IMPLICATIONS OF THE EAST KASHAGAN OIL BONANZA.

Publication: Monitor Volume: 6 Issue: 132

The oil discovery, just announced at Kazakhstan’s offshore field East Kashagan, could change the Caspian oil export picture in favor of the regional countries, the West and consumer countries in East-Central Europe, underscoring the common interests of these three sets of countries. It may also, in the process, rescue Washington’s Caspian policy post-Clinton.

The Offshore Kazakhstan International Operating Company (OKIOC) consortium has not yet released its estimates of East Kashagan’s reserves. But all indications suggest that it is a world-class deposit and one much larger than any known Caspian oilfield, including Kazakhstan’s giant onshore field Tengiz. Kazakhstani officials for their part speak of reserves comparable to those of Saudi Arabia’s richest oilfields. Kazakhoil state company chairman Nurlan Balgymbaev, for example, puts East Kashagan’s reserves at several billion tons. The estimates are of necessity tentative after drilling of the first appraisal well, 75 kilometers off Kazakhstan’ shore, more than 5,000 meters under the seabed. The oil is of high quality, “light and clear,” said President Nursultan Nazarbaev on July 4 aboard OKIOC’s platform.

OKIOC, which explores and will develop East Kashagan, is made up of the Anglo-Dutch company Shell, British Gas, British Petroleum Amoco, ExxonMobil and Phillips Petroleum of the United States, Norway’s Statoil, Italy’s Agip, France’s Totalfina and Japan’s Inpex, most of these holding equal stakes in the project.

The discovery at East Kashagan should help jump-start the overdue construction work on the planned Baku-Tbilisi-Ceyhan main export pipeline for Caspian oil. To become commercially profitable in the absence of U.S. government subsidies, that pipeline will need to put through an estimated one million barrels of oil per day. The international oil projects in Azerbaijan will not produce that amount soon, perhaps not before 2005 at the current pace of development. Kazakhstani oil can, however, offset the deficit and ensure that the aggregate oil volumes available for Baku-Ceyhan exceed the profitability threshold. While Tengiz oil is committed in advance for export via Russia, the oil from other Kazakhstani projects–such as the East Kashagan, once it comes on stream–is free from such commitments.

As long as Baku-Ceyhan needs to collect every drop of oil available in order to be profitable and attract investors, there is very little chance for consuming countries in East-Central Europe to benefit from Caspian oil. Those countries have proposed routes out of Azerbaijan that would tank and pipe the oil to the Balkans, to Danubian Europe, or to Ukraine and Poland (see Ukraine section above). This latter route seems to have the most promising commercial potential due to the large size of those two importing countries and also because it leads further to rapidly growing markets in the Baltic Sea region. But Azerbaijan and the international oil companies interested in Baku-Ceyhan, as well as the U.S. government and Turkey, are forced to set strict priorities as long as the oil export volumes are limited. Baku-Ceyhan remains the indisputable priority. East Kashagan, however, will–once on stream–almost certainly provide sufficient volumes to support more than just one major non-Russian pipeline out of the Caspian Sea.

East Kashagan may make the difference between success and failure of Washington’s policy in the Caspian region. The Clinton administration’s “multiple pipelines” strategy has yet to live up to its name. Apart from the Baku-Supsa (Georgia) oil pipeline out of Azerbaijan, with an annual throughput capacity of only 5 million tons, Russia not only remains the primary export route for Caspian oil, but is set to absorb an increasing share of it. Kazakhstan currently exports up to 14 million tons of oil annually via Russia. That amount is planned to increase significantly in 2001-2002 when the pipeline from Tengiz to Novorossiisk in Russia, with a 28 million tons capacity in the first stage, is due to be commissioned. Moscow’s potential leverage on Kazakhstan will thereby have increased, as will the proportion of Caspian oil resources diverted to Russia. That route is neither the most economic, nor free of political manipulation by Moscow in its dual role of commercial competitor and overbearing regional power.

With Baku-Ceyhan still on the drawing boards, the Caspian oil export picture–now or in the next year or two–is hardly one of multiple pipelines. East Kashagan can change that. According to Nazarbaev’s aide Yermuhammet Yertysbaev, the discovery “will enable Kazakhstan to start regional cooperation with Azerbaijan, Georgia, and of course Turkey, give us access to the Euro-Atlantic and other global systems, and open at long last a direct route for Kazakhstani oil to Western Europe.” To fulfill that vision, construction of the Baku-Ceyhan pipeline and development of the East Kashagan oilfield would need to proceed in correlation with one another and without delay.

Barring political obstruction, East Kashagan’s development can take up to five years to reach the stage of commercial production. Have international political games around East Kashagan already begun? This week’s announcement of the discovery was partly overshadowed by leaked and vague allegations of wrongdoing under the Foreign Corrupt Practices Act against some of the American firms in the project (Dow-Jones Newswires, Kabar, July 3-5; Kazakhstani Commercial Television, June 29; see also the Monitor, March 20, May 26, and the Fortnight in Review, March 30).

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