Recent Developments in the Structuration of the Central Asian Hydrocarbon Energy Complex

Robert M. Cutler

This document provides the requested item’s    full text.

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0. Introduction

This chapter reviews recent developments in the Central Asian hydrocarbon energy complex as of January 2009. Central Asia is taken to signify the five former Soviet republics of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan.[1] Only Kazakhstan and Turkmenistan have energy resources of sufficient significance to be strategic on the Eurasian level. Uzbekistan is an important gas producer for itself and Central Asia. The discussion here therefore focuses principally on the first two countries, with some reference to the third. Naturally, the geo-economic implications of developments for regions beyond Central Asia are an integral part of that discussion, representing its Eurasian and global significance.

Three phases in the evolution of energy geo-economics in Central Eurasia have already been completed. The first (1989–1994) was characterized mainly by a focus on oil, principally in the South Caucasus but also with reference to the North Caucasus and offshore Caspian and Black Seas, plus Turkey as a transit country. The second (1995–2000) was marked by a still higher role for Turkey as a transit country and by deepening plans for interconnections between Southwest Asia and Southeast Europe, as well as by the first sketches of projects heading eastward to China. The third (2001–2006) saw further development of plans for transshipment routes

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across the Black Sea and into China, as well as increased attempts by Russia to corner the market as much as possible on Central Asian natural gas.

These represent the phases of development denoted in the study of complex systems (“complexity science”) as emergence, autopoiesis, and coherence in the evolution energy geo-economics in Central Eurasia.[2] And that is also the periodization of the evolution of energy geo-economics in the Southwest Asian theater of Central Eurasia. In the Central Asian theater, it is slightly more nuanced. Since this region was torn until 1994 variously by civil war, the lack of definition of the status of Red Army (ex-Soviet) military, and complications of the financial ruble zone vs. attempts to establish stable national currencies, the phase of emergence of energy geo-economics in Central Asia proper falls only in 1995–2000, and that of autopoiesis in 2001–2006. The current phase, beginning in 2007 and stretching provisionally to 2012, is the phase of coherence.

This chapter therefore covers principally the contemporary period, i.e., beginning with the 2006–2007 transition. Its first part addresses Kazakhstan’s energy resources, in particular the offshore Kashagan oil-and-associated-gas deposit, and it discusses outlets for Kashagan’s gas and then for its oil. Kashagan’s centrality and the various possibilities for bringing its reserves to market lead the discussion then to the gas and oil in the Tengiz field. Other Central Asian gas resources are treated in the second part of the chapter, beginning with possibilities for Turkmenistan to participation new trans-Caspian pipeline project, then moving to discuss Kazakhstan’s Karachaganak field and other elements in the Cen-

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tral Asian gas picture, not neglecting Uzbekistan. The third part of the chapter looks further west and east, assessing the competition between the South Stream and Nabucco projects to Europe and, separately, possibilities for increasing China’s consumption. A brief conclusion then follows.

1. Kazakhstan: The Kashagan and Tengiz Deposits

1.1. Kashagan Oil and Gas

The Kashagan field in the Kazakhstani sector of the Caspian Sea remains the largest oilfield discovered since Prudhoe Bay, Alaska, in 1968. Measuring 45 by 75 kilometers, two and a half times the size of the nearby and better-known onshore Tengiz field, it is routinely ranked as the fifth or sixth biggest in the world and has the largest reserves of any oilfield outside the Middle East. These reserves are currently estimated at 38 billion barrels, of which up to 13 billion are judged recoverable. When the Kashagan oil strike was first confirmed in 2000, the original start-up date for production was set for 2005; it was then delayed by the consortium dominated by Western companies to 2008, and then again to 2010. Ratcheted back several times over the years, the year 2013 is now finally established.[3] As Kazakhstani law will subject the members of consortium to fines and penalties otherwise, this is likely to be definitive.

Kazakhstan holds the Western partners responsible for the failure of the Kashagan field to enter into production, yet a combination of formidable technical obstacles has delayed the field’s entry into production. For example, temperature extremes range from –30 to +40 degrees Celsius (–25 to +100 Fahrenheit). The waters are shallow, generally no more than three to four meters deep, and they freeze over for at least four months of the year on average. In addition, the reservoir itself is rather deep and under very high pressure. Moreover, the sulfur content is estimated to be between 16 and 20 per cent, and would corrode pipelines if not treated and removed beforehand.[4]

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The gas as well as the underlying oil have high sulfur content and are under extremely high pressure under its overlying dome. The companies also cite to the difficulties of extracting resources in shallow water with drifting ice during the winter. Also, Kazakhstani environmental law requires that the associated gas be captured rather than flared, and it also has provisions requiring appropriate care be taken not to damage the environment, including delicate, protected plants and animals. However, all of these conditions were known when the strike was confirmed in 2000; and although it is true that there are significant technical obstacles to the development of the field, nevertheless means exist to overcome them.

In early November 2007, Kazakhstan’s president Nursultan Nazarbaev signed a bill passed by the country’s parliament that would allow the government to change or revoke natural resource contracts deemed to threaten national security.[5] At the time, this was assumed to be merely a means to put pressure upon the consortium of mainly Western oil companies developing the Kashagan deposit in the Caspian offshore. Indeed, following his approval of the bill, negotiations between the government and the consortium members accelerated. On 13 January 2008, the Kashagan consortium agreed the new deal with Kazakhstan. In particular, the current Kashagan exploration consortium for developing the field will be converted into a new entity in which the Kazakhstan state company KazMunaiGaz (KMG) will hold a plurality stake of 16.81 percent while the share held by each of the largest Western shareholders (Eni, ExxonMobil, Royal Dutch Shell, and Total) will fall to 16.66 percent. Two other, more minor investors (ConocoPhillips and Inpex) will also see their shares reduced. KMG will actually hand over the (rather low) sum of US$1.78 billion in payment for shares from the Western partners only after the current exploration consortium disappears on schedule in favor of the newly agreed production consortium.[6]

