Oil from the Tengiz deposit in western Kazakhstan is being pumped westward through a pipeline through southern Russia. The pipeline, built by the Caspian Pipeline Consortium (CPC), has cost $2.6 million to construct: twice the originally estimated cost. It will have an initial capacity of somewhat less than 600,000 barrels per day (bpd). Its eventual full capacity will range from 1 to 1.5 million bpd. The date for loading the first tanker in Novorossiisk has been postponed several times, now likely to take place to be sometime in September.
BACKGROUND
From the beginning Chevron wanted a direct pipeline to a port, but disputes arose over which port it should be, who should pay for construction, and how. Restrictions by Russia on oil exports from Kazakhstan created doubts about the viability and future of the investments around the Caspian Sea almost as soon as the USSR disintegrated. In 1993, Russia limited exports of Kazakhstani crude oil, saying that the Tengiz field had to high a level of mercaptans, a family of sulfur compounds that corrodes pipeline. As a result of Moscow's insistence, Chevron's Tengiz venture had to build a treatment plant to extract hydrogen sulfide from the crude oil before putting it into the pipeline system.
Chevron had no stake in the CPC’s first incarnation. Rather, in the beginning, the CPC was a joint venture among Kazakhstan, Russia, and the Oman Oil Corporation. Chevron nevertheless found itself being asked to finance most of the then-projected $1.4 billion cost, since Russia and Kazakhstan had no money. Yet Chevron was offered only a minority stake in the pipeline. The bulk of its share under the original consortium structure would instead have gone to Oman Oil, which owned 33 per cent of the CPC, but whose financial participation would be minimal. This impasse led Chevron in May 1994 to slash its investment in Tengiz by 90 per cent for 1994.
In early 1995 Russia and Kazakhstan agreed to construct a $400 million section of the CPC pipeline. However, financing for the remaining 750-mile link to the Tengiz field remained a problem. Kazakhstani officials suggested that British Gas and Agip might join Chevron in financing it.
Finally in March 2001, Kazakhstani Prime Minister Kasymzhomart Tokaev turned the Tengiz tap to begin filling the 1,580-kilometer pipeline. Pumping was halted in May, supposedly to remove water that had been used for hydrotesting the line, but reports began to circulate later in the month, that the filling of the pipeline was also suspended because of a dispute with Russian customs over tariff treatment of the oil. However, the CPC contradicted this, saying that Kazakhstan and Russia had a customs agreement.
IMPLICATIONS
It appears that the “customs agreement” was no more than an initial understanding that had not be translated into proper documentation. A hint of the real problem behind the continual postponement of the first tanker-loading was given by a Chevron official, who stated in June that the CPC members had agreed to set up an oil-quality bank that would export a new standard grade of oil called CPC Blend, which would indeed be a blend of oils from Kazakhstan and Russia. The local Russian provinces had all along wanted to export their own production through the CPC, but this production is of a grade inferior to Kazakhstan's. An oil-quality bank is an established mechanism that divides revenue according to the market value of the oil that each producer contributes to the blend.
Some of the bureaucratic blockage was apparently motivated by Transneft, the Russian state pipeline monopoly, which has viewed the CPC from the beginning as an unwelcome competitor and dragged its heels to impede the project wherever possible, encouraging other to do the same. Some reports have suggested that Transneft viewed establishment of an oil-quality bank as a dangerous precedent that could be later extended, to its own detriment, throughout the Russian pipeline network. Undoubtedly, Transneft also wanted to see whether it could gain a stake in the eventual management of the CPC line itself.
Another CPC shareholder present at the Moscow meeting in August warned that problems still lay ahead, noting that the CPC would have to ‘explain’ the oil-quality bank idea—which is a new phenomenon to Russian energy sector—to the Russian authorities. This participant gave the earlier report about customs problems some credibility by hinting that they were in fact related to the oil-quality bank issue. In particular, he identified Russian tax officials as among those who could not understand why producers of lower-quality crude could get a lower share of export revenue even if they pumped more volume. It is also likely that the producers of Urals Blend petroleum, a lower grade with high sulfur content that historically reaches markets through Novorossiisk, did not want to forego exports through the new pipeline, although such abstention would have made CPC Blend of higher quality and hence more valuable.
CONCLUSION
The CPC was in the very beginning a victim of its own organizational problems, which made financing impossible to find. Significant here was the tendency of the CPC's erstwhile chief to try to run things with minimal consultation. Between 1995 and 1998 the United States, through its embassy in Almaty, did a considerable amount of work to convince people that the CPC pipeline could in fact be built. It also assisted in finding ways to restructure the consortium so that it could find financing. The CPC now involves eight oil companies including Chevron and ExxonMobil as well as the governments of Kazakhstan, Russia and Oman.
There has been speculation that Russia has held up the opening of the CPC in order to compel Kazakhstan to renounce its intention to export oil, later in the decade, through the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan to Turkey's Mediterranean coast. If so, the tactic was unavailing. According to news reports, Azerbaijan's Heydar Aliev was the first person with whom Kazakhstan's President Nursultan Nazarbaev spoke at the early-August informal meeting, in Sochi, of heads of state of the Commonwealth of Independent States; and the first thing Nazarbaev told him was that Kazakhstan confirmed its adherence to its previous statements in support of the BTC pipeline, which he seeks to transform, with U.S. encouragement, into the Aqtau-Baku-Ceyhan (ABC) pipeline.
Work is now under way, with U.S. assistance, to develop an intergovernmental agreement between Kazakhstan and Azerbaijan covering the commercial principles for Kashagan oil and eventually gas across Caspian. These would include transparency of pipeline rules and of the regulations for calculating costs, as well as decisions about what the supporting costs would be and provisions for barging arrangements. Despite widespread and fashionable skepticism throughout the 1990s, the Caspian basin (and Kazakhstan in particular) is on its way to fulfilling its promise of becoming an important producer in international petroleum markets.
Copyright © Robert M. Cutler
unless otherwise noted.
See reprint info if you want to reproduce anything in any medium.
For individual, non-commerical use only.
This Web-based compilation: Copyright © Robert M. Cutler
URL: http://www.robertcutler.org/blog/2001/09/the_caspian_pipeline_consortiu.html
First published in Central Asia – Caucasus Analyst, vol. 3, no. 18 (12 September 2001): 5–6.
