Sunday, May 13, 2007

Central Asia - Energy DIversification for Europe or Transportation Monopoly for Russia?

This week Russia struck a landmark deal that is set to be one of the few but badly needed diplomatic and political victories of Russia in the ex-Soviet Republics. The foundation for success was the usual – energy interests. Despite numerous attempts by Europe, and even the US to reduce energy independence of the Old Continent on its Eastern neighbor, Russia has managed yet again to avert its loss of influence in being the dominant supplier of oil and gas into Europe by managing to interest its Central Asian partners. This of course has come at a cost of opening its own projects and transit routes, a long-fought for national treasure, to its energy partners, in the face of Kazakhstan and Uzbekistan.

Over the past years, several projects have been undertaken to stem Russia’s power in energy supplies into Europe; the pace of change in this area of relations between Europe and Russia has accelerated, fuelling interest from the US, after the two supply wars involving Ukraine in late 2005, and Belarus in late 2006. Europe became deeply concerned that at a point in time, Russia might use its vast pipeline network to influence first of all the Eastern European countries, and maybe even promote its own policy by threatening cut-offs to the whole of Europe.

The BTC pipeline (Baku-Tbilisi-Ceyhan), offering a large supply of oil out of Azerbaijan into Europe without any Russian territorial or economic participation was the first in a series of such deals. Next, Europe was eyeing the ever-increasing growth in supplies from Central Asia. With Kazakhstan’s Kashagan oilfield, one of the biggest discovered in years, Turkmenistan’s enormous quantities of natural gas, and the new “democratic” allies of the West in the Caucuses region, the potential for a vast network of pipelines to be built out of Central Asia into Europe, without going through Russian territory became open. Russia had much to lose; not only the control over the pipeline network (which as we saw in the Ukrainian crisis proved to be more important than control over actual supplies); Russia’s underinvestment into its own oil and gas fields and a growing internal market, meant that an ever larger share of its supplies internally and into Europe would have to come out of Central Asia.

BTC Pipeline

Earlier this year Russia further expanded its pipeline network into Europe by signing a deal with Bulgaria and Greece for the construction of the Burgas-Alexandroupolis pipeline, set to bypass Turkey, a key energy ally and the host of the BTC pipeline. But the question of Central Asian resources remained open. In April of this year Kazakhstan and Turkmenistan began signaling their willingness to discuss energy transportation with the West, rather than Russia.

As of now two potential projects are in planning stage, both linking Central Asian energy supplies to European customers. The first, the Trans-Caspian pipeline network is set to go under the Caspian sea and possibly into the BTC pipeline (in the case of oil); the other, the Near-Caspian pipeline is set to go around the Caspian sea (into Russian territory, where it would be linked to Russia’s pipeline network or would be shipped from Novorossiysk to the Burgas-Alexandroupolis pipeline, also under Russian control.

Burgas - Alexandroupolis Pipeline

On May 9th, right after the Victory Day celebrations in Russia came to an end; President Putin took off for his tour of Central Asia, the main points of which would be negotiations with his Kazakh and Turkmen colleagues. The agreements that have been reached (without the finalized technical details) is that the Trans-Caspian pipeline network would essentially be put on hold with Kazakhstan and Turkmenistan agreeing to build with Russia the Near-Caspian pipeline, whose capacity would be over 10 billion cubic tones of gas by 2010, and could be expanded to at least 30 billion by 2012, a very significant number.

However, Russia’s deal came at a heavy cost. Kazakhstan, which has with every passing year been claiming title of one of the world’s key energy suppliers has been promoting its own interests and will most likely win, as a result of the deal to build the Near-Caspian pipeline, concessions from Russia. As Kommersant reports:

Kazakhstan, which owns a 19-percent share in the Caspian Pipeline Consortium, is most interested in oil issues. It is lobbying in Russia (owner of 24 percent of the CPC) for the approval of a project to expand the pipeline's capacity in exchange for a guaranteed supply to another pipeline, the Burgas-Alexandroupolis line, of 17 million tons of oil annually. That is the only figure that Nazarbaev cited accurately in relation to the CPC, when he said that the pipeline's capacity had to be raised from 23 million to 40 million tons per year. The pipeline already pumps 31 million tons per year, and the expansion project foresees increasing that to 67 million tons annually by 2012.

Caspian Pipeline Consortium

Seventeen million tons, that is, half of the planned increase in transport through the CPC, is being offered to the Burgas-Alexandroupolis line, in which Russia has a 51-percent share. Technologically, the project to expand the CPC implies no less growth in volume. In essence, Kazakhstan is suggesting that Russia exchange the expansion for a guarantee of participation in Burgas-Alexandroupolis. The rest of the oil will be transported by different routes, including the Odessa-Brody pipeline, a competitor of Transneft.

The bottom line of these concessions is that Kazakhstan and Turkmenistan will be sharing profits with Russia from part of the energy flows into Europe, something that has been unprecedented in the past. The alternative for Russia would be to completely lose the alliance with its Central Asian partners, who would ship their energy via Turkey into Europe.

A high-level source within the Russian delegation, cited by Kommersant stated that the idea “to build another pipeline (the Trans-Caspian – Blog author’s note), one that is very technologically difficult and risky does not make much sense. When the pipelines (Near-Caspian pipelines going to Russia (North), and to Uzbekistan and China (South) – Blog author’s note) will be built, it would make no difference for Turkmenistan where to sell its energy supplies, as Russian internal energy prices will approach those of Europe and the US”. However, the Turkmenistan president has confirmed that the idea of the Trans-Caspian pipeline has not been taken off the table and it is an option the country is considering, according to the New York Times. Some analysts, cited by take the stance that it is a bargaining option for Turkmenistan which wants to have as much energy interests in Russia and potentially in some projects in Eastern Europe as Kazakhstan will, considering the fact that natural gas from its country is being transported into Europe.

At the time of the meetings of the Central Asian presidents and the Russian leader, the so-called “Anti-Russian energy summit” was being held with the participation of Poland, Ukraine, Lithuania, Georgia and Azerbaijan. The goal of the summit, which at the last moment the Kazakhstan president (the key link in the then active “anti-Russian chain” declined to participate in) was the construction of the pipeline from Odessa (which would see energy supplies from the BTC pipeline and the potential Trans-Caspian pipeline) to Gdansk on the Baltic Sea. Despite the fact that the pipeline is de-facto agreed to be built, the capacity fulfillment will have to come from Central Asia (Kazakhstan and Turkmenistan). Turkmenistan’s neutral position on the issue will mean that in the future it may sign a deal to ship its supplies to Europe outside Russia. Turkmenistan’s highly autocratic regime and the virtual expulsion of all Russian citizens means that it will not listen to any concerns outside of its territories about its actions, unless it is offered economic incentives to do so.

The recent deal between Russia and Central Asia has finally made it clear that the story of friendly relationships on the post-Soviet landscape is only a myth. To capture the ability to negotiate and participate in the energy development projects in those regions means giving up large concessions. The Central Asian republics have an unheard of degree of bargaining power. First, Russian supply constraints to fulfill Europe’s energy contracts require heavy use of Central Asian energy. Second, Europe’s urgent need to diversify means that Central Asia is the likely stable source of future supplies. Third, the fact that Russian and European energy interests collide make Central Asia a virtual golden solution to energy problems for Russia and Europe. The main question that remains is, can the conflict of interests in Central Asia create a win-win solution for Europe and Russia or will the Central Asian map be only solved to appease one side versus the other creating a “bidder’s curse” where the winning side will have to give up too much to become a dominant energy supplier?


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