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The new agreement maintains the year 2041 as the end date for the project, rejecting the insistence of one of the Western partners for an extension, but it gives the consortium the right of first refusal of extension at that time as well as the right to meet competing offers. The new agreement means that KMG will not become co-operator of the project, as Kazakhstan appeared strongly to have desired during negotiations up until the end of last year; but the Italian firm Eni will lose its status as operator, as the project operator will be a new operating company owned by all the consortium participants. In addition, the investors will pay $5 billion additional compensation to Kazakhstan either immediately or over the life of project (which could therefore grow to $20 billion taking inflation into account).[7]

About 80 percent of Kazakhstan’s oil has nowhere to go today, other than through Russia’s pipeline system. Half the remainder is exported through the Georgian Black Sea port of Batumi, the seaside capital of the Georgian autonomous province of Ajaria; the rest goes to China. So Kazakhstan has now decided to construct a 980-kilometer pipeline, for Kashagan oil in particular, running from Eskene, where Kashagan’s onshore processing facility will be located once full-field development gets under way, to the port of Kuryk, near Aqtau. Starting at 500,000 barrels per day (bpd), its volume would later be increased to 750,000 bpd; to this, another 400,000 bpd may be added by doubling the capacity of the Aqtau port itself.[8]

This pipeline, provisionally estimated to cost US$3 billion, will be the main section of a projected Kazakhstan-Caspian Transportation System (KCTS) that will include expanded and upgraded ports as well as construction of tanker fleets and, if necessary, additional pipelines within Kazakhstan itself. Another field near Kashagan, called Kalamkas, has 500 million barrels of non-sulfurous oil that is relatively easy to lift, plus also 100 billion cubic meters (bcm) of natural gas. If it were desired to give KCTS an earlier launch, then Kalamkas could be developed faster than

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Kashagan and would produce 100,000 bpd within four years from the start of development.[9]

1.2. The Tengiz Resources and Their Egress

Coincidence or not, it was only when the KCTS was finally agreed in the course of 2008, that Russia allowed the CPC to reach a conclusion on the expansion of capacity for Kazakhstan’s oil through southern Russia. The CPC line takes oil from the Tengiz deposit in northwest Kazakhstan across southern Russia to the port of Novorossiisk on the Black Sea, to be loaded onto tankers for transit through the Turkish Straits. The CPC’s current capacity is 670,000 bpd, although this has recently been occasionally augmented through the use of additives to increase flow. The doubling of this capacity was foreseen in the original construction agreement, and planning and construction should have started not long after the pipeline opened in late 2001.[10] However, Kazakhstan and its president Nursultan Nazarbaev for years implored Russia and its present Vladimir Putin to make good on this promise without effect. In the event, the CPC expansion will be implemented not by construction of a new parallel pipeline but rather by that of additional pumping stations with augmented storage facilities at the Novorossiisk terminus. It appears that financing issues held back the final decision on the CPC’s expansion, estimated to cost $1.5 billion.[11] But also, coincidence or not, it seems to have awaited the conclusion of an agreement on construction of an overland pipeline from Burgos, Bulgaria, on the Black Sea to Alexandropoulos, Greece, on the Mediterranean Sea.

The Burgos-Alexandropoulos Pipeline (sometimes called the BAPLine) will provide a route for avoiding the already overcharged Turkish Straits. Russia has a majority participation in its construction consortium at 51 per cent, with the remainder distributed among Bulgarian and Greek companies. This distribution tends to remove the Burgos-Alexandropoulos route

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as a potential egress for oil arriving on the eastern Black Sea coast conveyed there by non-Russian companies, such as those managing the production and export of oil from Azerbaijan and Kazakhstan. In particular, it complicates finding an export route for Kazakhstan’s oil from the offshore Kashagan deposit, unless enough new Tengiz oil goes through the CPC to Burgos-Alexandropoulos to free up the KCTS trans-Caspian route for Kashagan oil.[12]

Earlier this decade, when it was thought that Azerbaijani offshore oil might not be plentiful enough to fill the BTC to maximum capacity, and when Kashagan seemed on-track for early development, oil from Kashagan was considered a prime candidate for topping off the BTC. That is because the Kazakhstani government had been counting on Russia to make good on its promises to double the volume of the pipeline of the Caspian Pipeline Consortium (CPC) so as to accommodate increased production at the onshore Tengiz field. Yet despite such promises, as well as repeated public statements by Russian leaders at the highest level, Russia’s commitments to expand CPC pipeline volume have not materialized. Regardless whether this failure is due to internal Russian bureaucratic and interregional squabbling or to the unwillingness of the Russian leadership to act on its words, the result for Kazakhstan has been the same.

Thus in November 2008 Azerbaijan’s state oil company SOCAR and Kazakhstan’s state monopoly KazMunaiGaz signed an agreement setting out the main principles for a transport system to convey Kazakhstani oil across the Caspian Sea for entry into the BTC pipeline, as another step forward in the realization of the KCTS that, while long discussed, has now become Astana’s response to Russia’s unwillingness and/or inability to implement the long-promised doubling of the capacity of the CPC line. It is also entirely possible that the oil could come from the offshore Kashagan deposit now under development, or even from both. The new document is said to specify quantities of 500,000 bpd by 2012, rising to 750,000

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bpd later.[13]This bilateral agreement was signed on the side of a larger meeting in Baku earlier this month that saw another significant agreement in which Azerbaijan agreed to supply Georgia’s natural gas consumption requirements for five years. This agreement represents Azerbaijan’s declination of Russia’s recent commercial offer for purchase of all of Azerbaijan’s gas production. While the commercial basis of the offer was excellent, current president Ilham Aliev averred noncommercial interests that must be considered.

