CC BY
95
Bohuslav LITERA
Senior research worker at the Institute of History, Czech Academy of Sciences (Prague, the Czech Republic).
OIL AND GAS IN THE CASPIAN: CURRENT SITUATION AND FUTURE PROSPECTS
A b s
After the disintegration of the Soviet Union in 1991 high hopes and expectations arose concerning production possibilities of oil and gas in the Caspian region, which encompasses territories of five states—Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan. These expectations were to some extent fomented by local governments and businesses, which were eager to incite interest as well as investments of Western companies; the governments realized soon enough that they are economically dependent on extraction of energy resources. At that time the Caspian was often consid-
r a c t
ered as possible future competitor of the Middle East in terms of energy supplies. The so-called “Great Game," in which Great Britain, Russia and China competed for influence in Central Asia throughout the 19th century, unfolded anew with novel variations. This time different actors sought access to and control over the development of energy resources and related transit corridors. Competing actors included international oil-producing companies, states in the region, governments of European countries, the U.S. and the EU. In recent years China became very active in this respect as well.
Current Situation in the Caspian
The initial euphoria had been slowly replaced throughout the 1990s by more sober assessments of extraction opportunities and amount of reserves, as well as of related problems with transportation of extracted materials to world markets. It became clear that the region will not become a full-fledged competitor for the Middle East, but that its deposits will be relevant for supplying not only the neighboring regions, but more distant areas of Europe and Asia as well. This is true for Azerbaijan and especially for Kazakhstan. Serious prospecting and exploration efforts on their territories commenced only recently and have already resulted in locating several important oil fields in northern part and gas deposits in the southern part of the Caspian. It seems likely that in terms of quantity, Caspian deposits of gas might be even more important than those of crude oil. However, as oil is easier to transport and oil-extraction projects offer faster returns on investments, at the moment existing infrastructure is designed for oil production, for which there is currently high demand on world markets. Oil production will thus provide the main pull in the development of Caspian deposits in the coming decade.
After disintegration of the Soviet Union, dynamics of crude oil production in countries of the Caspian basin (excluding Russia and Iran) was the following:
Table 1
Oil Production in the Caspian (millions of tonnes per year)
1990 1995 2000 2004
Azerbaijan 12.5 9.2 14.9 15.7
Kazakhstan 25.8 20.6 35.3 60.5
Turkmenistan 5.7 4.1 7.4 10.1
Uzbekistan 2.8 7.6 7.5 6.6
S o u r c e: British Petroleum Statistical Review of World Energy, 2001; 2005.
Most countries experienced decline in crude oil production after the disintegration of the Soviet Union; yet, this trend was reversed in the second half of the 1990s by relatively sharp increases. Kazakhstan is by far the biggest oil producer with 60 millions of tonnes annually.
For the future, estimates of proven reserves are much more relevant. The estimates for oil reserves are the following:
Table 2
Oil Reserves in the Caspian (billions of tonnes)
2000 R/P ratio (in years) 2004 R/P
Azerbaijan 0.9 63.4 1.0 60.2
Kazakhstan 1.1 31.1 5.4 39.6
Turkmenistan 0.1 10.2 0.1 7.4
Uzbekistan 0.1 10.8 0.1 10.6
S o u r c e: British Petroleum Statistical Review of World Energy, 2001; 2005.
The estimates are becoming more precise each year and are increasing due to extensive prospecting and exploration resulting in discoveries of new fields. The R/P ratio, i.e. ratio of proven reserves to production, is important as it measures for how long would the reserves of each country last given current level of production. In this respect, Kazakhstan has the most advantageous position among Central Asian states, as its reserves estimates have risen sharply, even though volatility of available data is significant. It is estimated that the Russian sector of the Caspian Sea has reserves of about 0.3 billion barrels of oil while the Iranian one 0.1 billion barrels, which is not a big share relative to their overall production levels.
The situation is somewhat different concerning production of gas, as the following table demonstrates.
Table 3
Natural Gas Production in the Caspian (in billions of cubic meters per year)
1990 1995 2000 2004
Azerbaijan 9.2 6.2 5.3 4.6
Kazakhstan 6.6 5.5 10.7 18.5
Turkmenistan 81.9 30.1 43.8 54.6
Uzbekistan 38.1 45.3 52.2 55.8
S o u r c e: British Petroleum Statistical Review of World Energy, 2001; 2005.
Production is relatively high only in Turkmenistan and Uzbekistan. The latter however consumes domestically almost all the gas it produces; the same is true for other countries as well. The only significant exporter is thus Turkmenistan, which consumes about 15 bcm domestically and is therefore able to export about 40 bcm mostly to Ukraine and also to Russia and Iran. Production levels are beginning to rise sharply in Kazakhstan.
