GEOPOLITICS OF THE GAS PIPELINES IN THE BLACK SEA-CASPIAN REGION
Sergey Sargsyan

"Noravank" Foundation
24 December 2009

The prospects of the gas pipelines policy, the configuration of
the pipelines networks are, to certain extend, dependent on the
availability of the raw materials, their division between the
countries of the region, the stability of functioning of the gas
producing and processing industries of those countries, the contents
of the contracts concluded. What capacities do the Caspian countries
possess and how do they manage them?

Turkmenistan In June 2007 Chinese China National Petroleum
(CNPC) Company obtained the Bakhtiar gas field (one of the most
perspective gas fields in Turkmenistan) development license. Its
gas reserves on the evaluation of the Chinese and Turkmen experts
should be enough to fill the new gas-pipeline going to China
(Turkmenistan-Uzbekistan-Kazakhstan-Urumchi- Shanghai) by which
Ashkhabad will export 30 billion m3 of gas annually to China.

Thus Turkmenistan undertook to supply gas:

To Russia, according to the 2003 contract concluded for 25 years –
50 billion m3 annually, with the gradual increase of the supply up
to the 90 billion m3 by 2028.

To Iran – 8 billion m3 annually (it is planned to bring the supply
to 12-14 billion m3 and in the future up to 20 billion m3) To China –
since 2009 for a period up to 30 years in scope of 30 billion m3.

The agreement with the PRC introduced an intrigue into the prospects
of the gas export not only from Turkmenistan but also from the whole
region of Central Asia as well as into the stability of its supply
which, according to the existing commitments, may directly reflect
on the viability of the new gas pipelines construction in the region
(firstly Transcaspian and Nabucco and the flowrate of each of them
will be 30 billion m3).

Table 1 Natural gas production and consumption in Turkmenistan1,
billions of m3

2006 2007 2008 Gas production 60,4 65,4 66,1 Home consumption 18,4
21,3 19,0 Balance + 42,0 + 44,1 + 47,1

According to the Russian and Western experts’ evaluations the total
potential of the gas fields in Turkmenistan will not exceed 15.5
trillion m3 (the proved, explored and forecasted reserves are meant),
though in 2007 the recent president G. Berdimuhamedov stated about the
42-44 trillion available reserves. There are no independent, general
and objective information about the gas reserves in Turkmenistan. The
results of the audit carried out by the American DeGolyer & MacNaughton
Company (on Davletabad field) and British Gaffney, Cline & Associates
(on the fields in the eastern parts of the country) by the order
of the president S. Niyazov in 2005 were not issued; simply the
statements by the officials were made. According to that data the
reserves of Davletabad field initially were about 4.5 trillion m3,
latter that number dropped to 1.3 trillion. And some experts are
inclined to evaluate them within the scope of 500-600 billion m3.

Due to the fact that the field had no international certification
once again the negotiations, which were to take place in October
2008, over the building of another gas pipeline, i.e. Trasafghani
(Turkmenistan-Afghanistan-Pakistan-Ind ia TAPI) were postponed.

In 2008 by order of G. Berdimuhamedov Gaffney Cline & Associates
Consulting Company carried out the evaluation of "Gunorta Yoloten",
"Osman" and "Yashlar" gas fields in the south-east of the country
which allowed to speak about their potential – 4.5-14 trillion m3. It
means that Turkmenistan takes the second place after Russia as for
the world gas reserves. But those figures need to be clarified and
the fields re-explored).

And the statement by Jim Gillett, the Business Development Director
of Gaffney Cline & Associates, that the amount of gas produced at
those fields may reach 70 billion m3, can reassure those who had
already concluded the gas supply contract but it is not suffice
(from the point of view of economy) to conclude new big contracts.

But the prospects of the rising of the rating of Turkmen gas fields, of
course, will even more increase the attention of all the geopolitical
actors to Ashgabat.

One of the main issues of the energy sphere of Turkmenistan is,
also, the fact that the gas production industry of Turkmenistan fails
to fulfill the planned increase of gas productions, which brought,
particularly, to the reduction of gas production in 2007 when from
67.4 billion m3 only 45.5 billion m3 were exported. In 2009 the level
of the planned gas production has been brought to the one in 2007,
i.e. 75 billion m3.

Table 2 Natural gas production shortfall in Turkmenistan, billions
of m3

2006 2007 2008 Planned 80 75 81,5 Produced 62,2 67,4 66,1 Balance
-17,8 -7,6 -15,4

By the time of functioning of the gas pipelines (Turkmenistan-PRC
from 2009, Caspian from 2010) Ashgabat will have had to increase the
production at least on 35 billion m3 (more than 50% from the current
gas production capacity) and in the future only on Russian and Chinese
projects still on 40-50 billion m3.

Kazakhstan There are also some problems in Kazakhstan connected with
the production of additional amount of gas (in northern – Russian,
and eastern – Chinese, lines).

Table 3 Natural gas production and consumption in Kazakhstan2,
billions of m3

2006 2007 2008 Gas production 23,9 26,4 30,2 Home consumption 20,3
19,5 20,6 Balance +3,6 +6,9 +9,6

Kazakhstan has undertaken to supply the Caspian gas pipeline with
10 billion m3 annually and to pump the same volume of gas to the gas
pipeline going to China (Beyneu – Shimkent branch).

At present, besides Karachaganak gas field, which is the main source
of gas production, the Kashagan gas field is supposed to be the most
perspective project: in 2010 it can provide 10 billion m3 capacity
and in 2015 it can reach its maximum capacity – 25 billion m3.