That most recent Baku meeting marked the second anniversary and fourth ministerial-level follow-up to the November 2006 Baku Initiative, itself in turn a follow-up to a 2004 conference that set the stage for a new cooperation among the European Commission (EC), Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkey, Ukraine, and Uzbekistan. It is noteworthy that the original initiative in 2004 preceded Russia’s ostentatious and highly publicized cutting-off of gas supplies to Ukraine at the start of 2006. This move affected the member-states of the EU to varying degrees and which drew mass and elite attention in Europe to the precariousness arising from dependence upon Russian energy supplies. In 2006, Russia supplied 40% of the EU’s natural gas consumption and 30% of its oil consumption. These proportions are at present projected only to rise into the future, particularly as the EU implements its policy decision of a few years ago, to increase the proportion of natural gas in its energy consumption mix for environmental and ecological reasons. Russia was present at the Baku Initiative meetings in 2004 and 2006 as an observer but did not respond to an invitation to send a representative to the most recent one.[14]

The Tengiz consortium already exports about 120,000 bpd of Kazakhstani oil across the Caspian Sea by barge to the Sangachal terminal at Baku, whence then overland by railcar to Batumi. Kulevi, on the Georgian coast near Poti on the Black Sea, is the site of a new export terminal opened re-

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cently. It is planned to handle about 100,000 bpd of late oil from Azerbaijan to start with, but its capacity can be doubled within two years, and then doubled again if necessary to handle further oil from Kazakhstan. It is not out of the question that Kazakhstan later adds further elements to the Eskene-Kuryk pipeline, effectively expanding the KCTS so as to decrease its dependence on the pipeline of the CPC, which runs from the Tengiz into Russia and then across to Novorossiisk on the Black Sea.[15]

At the latest Baku Initiative conference in 2008, Kazakhstan and Azerbaijan culminated years-long negotiations with agreements to supplement Azerbaijani crude in the Baku-Tbilisi-Ceyhan (BTC) pipeline by increasing the amounts of Kazakhstani oil to be shipped across the Caspian Sea. Still more significant, and the Russian invasion of Georgia notwithstanding, the redevelopment and expansion of ports on Georgia’s Black Sea coast now prepare the way for Kazakhstani crude later to enter the Odessa-Brody pipeline (OBP), which can be reversed so as to flow southeast-to-northwest, reaching world markets by way of Gdansk. This oil can come either from the massive offshore Kashagan field or the onshore Tengiz field itself.

Tankers from Batumi and Kulevi/Poti can take Kazakhstan’s as well as Azerbaijan’s oil to Ukraine over the Black Sea for insertion into the OBP. This pipeline, finished in 2001, lay empty for three years because Russia refused to allow transit of oil from Kazakhstan that would have been destined for Europe. So instead of flowing southeast-to-northwest, the OBP has since 2004 instead flowed northwest-to-southeast, carrying Russian oil domestically inside Ukraine. Now that Kazakhstani oil will have another route to the OBP, its flow may be reversed back to the originally intended direction. From Brody, the oil will flow to Plock, Poland, since higher world prices have made this continuation of the OBP economically justifiable to construct; from Plock, an existing pipeline goes to the port of Gdansk and thence to world markets. Since Kashagan is now not planned to enter production until 2013, this project can, if necessary, use oil from Tengiz or even the Azerbaijani offshore in the meantime.[16]

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2. Other Central Asian Gas Resources

2.1. The New Trans-Caspian Gas Pipeline Project

Following Niyazov’s death, Russia sought to prevent Turkmenistani negotiations with the EU for the TCGP from restarting. In December 2007, Russia, Kazakhstan, and Turkmenistan signed an agreement to refurbish and expand the capacity of the Prikaspiiskii (or “Caspian coastal”) pipeline, a Soviet-era gas line from Central Asia to Russia.[17] In separate negotiations with Moscow, Ashgabat bargained hard and succeeded in raising prices paid to it by the former from $100/tcm to $130 during the first six months of 2008, and $150 during the second half of the year. Russia thought that it had succeeded in purchasing the vast majority of Turkmenistan’s potential production over the long term and so sealing its lock on provisioning of Europe with natural gas from the region. However, in October 2008 the results of a new audit of the Turkmenistan’s gas reserves commissioned by Berdimuhammedov and performed by British expert firm Gaffney, Cline and Associates revealed that the new Yoloton-Osman field alone contains a minimum of four and a maximum of 14 trillion cubic meters, over and above the country’s current exports to Russia and Iran and its planned exports to China. Suddenly Turkmenistan’s available resources far outstrip Russia’s attempts to corral them.[18]

Both Azerbaijan and Turkmenistan have new and younger presidents than has been the case for most of the post-Soviet period. In May 2008 they held their countries’ first bilateral summit in over a decade. Symbolically, the day the summit began, a ship from the Azerbaijani state oil company SOCAR delivered equipment to a Turkmenistani oil rig located in Turkmenistan’s Caspian offshore. In a concluding joint press conference, the two presidents declared that all issues were resolved between their coun-

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tries. Turkmenistan reopened its embassy in Baku, and Azerbaijan paid off its $44.8 billion gas debt to Ashgabat.[19] The major international energy companies have known for ten years that there is no technical obstacle to construction of an ecologically sound gas pipeline tracing a relatively shallow east-west undersea ridge between Turkmenistan and Azerbaijan.[20]

