To paraphrase Queen Elizabeth, BP has had an “annus horribilis” in Eurasia. Its joint venture in Russia, BP-TNK, has been under attack by its Russian partners; and last month an explosion in Turkey damaged the Baku-Tbilisi-Ceyhan (BTC) pipeline, forcing BP to declare force majeure and halt export operations. When hostilities erupted between Russia and Georgia over South Ossetia, BP was forced to shut down the other pipeline that it operates for Azeri crude, Baku-Supsa, as well.
Now, according to the Russian news agency Interfax, citing an unconfirmed confidential source from within in the Caspian Pipeline Consortium (CPC), BP is contemplating whether it may end its participation in the $2.67 billion, 938-mile CPC pipeline, opened in November 2001, which transports Kazakh oil from Tengiz, Kashagan, and Karachaganak (Interfax, September 19).
BP-TNK accounted for a fifth of BP’s global reserves, a quarter of BP’s production, and nearly a 10th of its global profits, and was immensely profitable to the Russian Federation’s treasury. In May, as the battle raged over BP-TNK’s management, TNK-BP Chief Operating Officer Timothy Summers stressed the company’s importance to the Russian economy. He told telling journalists that TNK-BP had paid $20 billion in taxes in 2007. “As to the taxes and other payments into the budget, given the oil price at roughly $100 per barrel, the payments of the company in 2008 will amount to approximately $30 billion.” He concluded with the observation that in less than five years BP-TNK had already paid $48 billion in taxes (UPI, May 29).
While BP’s share in BP-TNK is 50 percent, with its three Russian partners holding the remaining shares, its percentage of CPC is more modest; BP owns 46 percent of Lukarco B.V., which has a 12.5 percent stake in CPC, as well as 19 percent of Kazakhstan Pipeline Ventures LLC, which has a modest 1.75 percent share. Besides BP, the other CPC shareholders are Russia with 24 percent; Kazakhstan, 19 percent; Oman, 7 percent; Chevron Caspian Pipeline Consortium Company, 15 percent; Rosneft/Shell Caspian Ventures Limited, 7.5 percent; Mobil Caspian Pipeline Company, 7.5 percent; Agip International (N.A), NV, 2 percent; BG Overseas Holding Limited, 2 percent; and Oryx Caspian Pipeline, LLC, 1.75 percent. In April 2007 Russia’s CPC share was placed under the management of the Russian state pipeline monopoly Transneft (Vedomosti, July 21, 2007).
CPC performs the same task for Kazakh crude as BTC does for Azeri oil exports, delivering 700,000 barrels per day (bpd) of Kazakh crude to Russia’s Black Sea Novorossiysk port, while BTC delivers one million bpd to Turkey’s Mediterranean port of Ceyhan. Like BTC, the CPC is a multinational consortium, but while there is no Russian investment in BTC, Moscow owns nearly a quarter of CPC through Transneft.
BP is in disagreement with the CPC management, which wants to spend $1.5 billion to more than double the CPC’s throughput to 1.5 million bpd over the next three years by building 10 new pumping stations, six new 100,000 cubic meter storage tanks, a third offshore loading system, and some pipe replacements. An unspoken subtext of the dispute may well be BP’s distaste for the aggressive management style of Transneft, which, as a monopoly, is used to having things its own way. CPC is currently the only oil export pipeline on Russian territory that is not wholly owned by Transneft.
The potential exit of Western CPC participants has thoroughly alarmed Astana, so much so that Kazakh President Nursultan Nazarbayev has appealed directly to Russian President Dmitry Medvedev for bilateral government support for the expansion project, telling him, “I would like to ask that we instruct the governments to solve completely the issue of expanding the CPC. It is very important that Kazakh oil goes specifically through Russia…I think it is beneficial for all of us to resolve this issue” (Interfax, September 22).
While Astana, as the major CPC exporter, remains firmly committed to the expansion project, Moscow is much more cautious, having repeatedly raised concerns about the CPC’s economics. CPC’s current debts total $5 billion, and Transneft has coupled any future CPC commitment to the consortium’s fiscal recovery, including both transport tariff increases and debt reduction. Oman is also considering withdrawing from the consortium.
The stakes involved in expanding the CPC line are significant; as the consortium states on its website: “Approval of CPC expansion will be an early, positive example of global energy cooperation. Delay in approving it will, on the other hand, erode value from the investment at a rate of $50 million a month” (www.cpc.ru). BP, which insists on borrowing more to fund the expansion, appears to be the only shareholder opposing the proposed terms hammered out for CPC’s expansion.
The era of Western energy companies uncritically lining up for a piece of Kazakhstan’s energy action at any price may be drawing to a close, given the dolorous example of Astana’s pressure earlier this year with its foreign partners over the terms of developing the Kashagan oil field. Kazakhstan has absorbed more than $40 billion in investments in its energy sector over the past decade. Given Russia’s insistence on fiscal reform, Kazakhstan, as the majority user of CPC (Russian oil firms use approximately 25 percent of its capacity), may be forced to do something that it has been most reluctant to do in the past—fund the upgrade itself.
As of January the National Bank of Kazakhstan reported $21.556 billion in assets in its National Oil Fund; while fully funding the CPC expansion would see the National Oil Fund shrivel to a mere $20.056 billion, nervous Kazakh accountants need not fear waiting years to be reimbursed, as the CPC website optimistically notes that the upgrades will “generate revenues of over $2 billion a year.”