Publication: Eurasia Daily Monitor Volume: 3 Issue: 91

Price of Russian gas set to double for Armenia

Following Azerbaijani President Ilham Aliyev’s late April visit to Washington and U.S. Vice President Richard Cheney’s early May visit to Kazakhstan, a breakthrough seems imminent on the project to connect Kazakhstan with the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. Officials in Kazakhstan now anticipate that Presidents Nursultan Nazarbayev and Aliyev will sign a framework agreement on that project by late June.

Kazakhstan’s Prime Minister Daniyal Akhmetov and KazMunayGaz Managing Director for Transport and Infrastructure Karygeldi Kabyldin have just discussed this issue in Baku with Aliyev and Azerbaijan’s State Oil Company management. According to officials on both sides, no political or commercial differences arise between them regarding this project. Remaining technical issues, such as the mode and schedules of transportation, can be ironed out in time for the agreement’s signing.

According to these Kazakh officials, oil deliveries into the BTC pipeline are to originate in the super-giant Kashagan offshore field. Oil transportation to Baku is to start in late 2008-early 2009 by tankers. Commercial production at Kashagan is expected to start in 2008 at an annual rate of 7 million tons (“early oil”), rising to 13 million tons annually by 2010 and reaching 50 million to 60 million tons per year by 2015. Developed by a consortium of Western companies with Italy’s Agip as project operator, the field holds estimated recoverable commercial reserves of at least 1.2 billion tons of oil.

Following his Baku visit, Akhmetov expressed confident hope that the agreement to be signed by the two presidents would include a pipeline on the Caspian seabed from Aktau in Kazakhstan to Baku. Thus far, Russia’s opposition (in tandem with Iran) has intimidated Astana into withholding its signature on the pipeline project. Cheney’s visit to Kazakhstan seems to have encouraged Astana that it is Kazakhstan’s national interests to join the project.

Transport to Baku by tankers, as has been proposed, is only viable as a short-term option. Once Kashagan comes fully on stream with its massive volumes, the existing fleet of small-capacity tankers would be neither sufficient nor cost-effective. On-site construction of medium-capacity tankers would involve prohibitively high investments, as well as expensive operations. Moreover, westbound transport solutions other than by pipeline would only ensure that the lion’s share of Kashagan oil is ultimately routed toward Russia, as is the bulk of Kazakhstan’s overall output at present.

According to estimates made in 2004, a trans-Caspian pipeline should become commercially profitable above an annual volume of 20 million tons of oil transported. However, oil price dynamics since then and into the foreseeable future suggest that the profitability threshold has descended below 20 million tons for a seabed pipeline.

During the Economic Cooperation Organization’s presidential-level summit just held in Baku, Kazakhstan’s delegation felt that Iran is softening its opposition to the proposed trans-Caspian pipelines. Astana intends to explore that issue further with Tehran. In addition, Kazakh officials are willing to discuss Iranian proposals to expand the existing swap operations. By this method, Kazakhstan delivers small volumes of oil to northern Iran by Caspian tankers, while Iran exports oil of equivalent value from the Persian Gulf on Kazakhstan’s behalf. The oil volumes swapped by Kazakhstan with Iran have been very small in recent years, despite Iran’s oft-expressed wish to increase them.

At this juncture, Astana seems to be considering an increase in those modest volumes as a means to induce Iran to lift its objections to a trans-Caspian pipeline. With Kazakhstan’s oil output due to grow spectacularly in the next few years, volumes swapped with Iran would in any case remain only a small fraction of Kazakhstan’s overall exports.

Meanwhile, Moscow is pressuring Western companies in the Caspian Pipeline Consortium (CPC), which owns and operates the Tengiz (Kazakhstan) — Novorossiysk (Russia) pipeline. Those companies depend on Russia’s consent to expand the pipeline’s capacity of 28 million tons annually in the first stage to the planned second-stage capacity of 67 million tons annually by the next decade, plus an additional mooring system for tankers at the port of Novorossiysk.

The Russian government, however, demands “corrections” in its favor to the 1996 contract, higher transit tariffs, and a high share of management posts for Russia in CPC, including the Director General’s post for a nominee of the Russian government. The Western companies involved are urgently in need of an export outlet for their rapidly growing output at Tengiz and elsewhere, and therefore are vulnerable to Moscow’s pressure on the CPC. They seem prepared to accept most of those conditions because they do not have a trans-Caspian option immediately available.

(Interfax, Trend, May 5-8)