In November 2007, Turkmenistan’s President Gurbanguly Berdimuhammedov and his entourage visited Brussels, where they had wide-ranging discussions with top-level EU officials and European businessmen, displaying an openness unthinkable during the reign of his predecessor Saparmurat Niyazov. February 2008 saw the settlement of a long-standing conflict over payment of Azerbaijan’s debt to Turkmenistan.[21] In early 2008, Berdimuhammedov signed a Memorandum of Understanding (MoU) with the EU’s External Relations Commissioner, Benita Ferrero-Waldner, during the trip of a very high-level EU delegation to Central Asia, providing for the export of natural gas from Turkmenistan to the EU but not specifying a route, which is nevertheless understood not to cross Russia. The 10 billion cubic meters per year (bcm/y) mentioned in the MoU amount is not very much of the estimated 500 bcm of natural gas that EU countries consume each year; however, for the EU it is an initial step towards diversification of supply.[22]

The TCGP project, which failed in the 1990s due to Niyazov’s insistence on personally leading Turkmenistan’s negotiations and his inability to grasp the technical details of project planning and financing, is now integrated as an aspect of the Nabucco pipeline led by Austrian concerns. The route of the Nabucco pipeline would run from Turkeys eastern border (with Georgia and/or Nakhechivan, in two non-mutually exclusive variants) through Ankara and Istanbul into eastern Greece, then northwards through central Bulgaria and western Romania, finally snaking across Hungary from southeast to the northwest and terminating at Austria’s Baumgarten gas hub. The new MoU for the first time gives proponents of

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the Nabucco pipeline specific volumes of gas from non-Azerbaijani sources to consider.

However, the most optimistic estimate today for construction of the Nabucco pipeline is that it will be completed by 2013. However, the MoU dedicated 10 bcm from Turkmenistan to Europe in 2009. This is achieved through the interconnection of natural gas rigs from the Turkmenistani sector of the Caspian Sea to those in the Azerbaijani sector, which are already part of the international network of gas pipelines from the Caspian to Europe. Insofar as Ashgabat has announced that the date of completion of the pipeline to China is delayed. It appears that these 10 bcm are coming from the 20 bcm quantities previously dedicated to China. It is perhaps no coincidence that Turkmenistan selected of a Russian company for the planning and construction of that project: the possibility of delays is intrinsic to such a choice, since Russia competes with China for volumes of Turkmenistan’s gas.[23]

The unresolved legal status of the Caspian Sea is a stumbling block insofar as Kazakhstan feels obliged to take Russia’s interests into account in formulating its own energy export policy. Talks among the five Caspian littoral countries over the status of the Sea in international law have been dragging along for well over a decade, although a number of important bilateral agreements have been reached on different issues. The most notable of these concerns the allocation of national sectors of the seabed, and it is such an agreement between Moscow and Astana that permitted resource development to move ahead notably in the northern Caspian offshore between Kazakhstan and Russia.

Russia insists, as a way of blocking the TCGP, that the agreement of all five littoral states is necessary for any trans-Caspian pipeline to be built. One way to finesse this problem could be to offer to include in the pipeline gas from fields assigned to Russia (but now developed jointly with Kazakhstan) during the demarcation of the "modified median line" delimiting the border between Russian and Kazakhstani sectors of the seabed. However, this is unlikely to work insofar as it would require not just an economic but rather a political decision on Russia’s part. Consequently, the EU has also been looking at exploring other means for conducting

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Central Asian gas from the eastern to the western coast of the Caspian Sea. The three methods available are liquefaction, compression, and gas-to-liquids. They would all be more expensive than constructing the TCGP, and the break-even price of the gas to the end consumer would be higher than the TCGP in every case, complicating the prospects of each in a different way.[24]

2.2. The Karachaganak Field and Other Central Asian Gas

The development of the natural gas production industry in northwest Kazakhstan has historically depended upon the capacity of the Russian gas processing industry, much as the development of the oil production industry there has depended upon the capacity of Russian oil pipelines. The Karachaganak gas deposit, for example, where today fully half of Kazakhstan’s gas is produced, has ever since Soviet times depended upon the capacity of the transborder Orenburg processing complex in Russia, which has been its only outlet. Throughout the 1990s, Russia was able to use its monopsonistic position so as to limit possibilities for developing Karachaganak’s gas production.[25] Various projects were elaborated over the past decade and a half for the westward transit of at least part of Karachaganak’s production towards the Caspian Sea basin for trans-Caspian export. However, whenever such projects would become sufficiently well defined to appear technically and economically feasible, Russia would reinvigorate negotiations with Kazakhstan for raising the prices and/or the quantities it would accept from Karachaganak, so as to render other routes uneconomical by comparison, only to alter the terms on offer yet again once the momentum of the alternative project had dissipated.

At the beginning of the present decade, Russia contracted to upgrade Kazakhstan’s gas pipeline infrastructure in the west and north of the country, linking this to the prospect of that gas flowing through those pipelines to be exported to Russia. An oil pipeline from Karachaganak was eventually constructed to Atyrau so that its liquids could be conducted

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into the pipeline of the CPC to Novorossiisk on Russia’s Black Sea coast. In mid-2007 the two countries reached agreement for further investment in Karachaganak with the intention of more than doubling current production levels from 7.5 to 16 bcm/y, all still going to Orenburg with the exception of a separate and much smaller Uralsk Gas Pipeline for local customers.[26]

Meanwhile, the (re)construction of the Caspian coastal (Prikaspii) pipeline, announced with Russia and Kazakhstan with much fanfare, was for a long time on hold at least from Turkmenistan’s side. Despite great publicity at the time about the project for a “gas OPEC” headed by Russia, it was rarely if ever noted, during all the commentary at the time, that the Prikaspii agreement represented nothing other than yet another intergovernmental MoU. It did not establish an international consortium to undertake the work; rather, the three governments became responsible for funding and assuring the execution of the work on its national segment. This allowed Berdimuhammedov to placate the Russia, which is promised as much as 50 bcm/y by agreements inherited from the Niyazov era, while gaining breathing space during which to pursue further possibilities.[27] In Turkmenistan and Kazakhstan, there have been delays. Not only is the TCGP of greater benefit to both of them since it would provide an additional outlet for the gas produced, but also it is more economical for them because it would be funded and constructed by the European companies concerned. Under the terms of a trilateral December 2007 agreement, the Caspian coastal pipeline is planned to carry 20 bcm/y beginning in 2012.[28] There has been some delay, but some of the more specific terms for this work were said to be agreed in December 2008 and embodied in the three countries’ respective national legislation.[29]

