DISCUSSIONS INTENSIFY WITH KAZAKHSTAN ON TRANS-CASPIAN GAS PIPELINE

On a visit to Astana on February 27-28, Azerbaijan’s Minister of Foreign Affairs Elmar Mammadyarov took the initiative to discuss possible exports of gas from Kazakhstan through the proposed gas pipeline on the Caspian seabed (Kazakhstan Today, Turan, February 28).

In his talks with Kazakh President Nursultan Nazarbayev and senior government officials, Mammadyarov broached the existing commercial, legal, and technical options for Kazakhstan’s gas to reach Europe through the proposed trans-Caspian pipeline and the existing Baku-Tbilisi-Erzurum (Turkey) line, which can be integrated in Turkey with the EU-backed Nabucco pipeline project for deliveries to Europe. The same corridor would also carry Turkmen gas. The United States supports all the phases of such a gas corridor and Azerbaijan’s top leadership is the most active regional promoter of this project.

Kazakhstan’s president and government display keen interest in the project, but they also hold considerable uneasiness about Russia’s resistance to it. Speaking to the press during Mammadyarov’s visit, Kazakh Energy and Mineral Resources Minister Baktykoja Izmuhambetov noted that Astana has recently entered into discussions on the project with senior U.S. and EU officials, but it cannot ignore Russia’s opposition. Russia insists that such a project needs the consent of all five Caspian riparian countries, meaning a Russian and Iranian right of veto.

U.S.-Kazakh discussions in early February in Astana also evidenced Kazakhstan’s concern about Russia’s opposition to this project. Minister of Foreign Affairs Marat Tazhin deemed it necessary to declare publicly that Kazakhstan’s policies on oil and gas exports “are shaped through active consultations with Russia. Our strategic document on eternal friendship with Russia is not just lip service or a rhetorical balancing act. We are in fact conducting a very open and transparent dialogue with Russia” on energy transit (Interfax, February 5).

In those February talks, U.S. Assistant Secretary of State for Economic and Energy Affairs Daniel Sullivan and Deputy Assistant Secretary of State Matt Bryza underscored Kazakhstan’s own interest in opening export outlets for its oil and gas, so as to end Russia’s transit monopoly. Kazakhstan’s interest in that regard fits in closely with Western companies’ need for non-Russian export outlets and Western countries’ imperative to avoid dependence on Russian transit of their energy supplies. At present, 100% of Kazakhstan’s gas exports and 90% of its oil exports are going to or via Russia (Kazakhstan Today, Interfax, February 5).

Some Kazakh officials, including Izmuhambetov, suggest connecting Russia to the trans-Caspian project as an incentive for Moscow to consent to it. Recently, Kazakhstan proposed that Russia be offered an outlet for associated gas from the northern Caspian oilfields Tsentralnoye and Khvalinskoye in the proposed trans-Caspian pipeline (Interfax, February 28). Those two offshore fields, legally adjudicated to Russia, actually straddle the Kazakhstan-Russia median line and are being developed by the two countries on a parity basis.

Kazakhstan is now drafting proposals to the European Commission on construction of a trans-Caspian pipeline and the funding of technical and economic feasibility studies. The pipeline as now proposed would originate at Kazakhstan’s giant Tengiz field onshore near the coast, connect with a line from Turkmenistan near the port of Turkmenbashi, and continue on the seabed to Baku and overland to Tbilisi and Erzurum.

Tengiz, the giant oilfield under development principally by ChevronTexaco and ExxonMobil, is expected to yield large quantities of associated gas when production reaches the planned level of some 25 million tons of oil annually. However, Russia’s stranglehold on the Tengiz-Novorossiysk pipeline — the sole existing outlet from Tengiz — has held oil production at Tengiz to some 13 million tons annually for the last three years.

Further affecting commercial prospects for associated gas, Italy’s ENI Agip company — the leader in the consortium to develop the supergiant Kashagan oilfield — has postponed the start of production there into the second half of 2010, instead of 2008 as had been planned (Interfax, February 26). In any case, the oil companies need time to develop and install the expensive technology for capturing the associated gas into a pipeline, instead of burning it in flares at the oil well.

Kazakhstan produced 27 billion cubic meters of gas in 2006, slightly up on 2005. Associated gas accounts for almost half of usable production (Interfax, January 18). The country expects to produce 29 billion cubic meters in 2007 and some 40 to 50 billion cubic meters per year during 2010-2015. Flaring of associated gas is expected to stop by 2011, at which time most of those volumes should be marketable for export. However, Kazakhstan will undoubtedly require growing volumes of gas for internal consumption of its urbanizing society, as well as for Kazakhstan’s southern regions, which are traditionally supplied with gas from Uzbekistan.

Russian quasi-monopolization of exports is a persisting risk. Gazprom is currently proposing a long-term agreement on the processing and export of 16 billion cubic meters of gas annually from Kazakhstan’s Karachaganak field, under development by an international consortium. Meanwhile, the Kremlin seeks to include Kazakhstan in the group of countries that would export their gas through the “single export channel” — Gazprom’s pipeline network in Russia. Meanwhile, the government of China is hoping, perhaps unrealistically, to import some 10 billion cubic meters of gas from Kazakhstan annually in the next few years.

Russia’s existing transit systems are already being used to capacity and will not be able to accommodate Kazakhstan’s rapidly growing exports of oil and gas by 2010 and thereafter. Moreover, Russia is not necessarily interested in the rapid growth of energy exports from Kazakhstan, as witnessed by Moscow’s prolonged obstruction of the Tengiz-Novorossiysk pipeline, even though it passes through Russia (albeit not under Transneft’s jurisdiction).

While the case for a westbound trans-Caspian gas pipeline from Kazakhstan is overwhelming, the ongoing developments underscore three impediments: (1) relatively limited volumes available in the next few years; (2) cost-effectiveness problems with the associated gas; and (3) Russia’s strong position and capacity to intimidate and obstruct in order to maintain that position.

Those impediments demonstrate the urgency of including Turkmenistan in this project. Turkmen gas volumes and probable reserves are vast and not affected by problems with associated gas. Kazakhstan’s participation is important and will be easier to obtain in conjunction with Turkmenistan, so that Kazakhstan should not have to face alone the brunt of Russian pressure.

However, the aforementioned impediments must not mean — as some of the officials involved seem to suggest — that the trans-Caspian gas pipeline is a “matter for the future.” Such remarks should be interpreted to mean that the future is now. Otherwise it would become Gazprom’s and the Kremlin’s future, in this region and in Europe.