Proven reserves of gas are indeed promising as is shown in the following table:
Table 4
Natural Gas Reserves in the Caspian (trillions of cubic meters, end of 2004)
Reserves R/P ratio (in years)
Azerbaijan 1.37 More than 100
Kazakhstan 3.00 More than 100
Turkmenistan 2.90 53.1
Uzbekistan 1.86 33.3
S o u r c e: British Petroleum Statistical Review of World Energy, 2005.
Outlooks
Future of oil production in the Caspian is dependent to a large extent on world prices. Costs for production and transportation of Caspian oil to the market are approximately $8-10 per barrel, which means world price needs to be at least $18/barrel. If it falls below this level, additional investments in production will not be profitable. Long-term perspectives were based on the assumption that oil price stabilizes at around $22-27/barrel; in 2004, however, the average price of Brent oil was at $38.27/barrel and in the following months it remained at a relatively stable level of around $60/barrel or higher. It is estimated that in 2015 the Caspian (excluding Russia) may pro-
duce almost 4 million barrels of oil per day. From this amount, over 50% will be produced in Kazakhstan and additional 15-30% in Azerbaijan. According to this estimate, Turkmenistan will not export any significant amount of oil and Uzbekistan is likely to become a net oil importer.1
If investments in oil production continue at least at the current level and if adequate infrastructure is provided, International Energy Agency estimated at the beginning of the millennium that Azerbaijan, Kazakhstan, Uzbekistan and Turkmenistan could together produce 3.9 million barrels of oil per day (i.e. 194 million tonnes per year) in 2010 following the optimistic scenario. According to pessimistic scenario, which takes into account delays in opening of new fields, production would rise only to 2.7 million barrels per day (i.e. about 135 million tonnes per year). This would mean that the Caspian region will produce about 4% of world oil. At the same time, it is estimated that the share of world oil production will be over 50% for the Middle East.2
Export of oil from the Caspian Sea basin should according to the baseline scenario rise from
1.5 million barrels per day (i.e. 75 million tonnes) in 2005 to 2.5 million b/d in 2010 (about 120 million tonnes annually). The area could reach the export peak in 2015, when all countries in the region combined could sell about 3 million barrels per day (i.e. 150 million tonnes) abroad. Nevertheless current plans of Kazakhstan to increase oil production seem overly ambitious, which could eventually lower this figure. Exports in 2020 are expected to fall to about 2.7 million barrels per day.
Given the fact that oil production in the region is currently (as well as in the near future) dependent on few huge fields, delays in development of any of these would have significant impact on overall production of the whole area. If world prices remain high in the long term, attractiveness of Caspian oil would rise correspondingly. Peak in production could in this case come already in 2010 instead of 2015. Kazakhstan alone plans to produce 150 million tonnes of oil in 2015 already.3
Influx of Caspian oil will have only limited impact on world prices, but when combined with overall Russian production its effect could become significant. Share of OPEC countries on world production is likely to rise till 2010 as production of several non-members will start to fall (e.g. countries surrounding the North Sea) and Caspian oil will likely replace only about half of this decrease.
As opposed to oil, development of gas production depends more on demands of the market than on accessible reserves. Gas reserves are relatively large in the region and production will not reach its peak until 2020. Gas exports from Turkmenistan will be significant in the coming decade not only for post-Soviet space (Ukraine, Russia) and China, but for supplying Europe as well, as it could start competing with Russian gas, which is becoming more and more expensive.4 Given the fact that Kazakhstan wants to stop importing Russian gas in the coming ten years, its export potential will be somewhat weakened.
Insufficiency of infrastructure is one of the main obstacles toward realizing the full potential of the Caspian region and it hinders exports from the area. It is estimated that construction of full-fledged infrastructure for production and transportation of oil and gas in the Caspian would require investments of approximately $200 billion. At the same time, Caspian countries are forced to compete with one another for foreign direct investments (FDI). Investor-friendly climate, both in the target and transit countries, is as important as technical and geological calculations. Azerbaijan and Kazakhstan are currently offering the best conditions for foreign investments.
1 See: R. Smith, “Politics, Production Levels to Determine Caspian Area Energy Export Options,” Oil and Gas Journal, Vol. 99, No. 22, 28 May, 2001, pp. 33-38.
2 See: Ibid., p. 37; Caspian Oil and Gas: 1999 Update, IEA, Paris, 1999, p. 3; Caspian Energy Resources. Implications for the Arab Gulf, The Emirates Center for Strategic Studies and Research, Abu Dhabi, 2000, p. 133.
3 See: Alexander's Gas & Oil Connections, 23 March, 2006, available at [http://www.gasnadoil.com/goc/nawes/ ntc61245.htm].
4 See: I. Woolen, “Central Asian Gas Crucial to Future Russian Gas Supply,” Oil and Gas Journal, Vol. 99, No. 33, 13 August, 2001, pp. 61-65.