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Uzbekistan does not usually come to mind when one thinks of Central Asian energy producers, because it does not export as much as either Kazakhstan or Turkmenistan. However, it is one of the top ten gas-producing countries worldwide, and it is third in gas production in the Commonwealth of Independent States. It has not gained corresponding attention on the world energy map because its population of approximately 28 million consumes over 80% of the gas produced, leaving comparatively little for export.[30]

When Bulgarian president Georgi Parvanov visited Tashkent in late 2008 to try to induce his Uzbekistani counterpart Islom Karimov to dedicate volumes of gas to the Nabucco pipeline project planned to run from Central Asia to Central Europe, the latter declined, saying that his country exports gas through only one pipeline (it dates from the Soviet era) and therefore exports only to Russia.[31] Parvanov was, in fact, a bit late. In September 2008, Karimov had already agreed to build a new pipeline to Russia parallel to the existing Central Asia-Center and Bukhara-Urals pipelines. With a capacity of 54 bcm/y, it will originate in Turkmenistan and also cross Kazakhstan before terminating in Russia. About half the volume will come from Uzbekistan, increasing its exports to Russia by about half from the level in 2006, with Gazprom investing about $1.5 billion in development of the gas condensate fields in the country’s Ustyurt region.[32]

In addition, at the end of 2010, Uzbekistan’s three-year agreement to supply 3.5 bcm/y to southern Kazakhstan will terminate. Kazakhstan has been "repaying" Uzbekistan via a swap arrangement by sending 3.5 bcm/y from its own Karachaganak complex in the northwest of the country to the transborder Orenburg gas processing plant in Russia. However, Karachaganak’s production capacity is being further ramped up and the Orenburg plant is being expanded, so those volumes from Kazakhstan

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will not be lost to Russia in the future.[33] All this suggests that despite Uzbekistan’s on-again, off-again relations with the Eurasian Economic Community (EurAsEC), the country’s relations with Russia are not suffering. Indeed, Putin’s efforts at formation of a Central Asian “gas club” within Shanghai Cooperation Organization (SCO) may appear to be bearing fruit: just not inside SCO itself. The signature of a trilateral agreement for yet another pipeline in December 2007, beginning in Turkmenistan and running to Russia through Kazakhstan alone, is further evidence of this energy diplomacy.

As Russia and China seek to augment their influence over the development of Kazakhstan’s energy production, Astana looks for other routes to overcome the restraints. The reinvigoration since 2007 of prospects for a new TCGP with Turkmenistan’s participation creates the possibility for Kazakhstan, which already cooperates with Azerbaijan on trans-Caspian oil shipments, to participate also with gas exports. Delays in the development of the offshore Kashagan field make associated gas from the onshore Tengiz oilfield the first candidate for such exports. At the time of Kashagan’s proving, it was considered that its associated gas might be piped under the Caspian Sea to Azerbaijan so as enter the South Caucasus Pipeline (SCP, also Baku-Tbilisi-Erzerum) and eventually, through Turkey, reach Europe.

Due to delays with Kashagan, and with Karachaganak still dedicated to Orenburg for the foreseeable future, associated gas from the onshore Tengiz oil deposit is now the best candidate to supply Kazakhstani gas in a revamped TCGP project. Industry practice has been to flare Tengiz gas into the atmosphere, but now this must cease by 2011. The government in Astana considers the practice to be environmentally unsound (there is legislation against it) and, moreover, wishes to recover the gas for domestic use and revenue enhancement through export. Since the agreement of the multilateral "Road Map" in Astana in November 2006 by the Second Energy Interministerial Conference of the Littoral States of the Black and Caspian Seas (a process set into motion under the EU-sponsored 2004

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"Baku Initiative" but which acquired true momentum following the January 2006 suspension by Russia of natural gas exports to Ukraine), Kazakhstan has been working together with Azerbaijan and the EU to address concretely the realistic prospects for Kazakhstan’s gas to reach Europe and the available techniques for this. The undersea portion of the TCGP as now conceived would run from Kazakhstan’s Caspian Sea coast at Aqtau (whither gas from Tengiz would be brought overland) to Baku, connecting there to the SCP and eventually on to Europe. At the same time, a spur from this main line to the port at Turkmenbashi would connect Turkmenistan’s gas fields to the TCGP. At present, the pipeline is projected to have an initial capacity of 20 bcm/y, possibly increasing to 30 bcm/y. Its total length would be almost 1600 kilometers, of which only 300 would actually be underwater.[34]

Since the death of Turkmenistan’s former president Saparmurat Niyazov at the end of 2006, Ashgabat is no longer an obstacle in principle to such plans. Following a visit by Turkmenistan’s new president Gurbanguly Berdimuhammedov to Berlin and Vienna in late 2008, the major German energy firm RWE together with Austria’s OMV formed a joint venture so as to move the TCGP project ahead. Berdimuhammedov had already visited Brussels for high-level EU discussions in late 2007, and by mid-2008 an agreement had been reached that 10 bcm of gas from Turkmenistan would reach Europe in 2009. This is being accomplished through interconnecting Turkmenistan’s rigs with Azerbaijani gas rigs in the Caspian offshore, which are in turn connected to the SCP.[35]

3. Looking Further West and East

3.1. Westward to South Stream and/or Nabucco

Agreement on the CPC expansion was also delayed for some time by Bulgaria’s insistence on receiving higher transit fees, for which it used as leverage the question of the source of its own gas imports. On this latter issue,

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Russia elbowed Turkey out of the way when, in January 2008 during a visit by Putin to Sofia, Bulgaria enrolled as a transit country in the “South Stream” pipeline project (gas from Russia under the Black Sea to the eastern Balkans and thence to the rest of Europe), itself main strategic competitor to the EU-sponsored Nabucco gas pipeline project.[36] Indeed, over the past two years, Russia has moved swiftly to pose obstacles to the realization of the Nabucco project. Its own South Stream pipeline project is planned to branch westwards from the Russia-Turkey Blue Stream pipeline under the Black Sea. Russia has played the national interests of EU members against one another and sought to entice European energy companies into special relationships that would prevent the all-European cooperation necessary to realize Nabucco from solidifying into concerted action.

