Publication: Eurasia Daily Monitor Volume: 2 Issue: 105

Until Kazakhstan’s President Nursultan Nazarbayev made a landmark trip to Baku on May 25, marking Kazakhstan’s decisive move towards joining the Baku-Tbilisi-Ceyhan pipeline project, bilateral relations between Azerbaijan and Kazakhstan had shown few signs of progress.

Azerbaijan’s President Ilham Aliev visited Kazakhstan in March 2004, a meeting that produced a joint statement on friendly relations and strategic partnership directed at safeguarding stability in the Caspian region and rooting out terrorist organizations that could undermine the sovereignty, independence, and territorial integrity of Kazakhstan and Azerbaijan. At that time, Nazarbayev went out of his way to pledge Astana’s readiness to mediate Azerbaijani-Armenian talks on Karabakh. Armenian President Robert Kocharian reacted angrily to this indiscreet remark, stating, “Nagorno-Karabakh cannot be a part of Azerbaijan” (Kontinent, March 30, 2004).

Although Nazarbayev’s arrival for the BTC launch was generally welcomed by project participants as a positive sign, Kazakhstan has not signed the requisite intergovernmental agreement with Azerbaijan specifying conditions for transporting Kazakh oil through the BTC pipeline. In his talks with Aliev, Nazarbayev stressed the priority of economic interests in bilateral relations and sidestepped the thorny issues of terrorism and separatism. Nazarbayev had good reason to be sure that the talks would be productive. Oil experts estimate that Azerbaijan alone cannot provide enough oil to operate the BTC pipeline at its full capacity of 50 million tons of oil. In the future, the total annual oil output of Azerbaijan and Kazakhstan could reach 220 tons, but not before Kazakhstan starts commercial development of the Kashagan oil deposits in 2008 (Delovaya nedelya, May 26).

One of the reasons Kazakhstan was reluctant to climb on the BTC bandwagon until the last moment was believed to be the high costs of pumping oil through the Baku-Tbilisi-Ceyhan pipeline. On his recent visit to Astana and subsequent trip to Baku, Georgian President Mikheil Saakashvili removed that hurdle by convincing BTC shareholders to lower transportation tariffs for Kazakhstan to $3.30 per barrel. But even this moderately low tariff is less attractive than the transportation costs charged by the Caspian Pipeline Consortium (CPC), which Astana currently uses to ship the bulk of the oil produced by the Tengiz-Chevroil joint venture. The fact that the BTC pipeline passes through volatile regions in the North Caucasus and eastern Turkey makes the prospect of using that route even grimmer for Kazakhstan.

Astana’s hesitancy about joining the BTC project for so long seems to be primarily the political uncertainty of the route. Even after the hearty handshaking with BTC shareholders at the Azeri Sangachal oil terminal, Nazarbayev has left his options open for backtracking regarding the current route, as well as the maritime route to Iran, Azerbaijan, and Russia as an alternative to highly politicized BTC route. Nor has Kazakhstan ruled out, despite all political risks it may entail, the construction of a pipeline to Iran via Turkmenistan. The Iranian option would be incomparably cheaper than the BTC pipeline, which demands up to $3 billion to build oil transportation infrastructure in western Kazakhstan. Astana will have to pour millions of dollars into the projected 700-kilometer pipeline that is to link oil producing Atyrau (western Kazakhstan) with Atyrau seaport, from where the oil will be delivered to Sangachal oil terminal in Azerbaijan. Kazakhstan depends on Russia for oil tankers, as creating its own shipbuilding industry is not economically feasible for this landlocked country. Astana needs only five high-capacity tankers to service the Atyrau-Sangachal oil transport route. All these economic and political factors may force Kazakhstan to make a hard choice between competing powers (Novoye Pokolenie, May 27).

In recent months Russia, in its drive to raise the annual capacity of the CPC to 67 million tons, has incessantly pressured Kazakhstan to increase the amount of oil pumped through the CPC pipeline. To achieve that target Russia is planning to build ten additional oil refineries.

Notably, just a few weeks before Nazarbayev’s departure for Azerbaijan, Kazakhstan Prime Minister Daniyal Akhmetov, a man known for his close personal links to Russian energy oligarchs, unexpectedly announced at a cabinet meeting that recent talks with Moscow on increasing the amount of Kazakh oil through the CPC pipeline had led nowhere, and therefore Kazakhstan would have to look for other routes. Although he did not specify the BTC, it was clear that Tbilisi and Baku had some role in that change of heart.

However, Azerbaijan also finds it difficult to cut the cord with Russia, as it currently lets 5 million tons of its oil flow through the Baku-Novorossiysk pipeline via Russia. In his remarks at the opening ceremony for the BTC project, President Aliev said that the doors to the BTC pipeline were open for everyone, including Russia (Panorama, May 27).

Not surprisingly, these words resonated with the often-emphasized multi-vector oil policy of President Nazarbayev, who was the only one in Baku to stress the importance of diversified export routes for the Caspian region’s hydrocarbons.

It is still too early to determine how oil cooperation between Azerbaijan and Kazakhstan will be shaped in the future. But they share at least one common interest: the search for a safe course ahead of the impending battle for oil.