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Caspian Gas: One for All?

Sergei Smirnov

A geopolitical game, precisely the gas pipelines race, continues to gather pace in the area of Western and Easter Europe, the Caspian littoral states, and Caucasus. The players in this race are more than enough: Russia, China, Turkey, Turkmenistan, Kazakhstan, and the EU countries. In this situation the leaders of the Central Asian states are forced to avoid taking sides in order to remain adhered to their own interests, national and often even personal ones.

Out of the three export pipelines projects proposed for today in Central Asia, (Caspian gas pipeline, Nabucco, and Turkmenistan-China) two provide for transportation of natural gas in bypass of Russia. The European Union, wishing to put an end to Gasprom’s monopoly on the Western market, tries to diversify the routes of transportation of blue fuel. Lobbying in all ways for the Nabucco project, it makes plans for delivering of Uzbek, Turkmen and Kazakhstan gas in bypass of Russian borders.

This project that has been being developed since 2002 provides for transportation of 31 billion m3 of Caspian gas to European countries through Azerbaijan, Georgia (CIS) and Turkey. However, Europe has not succeeded yet with the idea “jointly with others in the world to bypass Russia”. The latest events showed that the idea itself of “laying something, somewhere, as an alternative route” is a concern of the leaders of the European Union and USA, more than the leaders of those states where these energy resources are produced – Kazakhstan and Turkmenistan.

Attempts to receive guarantees from the latter ones as to the loading of the pipe are made persistently and regularly, however, they are still unsuccessful. The unwillingness of Astana and Ashgabat to be strongly tied with some sort of problem project, such as Nabucco, vividly became apparent in the increased attention paid by Kazakhstan and Turkmenistan to the construction of their own tanker park and to technologies of liquefied natural gas production.

The inter-governmental agreement on the Nabucco gas pipeline construction between Austria, Bulgaria, Hungary, Romania, and Turkey signed on July 13 agreed, in fact, to only the gas interests of Ankara and the EU member-countries. Some issues, such as uncertainty of arrangements with the countries-suppliers of raw material, the issue of borrowing of funds in a form of loans from international financial institutions for payment of the gas pipeline construction project, €7.9 billion worth, and the unsettled issue concerning the legal status of the Caspian Sea are still unresolved.

The answer from Russia to the conclusion of this multilateral agreement was Prime Minister Vladimir Putin’s, visit to Turkey in August of this year. During his visit, the parties signed inter-governmental protocols in the oil and gas field. In exchange to some concessions, the Russian party received Turkey’s approval for carrying out of surveys in the territorial waters of Turkey on the Southern Stream (“Yuzhny Potok”) gas pipeline project. We should remind that the project capacity, which Russia has been making an attempt to implement since 2007, is estimated at 63 billion m3.

The arrangement reached will allow Russia to supply natural gas to the south of Europe in bypass of scandal with Ukraine, and all this gives the start to negotiations with Turkey on the Blue Stream – 2 (“Goluboi Potok – 2”) project. In its turn, Ankara, playing simultaneously on two chessboards, is acquiring extra levers to influence Brussels and is getting new gas transit flows in its control.

By the way, in contrast to Nabucco, for example, Southern Stream has its own seller and a certain resource base. Considering all that, the situation with the Nabucco project implementation looks very pessimistic. Here, the wish only is apparent. Besides, 4% of the overall European consumption of natural gas a year (700 billion – 800 billion m3), which will be transported by Nabucco, are not crucial for the Euro Union states; thus, the project itself can be regarded as more political, than economically feasible. Hence, despite some difficulties, the Russian-Turkish arrangements are more realistic, than the agreement on Nabucco.

Caspian trio

The fundamental decision on the Caspian gas pipeline construction was announced by the Presidents of Russia, Kazakhstan, and Turkmenistan as early as in May of 2007 in the course of a tripartite summit held in Turkmenbashi. Under the approved declaration, the gas pipeline route will traverse alone the Eastern coast of the Caspian through Turkmenistan, then through Kazakhstan to Russia. In completion to this declaration, a trilateral treaty on “Cooperation in the Caspian Gas Pipeline Construction” was signed in December of same year in Moscow.

