partner and one of the few channels for selling Turkmen gas. We can assume that Russia will have to apply political pressure on Turkmenistan or agree to a growth in the price, as this was the case in August 2006 (when the price grew from $65 to $100 per 1,000 cu m). It is most likely that bargaining between these countries will result in increasing the price not to $150 but $120 per 1,000 cu m with a possible change in tariffs for pumping gas. We should not rule out the emergence of a Russian-Turkmen joint venture or a consortium for selling Turkmen gas.
Chinese Transit
China is becoming quite active in the Caspian Sea region. Chinese companies have considerably strengthened their involvement in developing gas resources in Uzbekistan, Kazakhstan and Turkmenistan, linking this to the possibility of transporting them to China’s western regions. In particular, Beijing has proposed to Ashgabat to build an export gas pipeline with a capacity of 30 billion cu m a year, which will cut through Turkmenistan, Uzbekistan and Kazakhstan. Moreover, China is ready to pay for its construction.
During a meeting held in Astana in late August 2007, Chinese President Hu Jintao and Kazakh President Nursultan Nazarbayev signed a number of cooperation agreements, including on building the Kazakh sector of the pipeline to China. The head of the KazMunayGas national oil and gas company, Uzakbay Karabalin, said then that the Kazakh sector of the pipeline will consist of two parts: the first – the border with Uzbekistan-Shymkent-Korgas (with a capacity of 40 billion cu m a year), and the second – Beyneu-Bozoy-Samsonovka (10 billion cu m a year), which will be built later after its economic expediency is justified. The first stage of the project is expected to be completed by 2010. KazMunayGas and China’s CNPC will built the pipeline on a parity basis.
As for Turkmenistan, CNPC and Turkmenistan’s Turkmengaz state-owned company have signed a contract on gas supplies: Turkmenistan has to supply up to 30 billion cu m of gas a year to the Celestial over three decades starting from 2009. Under a Production Sharing Agreement, the Chinese company will also develop one of Turkmenistan’s promising gas fields. After the signing of a contract between CNPC and Turkmengaz, international media outlets commented on the deal, saying that Turkmenistan had sold gas intended for Russia to China. This reflects the widespread view that Turkmenistan may not have enough resources for all international projects.
It is worth noting that “glitches” in negotiations between Russia and China on gas supplies to the latter are mainly caused by Beijing’s insistence on tying the price of gas to that of coal, not oil, which reduces the profitability of gas supplies to China compared with traditional European supplies. Therefore, there are no guarantees that the situation will not repeat after the construction of the gas pipeline from Turkmenistan to China.
Taking into account that Ashgabat’s relations with Tashkent are quite tense now, experts rule out the gas pipeline being built by 2010 (as Beijing hopes). Should transit issues with Uzbekistan be solved, the new gas pipeline from Turkmenistan may become reality by 2015.
Gas Arithmetic
Gas reserves of Shah-Deniz, Azerbaijan’s main gas field that is being developed by the AMOC international consortium, are estimated at 1,200 billion cu. m, Azerbaijani President Ilham Aliyev told the opening of the 14th Oil and Gas of the Caspian Sea exhibition in June 2007. Adding to this amount associated gas reserves of the Azeri-Chirag-Guneshli and gas sitting in strata of oil fields developed by SOCAR, we will establish that the country’s gas potential does not exceed 1,700 billion cu m (Italy’s ENI estimates this to be even more modest – about 1,400 billion cu m). At the same time, SOCAR estimates that a maximum of 20 billion cu m will be extracted from Shah-Deniz in 2015 (Azerbaijan’s gas output stood at 6.8 billion cu m in 2006). As a result, the main suppliers of gas for the trans-Caspian pipeline will have to be Turkmenistan and Kazakhstan.
In Kazakhstan, the launch of extraction in the Kashagan field which could produce significant volumes of gas has been postponed again (its possible that this will not be the last postponement). Bearing in mind that the country’s gas output (the total output stood at 27 billion cu m in 2006) will be exported to China, supplied to the domestic market and sold to the KazRosGas joint venture, it turns out that there will be nothing left for the trans-Caspian pipeline.