At present, Turkey appears to be a stumbling block to Nabucco, independent of Russian moves, as it insists on purchasing, at prices below-market, a portion of all gas transiting via Nabucco, for domestic consumption. Former Azerbaijani president Heydar Aliev, the current presidents father, was able magnanimously to forego transit fees in order to seal the deal with former Georgian president Eduard Shevardnadze for construction of the BTC back in the late 1990s.[37] However, it is doubtful that his son is either willing or able to accord such a privilege to Turkey.

On a visit to Baku in mid-2008, Gazproms chief Alexei Miller unexpectedly offered to buy natural gas from Azerbaijan at European market prices, minus transport costs. The Russian company made this offer again in late December.[38] It is likely, although unconfirmed, that this was intended to fill the Russian-Italian sponsored South Stream pipeline project, on which Gazprom is partnering with the Italian firm Eni, the same team that built the Blue Stream pipeline under the Black Sea from Russia to Turkey. The South Streams route had two variants. First it would cross, un-

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der the Black Sea, the continental shelves of Ukraine and Romania, whose agreement would also be necessary and not a sure thing, reaching Bulgaria. From there it would either continue through Greece and under the Ionian Sea to Italy or instead join another Turkey-Greece-Italy (“trans-Adriatic”) pipeline already planned by the Swiss energy-trading company Elektrizitäts-Gesellschaft Laufenburg with Norway’s StatOilHydro; or else it could take a northern route through Serbia, Hungary and Slovenia to Austria’s Baumgarten hub, unless from Slovenia it passed instead into northern Italy, or else via Bosnia-Hercegovina and/or Croatia to Trieste. Recent developments indicate that this latter Bulgaria-Serbia-Italy route may now be established.[39]

A potential problem from Baku’s standpoint was that Gazprom insisted on long-term contracts at fixed prices, whereas the price of natural gas in Europe is projected to rise over time. Baku announced instead its readiness to participate in the rival Nabucco pipeline project, which takes a route through Turkey, Bulgaria, Romania and Hungary, also terminating at Baumgarten in Austria. Also in mid-2008, Azerbaijan agreed to supply the first real order for physical gas through Nabucco: Bulgaria will buy more than 1 bcm/y of Azerbaijan’s natural gas as from 2013, when the Nabucco pipeline is projected to open. This amount represents over one-sixth of Bulgaria’s annual consumption and about one-eighth of the pipeline’s first-phase capacity.[40]

3.2. Eastward to China

Both Tengiz and eventually Kashagan oil could conceivably reach China. Already, a pipeline runs to the Caspian port of Atyrau from Kenkiyak in the Aqtobe region of western Kazakhstan, where China has industrial interests in the country’s hydrocarbon industry. The Kazakhstan-China pipeline finished in 2006 already runs from Atasu in the center of the country to the Dushanzi refinery in China. Between Aqtobe and Atasu, an existing pipeline already runs roughly halfway, from Kumkol to Atasu.

[ page 80 ]

China’s receipt of Tengiz oil therefore requires only construction of the segment from Kenkiyak to Kumkol and reversal of the Aqtobe-Atyrau pipeline to flow from west to east. The result could eventually boost Chinese imports of Kazakhstani oil from 100,000 to 400,000 bpd; but whether it happens, or how fast, depends crucially on the accessibility of oil from Kashagan. Kazakhstan’s decision in favor of the KCTS and its westward route for Kashagan suggests that the Kazakhstani leadership may not be too keen to repeat with China its mistake of depending too much on Russia.

The westward extension of China’s current oil pipeline from Kazakhstan, including the forced buyout of the Canadian firm Petrokazakhstan (formerly Hurricane Hydrocarbons) that controlled a key segment of existing pipeline, is an especially impressive piece of political-economic engineering. Chinese energy geo-economic penetration into Central Eurasia is confirmed not only with the entry into service of the oil pipeline from Kazakhstan but also with the construction now under way of the gas pipeline from Turkmenistan, through Uzbekistan and Kazakhstan to Xinjiang in western China. These realizations are testimony to Chinese strategic planning beginning fifteen years ago, when its national energy trusts first implanted themselves ever so delicately in the Caspian littoral.

A Turkmenistan-China gas pipeline, on which construction has already started in transit countries Uzbekistan and Kazakhstan, is formally an extension or add-on to earlier Kazakhstan-China negotiations. The route of the pipeline has not been made public, but the most reasonable scheme involves expanding the volume of the Bukhara-Tashkent pipeline within Uzbekistan and then taking it through Almaty to Alashankou on the border, where the existing Kazakhstan-China oil pipeline from Atasu also crosses into China. Towards the end of the first half of the present decade, the CNPC started negotiations for gas imports from western Kazakhstan with the country’s national energy trust KazMunaiGaz. The first phase of that project was assigned the figure of 10 bcm/y, and the second stage of the Kazakhstan-China gas pipeline was to have increased Kazakhstan’s own exports to China to 30

[ page 81 ]

bcm/y.[41] This gas could come either from the Karachaganak deposit, where production has been in thrall to Russian limitations on volumes receivable by the transborder Orenburg processing plant in southern Siberia. It could also come from the associated gas in the offshore Kashagan deposit, where China was rebuffed a few years ago when it tried to purchase a share of the consortium directing Kashagan’s development. In the beginning, it will probably come, however, from Chelkar, in the Aqtobe region in western Kazakhstan, where the CNPC has been already active for nearly a decade. From there, a feeder pipeline would logically descend southwards to Kzyl-Orda and then to the major city of Shymkent (South Kazakhstan province), thereafter rejoining the extension of the Bukhara-Tashkent pipeline to Almaty and beyond.