The new pipeline will be connected to the existing Central Asia – Center gas pipeline at the Kazakhstan-Russian border. The total length of the pipe will be 1,600 km. Of these, 10 km will be constructed by Russia, and the other 1590 km jointly by Russia, Kazakhstan, and Turkmenistan. The designed annual volume of gas transportation over the pipeline will be to 30 billion m3 of fuel from Turkmenistan and to 10 billion m3 from Kazakhstan.

However, there is still no complete assurance that Turkmenistan and Kazakhstan have a sufficient volume of gas, required for loading of the Caspian gas pipeline, since for that it is necessary to prepare a new resource base in the Turkmen and Kazakhstan Caspian Sea sectors. The analysts say that the statement of just approximate quantities of future supplies, not exact ones, is a very doubtful guarantee. For example, as early as in 2003 Russia and Turkmenistan signed a long-term inter-governmental agreement, under which the Supplies of Turkmen gas in 2007 had to come “to 60 billion –70 billion m3”. However, till recently they did not exceed 42 billion – 44 billion m3.

We should note that the “gas relations” between Russia and Turkmenistan sharply worsened in April of 2009, following the explosion on the export gas pipeline “Central Asia – Center” (CAC-4), of which the parties are still blaming each other. As a result, the supplies of Turkmen gas had ceased, and the Russian-Turkmen gas projects were frozen. The expansion of CAC-4 and the construction of the Caspian gas pipeline were delayed again, failing to even start. Although, it was supposed that the construction of the latter one would start in the mid of 2008, thus, the practical value of the Caspian project lies more in the global strategy plan, than in the gas marketing plan. Moreover, there is no hurry for the project participants, as even Gasprom cannot sell its gas to full volume because of the world economic crisis.

In June of this year, the said Russian monopolist proposed Turkmenistan to reduce the natural gas supplies volume or the gas cost. This is clear. Now Gasprom has no necessity in the expensive gas from Turkmenistan, especially now when the major consumer of it, Ukraine, has reduced the purchases from Russia from 40 billion to 32 billion m3. Furthermore, according to some sources, Kiev is planning to purchase only 27 billion m3 in 2010, since the contract provides for the possibility to purchase gas by 20% less than the agreed volume. It is likely that in 2010 also Gasprom will probably not purchase the Turkmen gas in the agreed volume and at the agreed price. Along with that, the Russian gas monopoly is interested in not allowing the Turkmen gas go to the European market in bypass of Russia. On the other hand, it is likely that Gasprom for Ashgabat will remain for many years more the major consumer. Thus, we think, both of the parties will try to find a mutually beneficial solution of this problem.

For Turkmenistan, in the event of successful negotiations with Russia and completion of construction of the Caspian gas pipeline, the pipeline will become the means of inflow of funds to the state budget and even more. In any case, Turkmenistan will not refuse the idea of the exports routes diversification, since this will allow indeed to reduce the almost the monopolistic dependence on Russia. It is not by chance that having quarreled with Gasprom, Ashgabat immediately started seeking new partners and even found them in Germany, Iran, and China. The gas pipeline to China (through Uzbekistan and Kazakhstan) serves this diversification purpose, which is to be launched into operation in December of 2009. The launch of a new gas pipeline to Iran is also expected at same time.

Chinese hieroglyph

The design throughput capacity of the gas pipeline Turkmenistan–Uzbekistan–Kazakhstan–China is 40 billion m3 of gas a year. With this, China, in the person of CNPC, intends to extract in Turkmenistan only 30 billion m3. The remaining volume is expected to be added by Kazakhstan. However, at the given moment, the same as in the case with the Caspian pipe, there is no clarity neither with the first source of supplies, or with the second one. In particular, in 2008 the volume of Kazakhstan gas exports (without taking into consideration the Karachaganak gas, directed under SWAP-operations to the domestic market) was less as 5.7 billion m3. This is in spite of the fact that domestic gas is exported presently only to Russia.