FDI in the energy sector reached $5bn for all the newly independent states of the Southern Caucasus and Central Asia in 1999. Future investments following already signed contracts should amount to more than $60bn. Kazakhstan alone received $8.4bn in FDI in 2004. However, experts warn that financing projects in a region with such high political as well as security risks is potentially perilous for smaller investors.5
Even though potential profits for foreign investors are great, so are the barriers for successful investment. They range from lack of information about local companies, inefficient state bureaucracy, combined with unclear competences of administrative bodies, to disputes over ownership of oil fields that are on the Caspian shelf or in remote autonomous regions. Further problems arise due to underdeveloped transportation and communication infrastructure, errant government policies as well as political instability and ethnic conflicts.
Most foreign companies operate on several oil fields. Chevron was leading in oil production in 1999 (it produced 88 thousand barrels per day) followed by ExxonMobil (68 thousand b/d), LUKoil (64 thousand b/d), British Petroleum (33 thousand b/d) and number of others (Agip, BG, Statoil). Agip was the leader in gas production, followed by British Gas, Chevron and LUKoil.6
Oil and Gas Pipelines
With the exception of Iran, the system of oil and gas pipelines in the Caspian region was built to serve the needs of centralized Soviet Union, which meant that it emphasized routes leading to the European part of the country. After collapse of the Soviet Union, pipelines leading from the Caspian cross territories of several independent states, notably Russia, and until recently did not have any direct “outlet” to the outer world. This historical legacy persists to this day and is only gradually being removed.
The biggest problem facing foreign investors in the Caspian region is the insufficient infrastructure of export pipelines, which would enable the energy resources to reach world markets. Construction of new pipelines is thus a top priority.
Main oil export routes are the following:
• Atyrau-Samara oil pipeline. This 690 km long pipeline was built more than 30 years ago. In Samara it connects to the Druzhba pipeline network. It has capacity of 10.3 million tonnes per year, which is currently being upgraded to 15.4 million tonnes.
• Tengiz-Novorossiisk oil pipeline. This 1,900 km long pipeline was built by Caspian Pipeline Consortium. Construction costs for the first phase of the project in 2001 were $2.4bn. The pipeline has capacity of 28 million tonnes per year. In the second phase of the project it should be raised to 66 million tonnes.
• Baku-Tbilisi-Ceyhan oil pipeline, which was lobbied by the United States, as it does not cross Russian nor Iranian territory. It is 1,764 km long with annual capacity of 50 million
5 See: H. McCutcheon, R. Osbon, “Coming to Terms with Risk in Caspian Region,” Oil and Gas Journal, Vol. 98, No. 34, 21 August, 2000, p. 54; Caspian Oil and Gas. The Supply Potential of Central Asia and Transcaucasia, IEA, Paris, 1998, p. 35; Caspian Oil and Gas: 1999 Update, p. 6; T. Adams, “Caspian Oil Realities,” Briefing Paper RIIA, No. 23, September 2001, p. 5; Alexander's Gas & Oil Connections, 10 May, 2005, available at [http://www.gasandoil.com/goc/ news/ntc51936.htm].
6 See: H. McCutcheon, R. Osbon, “Risk Management Financing Availability Key to Winning in Caspian Region,” Oil and Gas Journal, Vol. 98, No. 30, 24 July, 2000, pp. 39, 42. For overview of individual contracts and projects see: J. Rybar, Kavkaz, Rusko a “nova velka hra” o kaspickou ropu, Eurolex Bohemia, Praha, 2005, pp. 60-62, 67-69; A. Neff, “Caspian Nations Pursuit Oil Exports at Greatly Varying Paces,” Oil and Gas Journal, Vol. 106, No. 22,
13 June, 2005, p. 36.
tonnes, which can be enhanced up to 85 million tonnes. Construction costs were $3.6bn. The pipeline became operational at the end of May 2005, and first oil tankers began filling up in the Mediterranean in the fall of the same year.
• Kazakhstan-China oil pipeline project, with length about 3,000 km and annual capacity of about 20-40 million tonnes per year. A preliminary agreement was concluded in 1997, but further construction was halted. Construction of new pipeline from Kazakhstan to Western China commenced instead. This 960 km long pipeline with initial capacity of 10 million tonnes connected the Kumkol oil field in central Kazakhstan with eager Chinese market in December of 2005.7
• Trans-Caspian project, a 590 km long pipeline which is supposed to connect Aktau (on the Kazakh side of the Caspian Sea) with Baku, where it could join the Baku-Tbilisi-Ceyhan (BTC) pipeline. Feasibility studies have been completed in the late 1990s, but decision to begin construction is still pending.
Main gas export routes from the Caspian are the following:
• Central Asia-Center gas pipeline, connecting Turkmenistan via Uzbekistan and Kazakhstan with Russia and Europe. It uses existing infrastructure built under Soviet Union and its capacity is 110 bcm per year. Since 2002, it has enabled for example the supplies of up to 50 bcm of Turkmen gas to Ukraine.
• Turkmenistan-Iran gas pipeline. This pipeline with annual capacity under 10 bcm became operational in December of 1997. Several proposals to increase its capacity exist; however, the potential of this export route is limited, as Iran itself is a major competing gas producer.