The idea was first sketched on maps as early as 1993 when Western companies began to survey possibilities for energy development in Central Asia following the disintegration of the Soviet Union. However, the sheer scale of the project together with the self-imposed isolation of the country under its former president Saparmurat Niyazov, who died in December 2006, made it for a long time a non-starter. Nevertheless, it was Niyazov who, in April 2006, signed a framework cooperation agreement in Beijing with Chinese president Hu Jintao. By July 2007, there was an agreement signed by the CNPC and witnessed by Niyazov’s successor Gurbanguly Berdimuhammedov. Chinese experts conducting the geological exploration and development of the Bagtiyarlyk fields have already reported that they hold 1.6 trillion cubic meters of gas. A first phase will be opened for up to 10 bcm/y from the already operating Samantepe and Altyn Asyr fields, which are together expected to supply 13 bcm/y to the completed project. After this quantity reaches 10 bcm/y, the second phase will be inaugurated, adding 17 bcm/y from deposits that the two countries will develop under the terms of the July 2007 production sharing agreement.[42]

[ page 82 ]

4. Conclusion

To return to the terms employed in the introductory remarks to this chapter, the period beginning 2007 represents different phases of evolution depe"nding upon the scale of analysis. At the scale of Central Eurasia and Greater Central Eurasia, it represents the beginning of the autopoietic phase of the geo-economic structuration of the hydrocarbon energy complex at the given scale, following the closure of the phase of emergence through the development of its three subphases (1989–1994, 1995–2000, and 2001–2006). At the scale of Central Asia itself, however, and possibly Greater Central Asia as well, the political, social, and economic chaos following the disintegration of the Soviet order delayed the beginning of the emergent phase until the period 1995–2000. The three subphases for Central Asian energy geo-economics are therefore properly periodized as follows: emergence of emergence, 1995–2000; autopoiesis of emergence, 2001–2006; and coherence of emergence, 2007–2012. Following these developments, the broader phase of autopoietic development will then begin to emerge. The prospects for those further developments are now being sketched in the competition between the South Stream and Nabucco projects on the one hand and, on the other hand, the extension of export possibilities to China, as discussed above.

[Notes]

[ page 61 ]

[Note 1]. The Library of Congress system is used for transliteration from the Russian, and other standard systems for other vernaculars (thus “Berdimuhammedov” for the president of Turkmenistan rather than the Russian-based “Berdymukhammedov”), except when everyday usage has consecrated a familiar spelling in the English orthography.

[ page 62 ]

[Note 2]. Autopoiesis is the capacity of complex systems, and especially complex adaptive systems, to set their own goals through progressive interaction with their environment and through learning in response to this. See, among others: John Holland, Hidden Order: How Adaptation Builds Complexity (New York: Perseus Books, 1996); also Robert M. Cutler, “The Paradox of Intentional Emergent Coherence: Organization and Decision in a Complex World,” Journal of the Washington Academy of Sciences 91, no. 4 (Winter 2006): 9–27. For distinctions among Central Asia (the five former Soviet republics), Greater Central Asia, Central Eurasia, and other constructs see Robert M. Cutler, “US–Russian Strategic Relations and the Structuration of Central Asia,” Perspectives on Global Development and Technology 6, no. 1–3 (2007): 109–125.

[ page 63 ]

[Note 3]. Cutler, “Kashagan Leads Kazakhstan to Increase Trans-Caspian Oil Exports,” CACI Analyst, 9 July 2008, pp. 3–5.

[Note 4]. “Facts about Kashagan Oilfield,” Reuters, 6 September 2007.

[ page 64 ]

[Note 5]. Saule Akhmetova and Samat Daumov, “Review of the Law of the Republic of Kazakhstan ’On Introduction of Amendments and Supplements to the Law of the Republic of Kazakhstan “On Subsoil and Subsoil Use”’,” 14 January 2008, ⟨http://www.mondaq.com/article.asp?articleid=55592⟩ (accessed February 4, 2009).

[Note 6]. Nariman Gizitdinov and Lucian Kim, “Eni-Led Group Cedes Kashagan Oil Stake to Kazakhstan,” Bloomberg News, 14 January 2008.

[ page 65 ]

[Note 7]. Renaissance Capital, “Kashagan Agreement Will Be Finalised by 25 Oct [sic] 2008,” Business New Europe: Eurasia Digest, 29 August 2008.

[Note 8]. Julia Nanay, “Le puzzle des oléoducs de la Caspienne,” Énergies, No. 12 (Autumn 2007), Les défis de la sécurité énergétique.

[ page 66 ]

[Note 9]. Shamil Midkhatovich Yenikeyeff, Kazakhstan’s Gas: Export Markets and Export Routes (Oxford: Oxford Institute for Energy Studies, November 2008), p. 29.

[Note 10]. Chevron Corporation, Supplement to the 2004 Annual Report (San Ramon, Calif.: Chevron, [2005]), pp. 24–25.

[Note 11]. “CPC Seeks to Boost Through[p]ut by 2008,” Pipeline and Gas Journal: International Highlights, November 2004, p. 2.

[ page 67 ]

[Note 12]. Theodore G.R. Tsakiris, “Resolving the Bosphorus Conundrum: Caspian Oil Geopolitics after the Initializing of the Burgas-Alexandroupolis Pipeline,” Pipeline and Gas Journal, September 2007, pp. 34–38.