The future increase in the Kazakhstan gas exports are associated with the development of the offshore fields, in particular, with the commercial development of Kashagan, which is scheduled for the end of 2013. However, the situation is still as such that the increase in the natural gas production seems unlikely: NCOC Consortium, the operator of Kashagan, is planning in the first five years (2013–2018) to inject 55% of the casing-head gas in the reservoir, leaving just 4.8 billion m3 a year for further use. Moreover, the later it is supposed to inject up to 90% of the casing-head gas. Concerning Uzbekistan, at the current level of annual production of 60 billion m3 of gas, its export is about 12 billion m3. This is despite that fact that Uzbekistan itself has a shortage of blue fuel.

In Kazakhstan, the ceremony of launching the construction of the Kazakhstan-China gas pipeline was held on July 9, 2008. The first line of it, over which the transit Turkmen gas will be transported, will be put into operation in November of 2009. The financing of the gas pipeline construction is carried out at the expense of funds raised from Chinese banks. At the same time, no gas prices and tariffs for export transportation through Kazakhstan have been officially announced.

The project is being implemented in two phases: (1) Construction of the export pipe to provide the transit of gas from Turkmenistan, and (2) Trunk gas pipeline “Beineu–Bozoi–Samsonovka” for transportation of gas from the oil and gas fields in Western Kazakhstan to southern regions of the republic. The total length of the projected Beineu – Samsonovka gas pipeline route, to be traversed near Shymkent, will be about 1,510km, with the capacity of its first line of 5 billion m3/year in 2009–2010, and of the second line of 10 billion m3 in 2013–2014.

According to preliminary estimates, with the putting of Beineu– Bozoi–Samsonovka into operation, the volume of supplied domestic gas is likely to increase by 5 times for Kyzylorda Oblast, by two and half times for the Southern Kazakhstan Oblast, by three times for the Zhambyl Oblast, and 4.4 fold for the Almaty Oblast. The replacement of the imported gas with domestic gas will undoubtedly increase the level of energy safety of the republic and reduce gas tariffs for the population in Southern Kazakhstan.

It should be noted that the completion of construction of the gas pipeline from Turkmenistan to China in the near future will not infringe the interests of Russia, since in 2010 it is planning to transport 4.5 billion –5 billion m3 that is much less than the amount which Gasprom purchased from Turkmenistan.

Regarding cooperation of Kazakhstan and China in the gas sector, it is likely that it will face a number of serious problems. China’s obligations to finance the project can result in such that China will start influencing the natural gas price-making towards its reduction. Entering by China into gas supply contracts with Myanmar and Australia can also add to the strengthening of Beijing’s position in the negotiating over prices.

One cannot forget that fact that the Beineu–Samsonovka gas pipeline is aimed, first of all, to meet the domestic demand for natural gas of southern regions of Kazakhstan. As a result, this will bring complications to the export operation of the gas pipeline. Here could be the given conclusion: The economic efficiency of the export gas projects in the Caspian region, those ones which are being implemented or just planned for now, is as clear as the Chinese hieroglyphs.

So we ought to state that in the present pipeline race, despite the European Union’s activities to advance its own energy interests, Moscow outstrips Brussels. Meanwhile, China has the most success. At the same time, excessive gas diversification by the Central Asian states can lead to a problem to perform the undertaken obligations. According to experts, the current plans of the Caspian gas transportation are based on virtual reserves, which have to be first explored, proved, and extracted. This matter requires huge funds, new technologies, and, above all, time.


Table of contents
Caspian Gas: One for All?   Sergei Smirnov 
Insurance Market: Sight from Outside  The special report of Standard & Poor’s 
Macroeconomy. September 2009  Sergey Kasyanenko, Edilberto L. Segura 
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