The first article in this series discussed how the economic and physical geography of Kazakhstan has constrained and conditioned President Nursultan Nazarbaev's choice of export routes for Tengiz oil. The second analyzed recent events leading to the multiplication of export route possibilities despite the Asian financial crisis and the temporary fall in the price of oil. This week, I take a broader view to inspect the problems behind the expansion of Kazakhstani oil exports.
1. Problems and Lessons
The difficulties with Tengiz exports, along with a perspective on the whole field of circum-Caspian energy development, reveal three overarching problems. Each of these three problems implies a lesson arising from the experience of international cooperation on environmental issues.
The first problem is that the energy consortia have not been able to do it alone. The corresponding lesson is that they need help and know it. The technical problems of constructing export pipelines are inseparable from the political issues of who will build and control the pipelines, who will finance and manage them, and where they will be built. Due to the nature and variety of technical and geophysical obstacles facing the builders, pooling of financial resources and transport facilities is necessary.
The complexity of the technical problems in the Tengiz venture has forced the partners in the project to establish new forms of organization and decision-making. Existing political and eco-nomic structures and incentives have proven to be just as outdated as old methods of business operation. These have involved the application of specialized knowledge to fields as different but integrated as enterprise management, political engineering, and financial settlement.
The second problem is that unilateral coercion fails. The corresponding lesson is that states need more information and better ways to evaluate it. States have to seek more information and evaluate it properly because in the post-Cold War international system, there is no holding back the free flow of information nor in the end any holding back the ability of people to act on that information.
The involvement of citizens of a resource-producing country represents a type of at least "virtual" participation in policy-making by the host country's citizenry. It is related to the model of the small European countries such as the Netherlands, where specialized public interest groups have long cooperated with ministries in the practical resolution of policy questions, irrespective of legislative intervention. The experience of the Azerbaijan International Operating Company (AIOC) illustrates how private voluntary and non-governmental organizations can, through intermediaries, work informally with governments.
The third problem is that intra-governmental politics do not always help. The corresponding lesson is that human resources must be better integrated into the policy process. Indeed, enhanced citizen participation is necessary, for in the Caspian region these publics are increasingly literate, increasingly informed, and increasingly politically active.
Moreover, foreign investors increasingly recognize that their own economic interest requires emergence of an experienced younger generation that will be capable of taking over greater responsibility and carrying on the work of the present-day leaders later in the 21st century. This is in the medium-term and long-term interest of the governments and consortia because, as the new international system organizes itself from the bottom up, the newly independent states need people who can respond appropriately to new and unexpected challenges, quickly adapting policies and strategies efficiently to changing circumstances.
2. Why the Lessons Matter
These are not the only lessons to be drawn from the entire tableau of Caspian energy development. However, they are the ones that emerge most clearly from a comparison of the experi-ences of the AIOC and the Caspian Pipeline Consortium (CPC). In fact, they represent more general lessons that research on the effectiveness of international environmental institutions has shown to be significant.
The lesson that the energy consortia need help and know it follows from the problem that the energy consortia cannot do it alone. It is the energy analogue of the environmental lesson to en-hance the contractual environment.
The lesson that states need more information and better evaluation of it follows from the problem that diktats fail. It is the energy analogue of the environmental lesson to increase governmental concern.
The Caspian energy lesson that human resources must be better integrated into the policy process follows from the problem that intra-governmental politics do not always help. It is the en-ergy analogue of the environmental lesson to build national capacity.
In March of this year, the private U.S. consulting firm Legal Technical and Advisory Services (LTAS) held a training session for energy officials from Turkmenistan, Uzbekistan and Kazakhstan. This high-level hands-on seminar focused on legislation, policy and regulation of the oil and gas sector. Of particular note was the simultaneous presence of leading officials from the three most important energy-producing countries in Central Asia. The LTAS meeting in Atyrau could have provided an informal opportunity to look for ways to enhance Central Asian cooperation at ministerial and subministerial levels.
Indeed, over the last year the Central Asian Union's Committee of Prime Ministers has under-taken, at the direction of the member states' presidents yet without full success, to design plans for establishing multinational consortia in the areas of energy, water conservancy, unified tele-communications systems, mining and foodstuffs.
In fact, Kazakhstan and the energy consortia operating on its territory would do well to consider their interest in a new security concept that has recently been developed, called "cooperative energy security." The three necessary components of cooperative energy security are an investment-friendly financial climate, guarantees of secure transport and political stability. These components represent "transparencies" of the three classical economic factors of production: land, capital and labor.
First, the provision of secure transport means the transparency of land--which signifies geographical distance and therefore includes bodies of water--simply because transport occurs through and over land. Second, the transparency of capital signifies a similar absence of obsta-cles to foreign direct investment as it moves through the host country's domestic legal and fi-nancial regimes, which must be conducive to those flows and tailored to such a purpose. Third, the transparency of labor signifies political stability, without which there is no labor market; that is, without political stability, individuals do not have the necessary incentive structure to manifest socially as an aggregate labor force.
Implementing the three lessons mentioned above would help fulfill the needs of consortia, of governments in the region and outside and of the populations in the region. The first energy lesson responds to the needs of transnational corporations and their consortia because it promotes transparency of capital. The second responds to the needs of states in and outside the region because it promotes transparency of land. The third responds to the needs of populations in the region because it promotes transparency of labor as well as civil society. Combining these lessons in practice would offer something to everyone.
Copyright © Robert M. Cutler
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First published in FSU Oil & Gas Monitor, No. 52 (5 October 1999): 4–5.