[ page 68 ]

[Note 13]. Farid Guliyev and Nozima Akhrarkhodjaeva, Transportation of Kazakhstani Oil via the Caspian Sea (TKOC): Arrangements, Actors and Interests (Lysaker: Fridtjof Nansen Institute, 18 November 2008), p. 19.

[Note 14]. European Commission, “Energy & [sic] Transport International Relations,” ⟨http://ec.europa.eu/dgs/energy_transport/international/regional/caspian/energy_en.htm⟩ (accessed February 4, 2009).

[ page 69 ]

[Note 15]. Guliyev and Akhrarkhodjaeva, Transportation of Kazakhstani Oil via the Caspian Sea, pp. 16–17.

[Note 16]. Cutler, “Kashagan Leads Kazakhstan to Increase Trans-Caspian Oil Exports.”

[ page 70 ]

[Note 17]. “Tripartite Agreement on Pre-Caspian [ sic ] Pipeline Signed,” New Europe , No. 761 (29 December 2007). This project is sometimes called the Caspian Gas Pipeline , but also erroneously by mistranslation the “Pre-Caspian” Pipeline: the Russian prefix pri, meaning means “adjacent to” or “attached to” is not equivalent to the English pre . There is a geologic formation in northwestern Kazakhstan and southern Russia called in English the “pre-Caspian basin,” but it is, strictly speaking, unrelated to the track of trilateral pipeline project.

[Note 18]. “British Auditor: Up to 14 Trillion Cubic Meters Gas Reserve in Eastern Turkmenistan Fields,” News Central Asia, 14 October 2008.

[ page 71 ]

[Note 19]. “Turkmen Delegation to Baku for Debt Settlement, Cooperation Talks,” News Central Asia, 4 March 2008.

[Note 20]. Author’s interviews.

[Note 21]. “Azerbaijan, Turkmenistan Settle Old Gas Dispute,” Reuters, 5 March 2008.

[Note 22]. Robert M. Cutler, “The European Union Looks to Central Asia for Energy,” CACI Analyst, 16 April 2008, pp. 5–7.

[ page 72 ]

[Note 23]. Ibid.

[ page 73 ]

[Note 24]. Yenikeyeff, Kazakhstan’s Gas, pp. 72–73.

[Note 25]. Mehmet Ögütçü, “Kazakhstan’s Expanding Cross-border Gas Links,” CEPMLP Internet Journal 17, No. 8 (21 November 2006), ⟨http://www.dundee.ac.uk/cepmlp/journal/html/Vol17/Vol17_8.pdf⟩ (accessed February 4, 2009).

[ page 74 ]

[Note 26]. Yenikeyeff, Kazakhstan’s Gas, p. 25.

[Note 27]. “Gas Pressure Equalizes in Turkmenistan-Russia Talks,” News Central Asia, 26 November 2007.

[Note 28]. “Gazprom’s Delegation Visits Turkmenistan,” 3 July 2008, ⟨http://www.natural-gas.ch/2008/07/03/gazprom%E2%80%99s-delegation-visits-turkmenistan/>.">http://www.natural-gas.ch/2008/07/03/gazprom%E2%80%99s-delegation-visits-turkmenistan/⟩ (accessed February 4, 2009).

[Note 29]. Robert M. Cutler, “Russia Deepens Gas Hegemony,” ISN Security Watch, 30 January 2009.

[ page 75 ]

[Note 30]. International Energy Agency, “IEA Energy Statistics – Natural Gas for Uzbekistan,” ⟨http://www.iea.org/Textbase/stats/gasdata.asp?COUNTRY_CODE=UZ⟩ (accessed February 4, 2009).

[Note 31]. “Uzbekistan Rules Out Gas Exports to EU,” EUbusiness, 6 November 2008, ⟨http://www.eubusiness.com/news-eu/1225988235.99⟩ (accessed February 4, 2009).

[ page 76 ]

[Note 32]. Energy Information Administration, Department of Energy, U.S. Government, “Caspian Sea Energy Data, Statistics and Analysis – Oil, Gas, Electricity, Coal,” ⟨http://www.eia.doe.gov/emeu/cabs/Caspian/NaturalGas.html⟩ (accessed February 4, 2009).

[ page 77 ]

[Note 33]. “Uzbekistan, Kazakhstan, Russia Strike Gas Deal,” Radio Free Europe, 22 September 2006.

[Note 34]. Shamil Midkhatovich Yenikeyeff, “Trans-Caspian Pipeline Remains Contentious,” Oil and Gas Journal, 12 January 2009, p. 52.

[Note 35]. “Recent Initiatives to Advance the Nabucco Project,” Budapest Business Journal, 23 January 2009.

[ page 78 ]

[Note 36]. “Balkan Boost for Russian Gas Plan,” BBC News, 18 January 2008.

[Note 37]. Robert M. Cutler, “Just When You Thought Baku-Ceyhan Was Dead and Buried, Part 6,” FSU Oil and Gas Monitor, No. 77 (11 April 2000), p. 7.

[Note 38]. “Russian Gazprom Confirms Intention to Purchase Whole Volume of Azerbaijani Gas,” Today (Regnum News, Baku), 25 December 2008.

[ page 79 ]

[Note 39]. “Slovenia Backs South Stream Gas Pipeline,” United Press International, 20 January 2009.

[Note 40]. Clive Leviev-Sawyer, “Bulgaria Set for Azerbaijan Gas Deal as Nabucco Summit Continues: Gas Pipeline Project Asks European Investment Bank for Financing,” Sofia Echo, [27] January 2009.

[ page 81 ]

[Note 41]. Robert M. Cutler, “Gas Pipeline Gigantism,” Asia Times OnLine, 17 July 2008.

[Note 42]. Ibid.

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