TRANS-CASPIAN EXPORT OPTION NOW AVAILABLE TO CPC COMPANIES IN KAZAKHSTAN

Visiting Kazakhstan on March 14, U.S. Energy Secretary Samuel Bodman announced that he was conveying to President Nursultan Nazarbayev “the desire of the United States” to expedite the signing of the agreement on trans-Caspian oil transport from Kazakhstan through the Baku-Tbilisi-Ceyhan pipeline (press release, March 14). Under discussion for years, the agreement has been delayed by Moscow’s behind-the-scenes pressure on Nazarbayev.

In the current stage of discussions, the project envisages tanker shipments of 7.5 million tons of Kazakh oil annually to Baku in the initial stage; 20 million tons in the follow-up stage presumably before 2010; and up to 30 million tons annually after that. The transport project envisions a trans-Caspian shuttle line of five medium-capacity (65,000 ton) tankers. Once the 20 million ton target is reached, a seabed pipeline becomes commercially profitable, according to the project’s 2004-2005 feasibility assessments. However, rising oil prices since 2005 have almost certainly brought the profitability threshold for such a pipeline below 20 million tons of oil transported per year.

The timing for a definitive commitment by Astana is made even more propitious and perhaps compelling by Moscow-laid obstacles to the planned expansion of the Caspian Pipeline Consortium (CPC) pipeline. Built by Western oil companies as members of the CPC consortium, the pipeline runs from Tengiz and other onshore Kazakh oilfields to Russia’s Black Sea port Novorossiysk. The Russian government poses extortionate demands to the pipeline’s Western co-owners as a condition to authorizing the line’s expansion on Russian territory. Thus, the involved Western oil-producing companies face the dilemma of submitting to extortion or, alternatively, renouncing the planned expansion, in which case they would have to seek a non-Russian export route for their rapidly rising oil output.

On March 14-15 during an energy conference in Moscow, CPC General Director Ian MacDonald told the Russian side that decisions on expansion must be taken within next 2-3 months, “Otherwise, stop the negotiations; one cannot negotiate forever.” Delays are prompting producer companies in Kazakhstan to look for other export routes, he warned, speaking one week before the annual meeting of CPC’s shareholders (Interfax, March 15).

The CPC includes Western major oil companies — Chevron, ExxonMobil, Italy’s Agip, BP, British Gas, Shell — along with the governments of Russia and Kazakhstan and some smaller shareholders. The pipeline, entirely financed and built from 1996 to 2001 by the Western companies, officially commissioned in 2001, and fully operational since 2004, has a design capacity of 28 million tons annually in the first stage, and exceeded that capacity in 2005 by pumping 31 million tons to Novorossiysk. Existing agreements and plans call for expanding that capacity to at least 67 million tons annually by the next decade. CPC wants an immediate start to construction of additional pumping stations, storage reservoirs, and a third mooring system at the port of Novorossiysk.

The Russian government, controlling all major export routes out of Kazakhstan, has leveraged that position into windfall gains out of CPC at Western shareholder expense since 2001. At present, Moscow calculates that the rapid growth of oil output in Kazakhstan may increase the pressure on CPC’s Western members to accept a new set of Russian demands in order to secure this export outlet. Ostensibly to correct “faults” in the 1996 contract (the legal validity of which is not in dispute), the Russian government demands seven changes as preconditions to expansion of the pipeline. CPC’s Western companies have fully or largely agreed to five of those demands (www.cpc.ru).

Thus, transport tariffs on the pipeline were to be increased by $2.50 per ton of oil, to $30.83 per ton “temporarily” — a demand that has now escalated to $32.40 per ton. The increase affects the Western oil producing companies that financed and built the pipeline themselves. Interest rates on loans provided by those companies for the early phases of construction are to be reduced. Cost overruns would have to be covered by those same companies.

Corporate governance is one of the most contentious issues on the list of Russian demands. Thus, 50% of CPC’s management posts are henceforth to be allocated to shareholder governments, meaning a massive redistribution of posts in Russia’s favor. Moreover, CPC’s next General Director will be a nominee of the Russian government. Moscow wants to change the corporate structure further, by creating Boards of Directors with centralized authority. According to MacDonald, “Undermining [CPC’s] carefully constructed balance will be the surest way to destroy trust and stop progress on [pipeline] expansion” (Interfax, March 14).

American and other Western oil-producing companies in CPC now have a choice for the first time in a decade: Continue to face Moscow’s extortionate tactics and yield to some of them, or alternatively create a non-Russian, trans-Caspian export route, supporting the U.S. government’s efforts in that regard, rather than working at cross-purposes with it.