Turkmenistan, for its part, has dismissed doubts about its capability to fulfil its obligations on supplying gas. However, simple arithmetic operations show that in order to fill in all “promised” pipelines Ashgabat needs at least 170 billion cu m of gas a year. We can see that Turkmenistan is going to export more gas than Russia’s current exports to Europe.
Turkmen gas output totals 65 billion cu m a year now, and it should grow to 250 billion cu m by 2030. However, statistics shows that the current growth rates are negligible and real output always lags behind the target. For example the output grew only by 1% in 2006.
It should not be ruled out either that the fulfilment of the agreement with China will not only destroy all hopes about the trans-Caspian gas pipeline, but will also cast doubt on the implementation of the Caspian project. Moreover, the intergovernmental agreement on supplying gas to China stipulates that in case of shortages of gas to fulfil accords reached, Turkmenistan will have to do it at the expense of other resources.
Separating Gas from Politics
Relations between the countries concerned are developing in the Caspian Sea region, depending mainly on economic and political benefits offered by one pipeline project or another. Therefore, there are two main camps formed there: Azerbaijan, Georgia and Turkey, relying on US support, on the one hand, and Russia and Iran, opposing the first group, on the other. Turkmenistan, remaining loyal to Russia, is inclined towards the first group, while Armenia to the second group, and Kazakhstan is ready for any routes for hydrocarbon export that are beneficial for it.
As a result, the extraction and transportation of hydrocarbons in the region have become so politicised that any moves in this sphere are treated only in one aspect: whether Caspian hydrocarbons will go to Europe bypassing Russia or not. If they bypass Russia, this will be considered by Europe as a “historical contribution to ensuring energy security” (even if Caspian imports will account for only 1% of the EU’s annual consumption).
The multi-vector policy, pursued by Astana (and Ashgabat in recent times), sets many questions not only for the regional countries but also for Russia, the USA and China. Numerous meetings held by negotiators from Russia and the USA have failed to clarify with whom Kazakhstan and Turkmenistan will cooperate “more closely” and “with a greater priority” on energy issues. In particular, having signed the declaration on building a Caspian gas pipeline, the Turkmen president immediately expressed Turkmenistan’s “continuing interest” in building a promising gas pipeline on the bed of the Caspian Sea to Azerbaijan. Moreover, Turkmenistan does not shy away from building gas routes both to Iran and China.
It should also be noted the competition for accessing regional energy resources has intensified within the Shanghai Cooperation Organisation (SCO). Regional countries are tempted to use China’s growing interest in their resources to achieve certain concessions by Russian or Western companies. Nevertheless, at a recent summit in Bishkek the leaders of the organisation’s member countries expressed their intention to create a “regional energy club”, which has caused quite considerable concern both in Washington and leading European capitals. And it was not even important that SCO member countries stopped short of clarifying what this club would do and when it would be set up. The most important point is that SCO countries have categorically refused to invite either America or western Europe to it.
This approach complicates western Europeans’ access to Central Asian energy resources, while Russia is strengthening its position as a transit country for Europe and increasingly thirsty China is ready to fight for these resources, actively “diverting” oil and gas pipeline towards its borders.
Moscow, Ashgabat, Baku, Ankara, Washington and Astana perfectly understand that routes to export hydrocarbons are efficient levers of influence in the region. This means that the fight for Caspian gas pipeline projects will be extremely fierce and at least one of them will fail in the near future due to shortages of gas.
Moreover, it can be predicted with greater likelihood that the victim of a new round of the Great Game on the Caspian chessboard will again be the trans-Caspian project.

Table of contents
Competitiveness. A Step Forward, Two Backward  Sergey Gakhov, Yelena Zabortseva 
Rating of Kazakhstan... Goes Down  Ben Faulks, Luc Marchand 
Corporate Governance. Kazakh Reality  Anastasiya Raziyeva 
Stock Market: Evaluation and Forecasts  Zhasulan Bekzhigitov 
Exchange Summaries. Mess and Disorder  Tatyana Kudryavtseva 
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