Publication: Eurasia Daily Monitor Volume: 5 Issue: 137

Kazakhstan's Kashagan oil fields

At a recent government session Kazakh Prime Minister Karim Massimov congratulated Minister of Energy and Mineral Resources Sauat Mynbayev on the successful outcome of talks with the international Agip KCO consortium developing the Kashagan oil field, the largest deposit found in the Caspian in the past 30 years. The long-drawn-out row between the Kazakh government and Agip KCO culminated last January in increasing the share of KazMunaiGas, the state-controlled oil and gas company of Kazakhstan, in the Kashagan project from 8.33 percent to 16.88 percent. Additionally, the consortium was penalized $5 billion for repeated delays in implementing the project, which resulted in raising its original cost from $57 billion to $136 billion. Last June the Ministry of Energy and Mineral Resources and Agip KCO signed a new memorandum setting the deadline for the start of extraction of Kashagan oil. Mynbayev told the press that the original project budget scheme presented by Agip KCO in April this year had been rejected by the government on the grounds that it did not take into account Kazakhstan’s financial losses resulting from postponing implementation of the project. Mynbayev said in June that the international consortium had accepted nearly all the conditions put forward by Kazakhstan and that the final date for starting Kashagan oil extraction was set for October 1, 2013. He added that the government would not tolerate further delays in developing the oil field and all investments made by Agip KCO in Kashagan after the set deadline would not be compensated by Kazakhstan. “They have already invested $17 billion, and after October 1 [2013] the money will not be compensated, which will mean net losses [for Agip KCO],” warned Mynbayev. He added that Kazakhstan had also rejected the request of the international consortium to extend the product-sharing agreement after it expires in 2041 (Panorama, July 4).

Some Russian experts think the tough line adopted by the Kazakh government and the prolonged disagreements between Western companies and Kazakhstan over Kashagan jeopardize the Baku-Tbilisi-Ceyhan project, which to a great extent depends on Kazakh oil to be economically feasible. Moscow does not seem to have lost interest in the sporadically discussed 1,650 kilometer pipeline project from Kazakhstan via Turkmenistan through Iran to the Persian Gulf as an alternative and, in economic terms, cheaper route for Caspian oil. While a pipeline route to Iran would have positive political significance for Russia in the present standoff between Moscow and the West, in economic terms it clearly runs counter to Russian interests and would only boost the exports of rival Kazakh oil. Nevertheless, the slightest dissatisfaction within the Agip KCO with American sanctions threatening potentially beneficial energy ties with Iran would be good for Russia. In this highly politicized atmosphere surrounding pipeline projects, Astana is apparently in no hurry to let Kashagan oil flow through the BTC. Obviously, oil authorities in Kazakhstan are playing for time to synchronize the projected increase of oil output to 150 million tons a year by 2015 with the completion of the Russian pipeline from East Siberia to the Pacific (VSTO). Russian Transneft Company plans to complete the construction of this important oil route to Asian markets by 2012. If Kazakhstan chooses to ship its oil through East Siberia and the Pacific pipeline, it would cause an oil deficit in the EU and thus render significant weight to Astana’s arguments with western companies (www.gazeta.kz).

Russia has never ceased its attempts to regain control over Azeri and Kazakh hydrocarbons and reassert its weakening position in the Caspian region using all imaginable means for this purpose. During his May 22 and 23 visit to Astana, Russian President Dmitry Medvedev tried to entice his Kazakh counterpart with the Eurasia channel project to create a maritime route linking the Caspian with the Black Sea. The project is conceived as an alternative to the EU-backed TRACECA Eurasia transport corridor project bypassing Russia. But in its desperate battle for control over Caspian hydrocarbons, Moscow faces strong competition from its political ally Iran. At the second oil conference in Baku, Amin Yeskenderi, an executive of the Iranian Oil Ministry, stated the intention of his country to expand oil transport from the Caspian region to the Gulf states. In anticipation of the growth of Caspian oil export volumes to 4.7 million barrels a day in 2020, Iran plans to increase the capacity of its Neka oil terminal and lay a 1,560 kilometer pipeline from Neka to Jask seaport on the Gulf of Oman with a projected capacity of 1 million barrels a day. If this project materializes, Iran will be able to offer all the Caspian oil-producing states a new oil transport route with the lowest possible transit tariffs (www.regnum.ru).

With the uncertainties surrounding Kashagan, escalating disputes with Agip KCO, and the Baku-Tbilisi-Ceyhan pipeline, Russia is regaining confidence in its uninterrupted efforts to strengthen its foothold in the Caspian. In fierce competition with Western rivals, Moscow is seeking a new energy alliance in Central Asia and within the Shanghai Cooperation Organization. It is not clear whether these overtures will bear fruit any time soon. One thing can be said with certainty, though: further delays of the Kashagan project will not contribute to the energy security of the West.