• Blue Stream gas pipeline, connecting southern Russia with Turkey. This pipeline is laid on the bed of the Black Sea. First supplies through this almost 400 km long pipeline began in December 2001, but the intake is only several billion cubic meters per year as opposed to the planned 16 bcm annually.
• Trans-Caspian gas pipeline project, with length of1,686 km, which would connect Turkmenistan, Azerbaijan, Georgia and Turkey. Preliminary study for this $3 billion project has been completed; realization is yet unclear.
• Baku-Erzurum gas pipeline project, which would transport gas from the Azerbaijan Shakh Deniz gas field to Turkey and further to Europe. This project proposed by BP has been postponed several times due to uncertain yield of the field and over-supply of the Turkish market.
• Turkmenistan-China gas pipeline project. Proposed length is 8,000 km, and construction costs are estimated to reach approximately $12bn. Only preliminary study has been completed so far, but the project was confirmed in the Sino-Turkmen agreement on gas supplies (signed on April 2006).8
The Russo-Ukrainian price dispute and short cancellation of gas supplies in winter months of 2005 and 2006 induced the European Union to focus on supply security. One of the proposed options is project Nabucco of the Nabucco consortium consisting of five companies from five Central and South Eastern European countries. The plan is to build a gas pipeline 3,400 km long with initial capacity of 4.5 bcm per year, which could be enhanced to 25-30 bcm. Such pipeline would transport gas
7 See: J.P. Dorian, “Oil, Gas in FSU Central Asia, Northwestern China,” Oil and Gas Journal, Vol. 99, No. 37, 10 September, 2001, p. 21; H. Wolowska, “Caspian Oil and Gas: The Facts at the End of the Year 2000,” Prace OSW/CES Studies, No. 1, 2001, p. 49; R. Smith, op. cit., p. 38; Trend, No. 21, 24 June, 2005, p. 19; J. Roberts, “Caspian Oil and Gas. How Far Have We Come and Where are We Going?” Oil, Transition and Security in Central Asia, ed. by S.N. Cummings, RoutledgeCurzon, London, New York, 2003, pp. 153-154.
8 Based on J.P. Dorian, op. cit., p. 26; H. Wolowska, op. cit., pp. 49-50; R. Smith, op. cit., p. 38.
from Central Asia, Azerbaijan and Iran to Europe. However, possible realization of this project will not start until next decade.9
Total capacity of oil pipelines for transportation of Caspian oil to Russia was 18.5 million tonnes per year in 1998. This capacity had been almost fully utilized, and in the following years it increased even further. The situation concerning gas was even more complicated. Given effective control of export pipelines Moscow was able to exclude Central Asian gas from lucrative markets, as it could substitute the Russian gas. Export opportunities for Uzbekistan and especially Turkmenistan remained limited to insolvent countries in the post-Soviet space (especially Ukraine). Azerbaijan and other countries even imported Russian gas. However, since the turn of the century the position of Gazprom as well as of Russia began to shift. The reason is that Gazprom wants to buy vast quantities of Turkmen and Kazakh gas and reassert its control over energy infrastructure in the Southern Caucasus as well as in Central Asia.
In 2010 Central Asian states will have together with Azerbaijan about 120 million tonnes of oil and 80 bcm of gas available for export per year. Current capacity of pipelines does not enable transportation of such volumes. This is why construction of new pipelines and rehabilitation of current pipeline network began in the second half of the 1990s. Most of these need to cross or come dangerously close to crisis-prone areas, which raises concerns that they might become targets of attacks. Other proposed routes leading through Iran are blocked by U.S. sanctions and its policies toward Tehran. At the same time, U.S. tries to diversify export routes in order to reduce dependence of Central Asian countries on Russia.
Caspian oil can successfully compete with Russian oil, as it is of higher quality (the Russian oil has high content of sulphur) and extraction is cheaper. German, Czech and other oil refineries are indeed showing great interest in this type of oil. Apart from the European market, China, which already takes part in oil production in Kazakhstan, is another prospective consumer, and in medium to long run it will undoubtedly become an important buyer of Central Asian energy resources. Construction of new internal Chinese oil pipeline from Northwestern China to Shanghai will help link Central Asia with this country. Relevant agreement about construction of the 4,000 km long pipeline, which will cost $20bn, was signed by consortium led by Royal/Dutch Shell in July 2002.10
Biggest consumers of gas from Azerbaijan and Central Asia will probably remain in the postSoviet space (Uzbekistan, Ukraine); Russia is bound to play a prominent role. The perspectives for enhancing exports of Russian gas to Western Europe (possibly even to 200 bcm per year) are not quite clear at the moment. Supplies of Turkmen gas to Russia would free its own gas for exports to Europe. However, in the medium run exports to western China look promising as the 2006 agreement on gas pipeline construction and energy supplies from Turkmenistan to China demonstrated. Gas from Azerbaijan will head for Georgia and possibly even Europe in the medium to long term perspective. Other neighboring countries, especially Turkey, can become its consumers as well, even though political considerations can block such development. In the case of Turkey, competition from Russian gas is particularly strong.11
The current network of oil and gas pipelines serves Russian interests best. Almost all Central Asian countries are observing Russian intentions with certain distrust, both in general and concerning energy resources in particular. Moreover, recent years encumbered bilateral relations with a number of disputes and conflicts. For this reason, operators of Caspian oil fields have since the beginning of
