Publication: Monitor Volume: 7 Issue: 16

The choice of a pipeline route from Kazakhstan’s giant Kashagan oilfield has become a key issue in Caspian oil politics. According to preliminary estimates, Kashagan may well be the richest offshore oilfield discovered anywhere in the world in recent years, potentially matching the North Sea’s oil reserves, and boosting the overall commercial prospects of the Caspian oil basin. But in order for those prospects to be fulfilled, the regional countries and their Western partners must find export routes not subject to manipulative control by Russia or Iran. Clearly the most sensible solution would be to plug Kazakhstan into the planned export pipeline for Azerbaijani oil from Baku via Georgia to Ceyhan in Turkey.

With much of Kazakhstan’s oil is already committed for export through Russia, the Kashagan field becomes crucial to linking Kazakhstan directly with the Western world and, in the process, advance the Baku-Ceyhan project, which in turn underpins Azerbaijan’s and Georgia’s hopes for development as independent countries.

The Kashagan field is being explored and developed by the Offshore Kazakhstan International Development Company (OKIOC), made up of the Anglo-Dutch company Shell, British Gas, ExxonMobil of the United States, France’s TotalFinaElf, and Italy’s Agip, each holding one seventh (14.29 percent) of the shares; Japan’s Inpex and Phillips Petroleum of the U.S. with one-fourteenth (7.14 percent) each; and British Petroleum Amoco and Norway’s Statoil with 9.5 percent and 4.8 percent, respectively.

OKIOC began the exploratory drilling in autumn 1999, reported a potentially huge find at East Kashagan as early as July 2000, and moved in October to explore West Kashagan. The consortium expects to complete the exploratory drilling by May 2001, launch immediately thereafter the appraisal drilling program, and proceed to commercial field development by spring 2003. The consortium is now on the verge of crucial decisions on selecting–from among its constituent companies–the project operators for field development and for the export pipeline.

TotalFinaElf publicly seeks those roles and advocates, also publicly, the choice of an export route via Iran. Such a solution would leave the export routes for Kazakhstan’s oil in the hands of countries–Russia and Iran–which are commercial competitors to Kazakhstan, aspirants in one way or another to regional hegemony, and problematic to say the least as partners to the West.

Routing Kashagan’s oil to Iran could also discourage an early start of construction of the Azerbaijan-Georgia-Turkey pipeline. Financing of that project hinges on the size of oil volumes available to be committed to that pipeline. Those volumes can be maximized by adding oil from Kashagan or other Kazakhstani projects.

On January 18, Kazakhstan’s President Nursultan Nazarbaev urged the OKIOC consortium to select a project operator without delay and to accelerate the exploration program at Kashagan, so as to start commercial production by 2005. He called also for the recovery and marketing of the massive quantities of associated gas that are expected to be found at the oilfield.

Meanwhile, the government of Kazakhstan examines ways to join the Baku-Ceyhan pipeline project, irrespective of the ultimate decision about the export route from Kashagan. The Ministry of Energy and Mineral Resources is now considering a short-term and a medium-term plan, both just submitted by a working group of the Chevron and Shell companies. Both versions envisage Kazakhstan’s main oil port, Aktau, as the actual starting point of the Baku-Ceyhan route, which would thus become Aktau-Baku-Ceyhan. This, in broad terms, is also the approach of Turkey and a supportive American government.

The short-term version involves shipping annually 12 million tons of Kazakhstani oil across the Caspian Sea by tanker from Aktau to Baku. The medium-term version would involve laying an overland pipeline from the onshore Tengiz oilfield to Aktau and a subsea pipeline from Aktau to Baku with an annual throughput capacity of up to 50 million tons. That would in turn necessitate expanding the planned capacity of the Baku-Ceyhan stretch by laying a parallel line. The medium-term version is contingent on the confirmation of existing estimates of Kazakhstan’s oil reserves.

Both versions would require, among other things: advance commitment of oil export volumes from producer companies in Kazakhstan and Turkmenistan; a framework agreement among the governments of producer and transit countries, providing for a single legal and tax regime along the entire export route; guaranteed financing of the project by all parties, and allocation of the ownership shares in strict correlation with the financing burden. This last condition seems designed to encourage the governments in the region to co-invest in the project, rather than providing only physical inputs.

With so much at stake, the Russian government seeks to firm up its grip on Kazakhstan’s oil exports. The main export pipeline out of Kazakhstan, leading to Novorossiisk, is due to be commissioned later this year. Apparently hoping to discourage alternative solutions, President Vladimir Putin ordered two weeks ago an unprecedented show of naval force in the Caspian Sea. (Dow Jones Newswires, Habar, IRNA; Reuters, January 22; see the Monitor, July 7, October 23, December 12, 2000, January 16, 23).