TENGIZ-NOVOROSSIISK PIPELINE INAUGURATED.

On March 26, the Caspian Pipeline Consortium (CPC) inaugurated the first international pipeline dedicated to moving Caspian oil to world markets. The pipeline, which took some eight years to plan and build, will bring Kazakhstani oil to Russia’s Black Sea port of Novorossiisk and from there to a potentially wide range of customer countries. The giant Tengiz onshore oilfield is the primary source of oil for the CPC pipeline in its first phase.

Development of the Tengiz field and construction of the pipeline are purely Western efforts in terms of technology and financing. Russia, having historically failed to tap Kazakhstan’s huge oil reserves, has managed to muscle itself in as transit country for the lion’s share of the currently available Kazakhstani oil. Moscow now stands to gain windfall revenues and some usable political leverage. Kazakhstan, on the other hand, is now joining the ranks of the world’s leading oil exporting countries, thanks to this pipeline.

President Nursultan Nazarbaev went along with the choice of the Russian export route for two reasons: first, because of his country’s potential vulnerability to Russia and consequent need to show deference to Russian interests; and, second, because this project offered the only large-scale export option before the Clinton White House had devised a half-way coherent policy on Caspian pipeline issues. The CPC project enjoyed a head start of about five years over the Baku-Tbilisi-Ceyhan project in terms of active planning and financing, with full-scale construction work underway since 1998 on Kazakh and Russian territory.

Originally formed in the early 1990s and reshuffled several times, the CPC consortium stabilized by 1998: Russia with 24 percent interest, Kazakhstan with 19 percent and Oman with 7 percent; the American companies Chevron and ExxonMobil with 15 percent and 7.5 percent, respectively; LukArco–a partnership of Russia’s Lukoil with Atlantic Richfield, the latter now a part of British Petroleum Amoco–with 12.5 percent; Rosneft Shell–a Russian-British partnership for this project–with 7.5 percent; Italy’s Agip and British Gas each with 2 percent, and Kazakhstan Pipeline Ventures and Oryx Caspian Pipeline with 1.75 percent each. CPC has the most complex structure of all the complex consortia formed to share the high costs and risks attendant to Caspian oil development and export.

The pipeline runs for a total length of 1,580 kilometers and a cost US$2.6 billion. Its first-phase throughput capacity is 28 million tons annually, with a projected second-phase (in or after 2010) capacity of 67 million tons.

The March 26 official commissioning in Kazakhstan’s oil capital Atyrau involved opening the tap to fill the pipeline with a first consignment of Tengiz oil. The oil should reach Novorossiisk within approximately ninety days for loading on tankers. The pipeline will operate on a testing basis with a throughput of 8 million tons during the remainder of 2001, and is expected to reach its full first-phase capacity next year.

The pipeline’s main customer is the Tengizchevroil consortium, which is developing the Tengiz oilfield, the richest of all fields now in operation in the Caspian basin. Chevron holds a 50 percent interest and is the project operator, with ExxonMobil holding 25 percent, Kazakhstan 20 percent and LukArco 5 percent. Chevron took over at Tengiz in the early 1990s after years of failed Soviet/Russian attempts to develop the field. Its output rose to 10.5 million tons in 2000 and is due to reach 12 million tons in 2001. Those figures amount to approximately one-third of the current total oil output in Kazakhstan. While Chevron and ExxonMobil are minority shareholders in the CPC pipeline, their control of the Tengiz field might add up to a critical mass which could protect the interests of both Kazakhstan and Western shareholders from possible Russian attempts to manipulate the transit for unilateral advantage.

Kazakhstan reckons that the involvement of influential American companies amounts to a safeguard against possible Russian rule bending, which Kazakhstan alone would not have been in a position to resist. For example, Moscow may well seek to erode the dedicated status of the CPC pipeline in favor of Russian oil producers (including those marketing the lower-grade Ural blend), or spring surprises on its partners in terms of tax and royalty calculations, or try to impose favored local Russian subcontractors on the consortium for construction and maintenance work, or attempt to manipulate the issue of access to Novorossiisk port installations. The Russian side has repeatedly evidenced ideas along those lines.

Before the CPC pipeline became available, Tengizchevroil was using concurrently at least three export routes which were cumbersome, expensive and of modest capacity. One was the Atyrau-Samara (Russia) pipeline, a part of which capacity was being set aside annually for Tengiz oil. Another route took Tengiz oil in rail tanks on Russia’s railroads for transit to third-country destinations. Yet another route took Tengiz oil across the Caspian Sea by tanker to Baku, then by rail across Azerbaijan to Georgia’s Black Sea port of Batumi. And a fourth route has involved shipping oil by tanker to Russia’s Caspian port Makhachkala, then overland via Tikhoretsk to Novorossiisk.

The absence of a large-capacity and cost-effective route slowed the pace of development and output growth at Tengiz. Now, the CPC line should substantially accelerate the field’s development and production. The new pipeline will, moreover, take to Novorossiisk the output of some other Kazakhstani onshore oilfields and also that of liquefied gas from the giant Karachaganak project.

Earlier this month, Nazarbaev announced his intention to commit early oil from the offshore Kashagan field for export through the planned Baku-Tbilisi-Ceyhan pipeline. That project has recently been renamed Aktau-Baku-Tbilisi-Ceyhan, in expectation of Kazakhstani oil inputs from the Aktau export terminal. Kashagan is expected to contain reserves far larger even than those of Tengiz. But Kashagan is still in the exploration stage and will need at least four or five years to come on stream commercially. The Russian government opposes both Baku-Ceyhan as such and the idea of laying a westbound trans-Caspian pipeline for Kashagan oil. For now, Russia is capitalizing on a substantial head start over America’s Caspian and Caucasus friends in the contest for oil export routes (Dow-Jones Newswires, Oil & Gas Journal, March 25-27).

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