9 See: Alexander's Gas & Oil Connections, 17 August, 2005, available at [http://gasandoil.com/goc/news/ ntc53362.htm].
10 See: Hospodarske noviny, 8 July, 2002.
11 Based on Caspian Oil and Gas. The Supply Potential of Central Asia and Transcaucasia, pp. 92-93; B. Shenoy, G. Gulen, M.M. Foss, “Caspian Oil Export Choices Clouded by Geopolitics, Project Economics,” Oil and Gas Journal, Vol. 97, No. 16, April 1999, pp. 29-35; “Kaspicka ropa a Slovensko,” Trend, No. 29, 18 June, 2001, pp. 8-9.
the 1990s been looking for alternative ways of reducing the dependence on Russia. Even though many options have been considered, virtually none has been completed so far. Complex security environment in the region is the main reason, apart from high financial costs and time-consuming preparatory works. There are several hotbeds of serious conflict, which limit the possibilities of transit routes for pipelines from Central Asia and the Caspian basin. Environmental concerns come to the fore as well.12
Instability in domestic politics, security concerns and permanent tensions between Pakistan and India as well as the situation in Afghanistan lead to the conclusion that southeastern direction for alternative pipelines is not a realistic option. The same is true for proposals that traverse Iranian territory, as U.S. sanctions against Iran have been repeatedly prolonged. The routes leading from Western Kazakhstan or Turkmenistan to China are free from high security risks. However, distances between oil and gas fields near the Caspian Sea and markets in Eastern or Southeastern China or even Korea and Japan are too long. Nevertheless, Chinese authorities seem committed to pursue these alternatives.13
Routes leading through Russia include mainly the pipeline built by Caspian Pipeline Consortium, which includes several Kazakh, U.S., Russian and other companies. This pipeline transports oil from the Caspian Tengiz field to the Russian port of Novorossiisk. It is then necessary to ship it on tankers through the overloaded Turkish Straits. An alternative route for Kazakh oil will be provided by the Odessa-Brody pipeline through Ukraine and then from Brody through Druzhba pipeline to Central Europe, even though the Odessa-Brody pipeline is currently used by TNK-BP to transport small quantities of oil in reverse direction. Discussions are underway about prolonging this pipeline further to Gdansk in Poland. This would enable the transportation of Central Asian oil practically to whole Europe. The Odessa-Brody pipeline is a part of the Eurasian oil transportation corridor, an international project, which should ease the transportation of Caspian oil to Europe without necessarily passing through Russian territory.14
Baku-Tbilisi-Ceyhan (BTC) oil pipeline provides connection between Azerbaijan and the Turkish Mediterranean port of Ceyhan through Georgia, and was built by the Consortium under leadership of British Petroleum. Its construction was technologically challenging, economic viability remains questionable, and there are serious environmental concerns. The pipeline should transport Azerbaijani and possibly also Kazakh and Russian (LUKoil, TNK-BP) oil from the northern part of the Caspian Sea.
At the same time, Kazakhstan wants to diminish its dependency on Russian supplies of oil to its eastern regions, and thus plans to build an internal pipeline leading from western to eastern Kazakhstan. This would enable Kazakhstan to stop costly exchanges of oil with Russia, which leads to parts of Kazakh oil being exported to Russia. Concurrently, Kazakhstan was negotiating with Turkey and Iran the construction of pipelines which would connect it with Europe. In this case, however, it ran into U.S. resistance. For its part, the U.S. tries to convince President Nursultan Nazarbaev that Kazakhstan should export its oil through the BTC pipeline.15
With respect to severely limited export routes for gas, only Turkmenistan currently has wider range of export options. Iran keeps blaming United States for pressuring late President Niyazov to
12 See: M. Clark, “The Bosporus Bottleneck,” Petroleum Economist, Vol. 71, No. 6, June 2004, pp. 28-29.
13 See: Caspian Oil and Gas. The Supply Potential of Central Asia and Transcaucasia, pp. 133-144; The Politics of Caspian Oil, ed. by B. Gokay, Palgrave Macmillan, Houndmill, 2001, pp. 121-125; The New Economy of Oil. Impact on Business. Geopolitics and Society, ed. by J. Mitchell, Earthscan Publications, London, 2001, pp. 131-138. For discussions on possible pipeline routes see also: M.B. Olcott, “Pipelines and Pipe Dreams: Energy Development and Caspian Society,” Journal of International Affairs, Vol. 53, No. 1, Fall 1999, pp. 305-323; C. Miles, “The Caspian Pipeline Debate Continues: Why not Iran,” Journal of International Affairs, Vol. 53, No. 1, Fall 1999, pp. 325-346.
14 See: Trend, No. 24, 12 June, 2002, p. 6.
15 See: Alexander's Gas & Oil Connections, 6 July, 2005, available at [http://www.gasandoil.com/goc/news/ ntc52755.htm].
focus export routes to the west through Azerbaijan and Georgia instead of Iran, which offers significantly lower transit fees. The most important alternative proposal of Turkmenistan has been the project of Trans-Caspian Pipeline leading through the Southern Caucasus to Turkey. From there Turkmen gas could be transported to Europe in the future. Plans for a gas pipeline Iran-Turkey-Eu-rope are already prepared, but political considerations hinder the beginning of construction works. Nevertheless, a 144 km long pipeline connecting fields in western Turkmenistan with northern Iran was completed already in 1997. Routes through Afghanistan to Pakistan are being considered, but they remain only theoretical at the moment.
The biggest volume of Turkmen gas for export flows through Russian pipelines to Ukraine as well as to Russia itself, as Gazprom is highly interested in long-term supplies of Turkmen gas. In the long-term perspective (at least ten years) it is necessary to count with dependence of Turkmenistan and whole Central Asia on Russian gas transportation system, even though Turkmenistan concluded an export agreement with China as well.
Uzbekistan was considering construction of several new gas pipelines. However, according to estimates the country will become a net importer of gas in the medium-run. Only discoveries of new gas reserves could provide some hope for future exports.
Energy Politics and Policies in the Caspian
Kazakhstan
Kazakhstan is the largest newly independent state in the Caspian in terms of land area and second biggest country in Central Asia population-wise. At the moment the production is concentrated on three key fields—Tengiz (consortium led by ChevronTexaco), Karachaganak (British Gas) and Kashagan (Agip). With the exception of Azerbaijan, no government in the region provided such favorable conditions for foreign investment as Kazakhstan did in the early years of independence. These included enactment of relevant legislation, formulation of an independent national energy strategy or even elimination of bureaucratic hurdles and delays. President Nazarbaev personally supervised the progress in important negotiations. Income from oil exports and foreign investment serves to finance his megalomaniac projects which include the construction of brand new capital city. Kazakh economic growth in recent years averaged 9% annually, mainly thanks to expanding oil production and high world price of this commodity.16
Founding of joint ventures between Western companies and former Kazakh state company KazakhOil became common practice. The biggest multinational companies such as Chevron invested in fields like Tengiz, which is the most abundant field in the country with reserves of 2.4 to 2.9bn tonnes of oil. Joint-venture company Tengizchevroil, where Kazakhstan owns 20%, U.S. companies Chevron and ExxonMobil 50% and 25%, respectively, and Russian LukArco 5%, produced 12 million tonnes of oil per year there.17 Another consortium financed the construction of oil pipeline to Russian Novorossiisk. KazMunaiGaz was founded in 2002 and controls all governmental share in new projects.
In recent years Kazakhstan government tried to revise contracts with oil companies in order to ensure greater revenues for the state budget. It focuses on intergovernmental agreements rather than on launching international tenders for exploration and development of separate production blocks.
16 See: I. Gorst, “Papa Knows Best,” Petroleum Economist, Vol. 73, No. 1, January 2006, p. 4.
17 See: Oil and Gas Journal, 5 April, 2001, available at [http://ogj.pennet.com/news].
Foreign oil companies are thus facing a dilemma—rich oil deposits have great potential, but at the same time pressure of the state increases.18
Azerbaijan
The situation of Azerbaijan, traditional oil producer in the region, has been sufficiently ana-lyzed.19 The fact that many exploration drills in its sector of the Caspian Sea ended by failure or by locating only a field of gas is a problem for the country.20 It seems that the only hope for Azerbaijan is the contract signed with AIOC consortium concerning Azeri, Chirag and Gunashli oil fields. It has been signed as a “deal of the century” in 1994 for 30 years, with BP being the biggest shareholder. First oil was extracted in 1997, but 2005 became the decisive year. At that time the BTC pipeline, operated by a consortium also led by BP, became operational. In order to fill the pipeline, AIOC began to increase production from 130 thousand b/d at the end of 2004 to current 220 thousand b/d. It is estimated that it might push the production as high as 754 thousand b/d in 2007. The aim is to reach 1 million b/day the following year. The production will reach its peak at this level, after which a decline to 800 thousand barrels is expected at the beginning of next decade, at the end of which the production is estimated to fall further behind to 250 thousand b/d.21
With the oil boom currently underway, Azerbaijan needs new oil fields. The outlook is rather bleak in this respect, as number of exploration drills remained dry and prepared projects were cancelled. The hopes are focused on the northern part of the Azerbaijani sector of the Caspian Sea, where Russian LUKoil undertakes exploration drills, and on the area next to Azerbaijani-Iranian and Azerbaijani-Turkmen sector borders. In both cases the areas in question are disputed. Only an agreement on joint production modeled on the Russo-Kazakh agreement could open the fields for drilling. The absence of such an agreement and improbability of its signing in the near future lead to the conclusion that production and export of oil and the accompanying inflow of financial resources are dependent only on the three oil fields mentioned above.
Production of gas could supplement the production of oil in the long-term perspective, as gas has been found in several exploration drills instead of oil. This is especially the case of Shakh Deniz field.
Turkmenistan
Turkmenistan is the leading country in production and export of gas. It holds eighth biggest reserves of gas in the world, which is second only to Russia in the post-Soviet space. Additional exploration is likely to further raise this estimate. More than half of Turkmenistan’s gas comes from the Dauletabad field in eastern part of the country. Major obstacle adversely affecting possible increases in production is the geographic isolation of the country. Hopes for a production boom remain constrained unless reliable transportation routes to markets in Europe, Turkey or even China are established. In this respect, Turkmenistan will be dependent on Russia’s attitude in the coming years.
18 See: I. Gorst, op. cit., p. 5.
19 See: J. Wanner, “Kaspicke energeticke suroviny a jejich vyznam pro stredni Evropu,” in: B. Litera, K. Hir-man, J. Vykoukal, J. Wanner, Ruske produktovody a stredni Evropa, Eurolex Bohemia, Praha, 2003, pp. 47-80; J. Rybar, op. cit., pp. 52-62.
20 See: N.J. Watson, “To Boldly Go,” Petroleum Economist, Vol. 72, No. 10, October 2005, pp. 21-22.
21 See: A. Neff, op. cit., pp. 35-36.
The same holds for production of oil, even if Turkmenistan produces only over 7 million tonnes per year after a decline in production in the early 1990s. Isolationist policies of President Niyazov as well as combination of economic and political factors preclude more activity on the part of Western or Russian companies. So far, Turkmenistan exported small quantities of its gas to Iran and—from dire lack of other options—to Ukraine, which was supposed to consume 250 bcm of Turkmen gas between 2002 and 2006, even though the country is still hardly solvent. Under the agreement between Russia and Turkmenistan, Gazprom is supposed to gradually increase its purchases of Turkmen gas to 80 bcm per year since 2009 (30 bcm in 2006 already). Given such high volumes of export to Russia, it is questionable whether Turkmenistan will be able to keep the extent of its supplies to Ukraine. Niyazov moreover promised to export further 30 bcm to China since 2009. The 2006 Sino-Turkmen agreement stipulates that this gas should be transported through a new pipeline, and both sides should undertake joint exploration and drilling in the Amudarya basin.22 However, realization of the agreement will most likely be less ambitious in the end.
Uzbekistan
Uzbekistan lies in the geographical center of Central Asia, and it serves as a hub for its transportation and energy-related infrastructure. Its production of oil (7.5 million tonnes in 2000) has doubled since the beginning of the 1990s which enabled Uzbekistan to stop importing oil for purposes of generating electric power. Uzbekistan even exports smaller quantities of this commodity at the moment. The state-controlled Uzbekneftegaz company focuses on exploration and development of new fields as well as on full utilization of currently used as well as depleted fields.
Iran
Iran demands an equal share of 20% of the Caspian Sea area for each littoral state, which puts it at odds with its neighbors.23 Russia, Kazakhstan and Azerbaijan reached a separate understanding in 2003 which would effectively leave only 13% for Iran in case Turkmenistan adhered to the same delimitation principles. Despite these conflicts Iran shows signs of pragmatism and keeps increasing production on its oil fields. Its aim is to raise oil production from recent level of 110 thousand b/d to
1.6 million b/d at the end of the decade.
Russia
Fields in the Russian sector of the Caspian Sea remain largely untapped as Russian oil companies focus on other regions. However, Russia has been active throughout the 1990s in diplomatic and legal disputes over production rights. Putin administration started to put more emphasis on development of oil fields in this territory. Several agreements with Kazakhstan and later with Azerbaijan paved the way for further development, as they formalized the delimitation of the Caspian Sea bed and enabled founding of joint ventures.
22 See: A. Loskot-Strachota, A. Jarosiewicz, “Gazoci^gowe plany Chin w Azji Centralnej, Komentarze OSW,” available at [http://www.osw.waw.pl/publ/koment/2006/04/060412.htm].
23 For disputes concerning the status of the Caspian Sea see: C.M. Croissant, M.P. Croissant, “The Legal Status of the Caspian Sea: Conflict and Compromise,” in: Oil and Geopolitics in the Caspian Sea Region, ed. by M.P. Croissant and B. Aras, Praeger, Westport, 1999, pp. 21-42 (see also: K. Hirman, “Kaspicke more stale caka na svoj status,” Trend, No. 29, 18 July, 2001, p. 9.
Strong support of Russian companies trying to regain positions and influence in the Southern Caucasus and especially in Central Asia has been a significant aspect of Putin administration’s energy strategy. Apart from the already mentioned deal with Turkmenistan, Gazprom signed agreements on cooperation in the gas sector with Tajikistan and Kyrgyzstan. The agreements include provisions on prospecting and exploration, possible gas production and its purchases by Gazprom. A similar deal was signed with Kazakhstan as well.24
Two years later, in November of 2005, Gazprom signed an agreement with KazMunaiGaz concerning five-year buyout of all Kazakh gas exports, which is being exported to Russia through Bukhara-Ural pipeline. The agreement also deals with transit of gas from Turkmen and Uzbek fields. Shortly before that, in September of the same year, Gazprom signed another contract with Uzbek Uztransgaz, in which Gazprom acquired rights for practically all capacity of Uzbek transit pipelines for gas from Uzbekistan and especially from Turkmenistan.25 Vladimir Putin’s support of the Uzbek regime of Islam Karimov during the 2005 Andijan riots had direct economic consequences. As part of a strategic partnership between Russia and Uzbekistan a contract with LUKoil was signed concerning exploration and production rights in the Bukhara and Khiva regions.
The aim of Gazprom to acquire maximum control over Caspian gas production and its export to Europe is evident. Directing flows of gas to Russia is part of this strategy, as import of Central Asian gas would make more Russian gas available for export to Europe. This would lower the pressure on Gazprom to open more production facilities in Russia itself. It seems that this objective could be accomplished in 2007 through a series of agreements with Kazakhstan, Uzbekistan and an older contract with Turkmenistan. Strong Russian resistance to the proposed gas pipeline underneath the Caspian Sea is based on this strategic approach, as this U.S.-backed project would connect Central Asian fields with Azerbaijan and allow further transportation of gas through Georgia and Turkey to European markets.26
At the moment there are no indicators that the position of Russia as a virtual monopolist in transportation of gas from Central Asia and as an important oil transit country could seriously weaken in the near future. In the coming years governments in the region as well as energy companies will need to overcome a number of obstacles connected with increased levels of production of energy resources and with their secure transportation to regional and world markets. This will not be possible without foreign investment. At the same time, investments to oil and gas production and transportation can significantly increase incomes of national governments, and stimulate investment and development of other economic sectors. This could provide financial independence for Central Asian countries. Local governments should create a climate favorable for investment which includes adequate legal and administrative environment, functioning institutions and suitable educated personnel. For this reason, many reforms are still necessary.
C o n c l u s i o n s
1. Production of energy resources, especially of oil, in the wider Caspian region is full of political, security and economic risks; nevertheless it is highly interesting for international companies, which are investing considerable sums in it. The region will become a new supplier of energy resources, but it will most probably not become a producer of such volume which could affect world prices.
24 See: J. Siekierzynski, “Gazprom uzyska monopol na rynku dostaw gazu z Azji Centralnej do Evropy, Komen-tarze OSW,” available at [http://www.osw.waw.pl./publ/koment/2005/11/051124b.htm].
25 See: Ibidem.
26 See: Alexander’s Gas & Oil Connections, 5 April, 2006, available at [http://www.gasandoil.com/goc/news/ ntr61472.htm].
2. Main obstacles for development of oil and gas production are the still underdeveloped infrastructure and lasting disputes over status of the Caspian Sea.
3. Azerbaijan is still considered to be the main oil producer in the region. Yet, its production will reach its peak in the near future and the oil boom there will be relatively short-lived. Kazakhstan is more promising in this respect, but it shows an increasingly stricter attitude toward international oil companies.
4. With the exception of Turkmenistan, where future development is inextricably linked to natural gas, perspectives of production and export of this commodity are largely unclear at the moment, as the focus of foreign investment is still predominantly on the oil sector.
Michael D. KENNEDY
Professor of Sociology, Director of the Center for Russian and East European Studies,
Director of the Center for European Studies/European Union Center, The University of Michigan (Ann Arbor, U.S.A.).
Elizabeth EAGEN
Is receiving a dual master’s degree in Russian and East European Studies and Public Policy at the University of Michigan. She is a former Fulbright Student in Georgia (Ann Arbor, U.S.A.).
POSTCOMMUNIST CAPITALISM AND TRANSITION CULTURE IN GEORGIA Essay on Necroeconomics: The Political Economy of Post-Communist Capitalism (Lessons from Georgia) by Vladimer Papava (New York, Lincoln, Shanghai: Universe, Inc. 2005)
Vladimer Papava, former Minister of Economy in Georgia between 1994 and 2000 and now a Fulbright Scholar at the Central Asia-Caucasus Institute at the School of Advanced International Studies (SAIS), is just the kind of person you want in your intellectual company, and probably in your government too. Widely read and articulate, able to fashion vivid images in conver-