But Kazakhstan has rather serious problems in increasing the volume
of gas production.

Firstly, 70% of the produced gas is supposed to be "associated", i.e.

it is produced at Karachagan, Kashagan and Tengiz oil wells. In order
to render it marketable gas needs additional filtration and this
brings not only to the cost supplement but also to the reduction of
its real amount.

Besides, it is more profitable to pump the associated gas back into
the oil wells in order to boost their productivity.

Secondly, more than 4 billion m3 of gas are converted to the liquefied
gas.

Thirdly, Kazakhstan imports 2 billion m3 of gas from Uzbekistan in
order to supply it to the southern regions of the country (according to
the forecasts made before the crisis the import volume for 2008 should
have been increased to 3.5 billion m3). In order to implement the
programme on Kazakh gas supply to those regions, which is stipulated,
particularly, by the programme of building gas pipeline to China,
and the "deviation" of additional gas volume will be demanded.

Fourthly, the other most major fields are trans-border: Imashevskaya
gas condensate field is on the border of Atirau region of Kazakhstan
and Astrakhan Oblast of Russia; Khvalinskoe and Central gas fields
are on the sea border of the RF and Kazakhstan in the central part
of Northern Caspian Sea.

Both for Moscow and for Astana it is profitable to produce those fields
jointly, on the bases of the agreement on dividing the production. But
the final configuration of the participation of Russian and Kazakh
companies for production of those fields has not been settled yet and
it is not excluded that Moscow deliberately protracts the conclusion
of the production contracts expecting more profitable economic and
political situation.

Azerbaijan Early in June 2008 Moscow also approached with a proposal,
analogous to the one approached to Astana and Ashgabat, to Baku to
buy gas on "European" prices. From the economic point of view that
proposal is:

Rather attractive: at the moment of that proposal State Oil Company
of Azerbaijan (SOCA) sold its gas, which was supplied to Turkey by
means of Baku-Tbilisi-Erzurum (BTE) gas pipeline only at $120 for
one thousand m3, meanwhile Gazprom sold gas to Europe at $350-370.

>>From technical point of view it is rather feasible, by operating
in reverse the unused Mozdok-Baku gas pipeline (after Baku in 2006
refused to buy Russian gas on new, higher prices and passed to the
gas from their local gas fields) with 5 billion m3 flow efficiency
which can be reached to 8 billion m3 in case of small investments.

Table 4 Natural gas production and consumption in Azerbaijan3,
billions of m3

2006 2007 2008 Gas production 6,1 9,8 14,7 Home consumption 9,1 8,0
9,3 Balance – 3,0 + 1,8 + 5,4

After the beginning of the gas output within the bounds of "Stage-1"
of Shah-Deniz gas field in autumn 2006 the purchase contracts were
signed by Turkey – 6.3 billion, Azerbaijan – 1.5 billion and Georgia –
0.8 billion m3 annually. Because of the increase of prices on Russian
gas in 2006 and the refusal of the AR from its import in 2007 the
Azerbaijani quota was increased at the expense of Turkish (with the
consent of all parties) to 3 billion m3 per year.

According to the forecasts after the realization of "Stage-2" of
Shah-Deniz4 project by 2012 the gas output will have reached 20
billion m3 per year (according to more optimistic estimation – 25
billion m3). The total export potential of Azerbaijan by that time
will have reached 10-12 billion m3 per year which, anyway, will not
be enough for full-fledged Baku-Tbilisi-Erzurum pipeline throughput
(16 billion m3).

Increasing the gas prices for Azerbaijan, Russia not only made Baku
refuse from its import but in fact did not allow Baku to announce about
the full-fledged Baku-Tbilisi-Erzurum pipeline throughput according
to its rated capacity of 16 billion m3.That would have more political
than economic effect but it should have positive effect on the further
increase of its investments attractiveness.

The fact that the BTE is of great political importance for Azerbaijan
predetermines that among all the Caspian states there are least
chances to have the positive response to the Russian proposals in
essential and not symbolic amounts5 on behalf of Baku.

It should be mentioned that not only Europe and Russia put in a claim
on Azerbaijani gas. Tehran, which has 10% share in the project6, also
stated about its willingness to buy gas from Shah-Deniz field in full.

***

By offering "European price" for the gas from the Caspian region
Russia eliminated the economic component in the choice of its export
direction and shifted the issue into the political plane. Though the
gas producer countries understand the strategic intention of Moscow –
to preserve the main configuration of the gas transmission network
of the region – they have a real opportunity to gain some political
preferences from all the interested parties.

The interest of Moscow in Azerbaijani gas may be projected by Baku,
firstly on the correction of the Russia’s stance in regard to the
Nagorno-Karabakh conflict. As for Nabucco pipeline the Azerbaijani
gas can be only additional filler and this makes its bargaining
position vulnerable at the negotiations with the parties concerned
and subordinates it to the decision of Central Asian suppliers.

The gas factor may promote to the tolerance on behalf of the EU and
US towards the authoritarian authorities in Ashgabat, human rights
and freedoms violations. At the same time it is not excluded that
Ashgabat, under the high Chinese demand for the gas, will be forced
to reconsider some contracts concluded previously (if not on political
reasons then on the economic ones) and first of all those with Russia.

Another incident in gas transmission system of Turkmenistan such as
blowing up the gas pipeline in April of this year may give a rise
to it7. It seems that in connection with the change of power in
Turkmenistan and "revision" of Saparmurad Niyazov’s legacy, the
negative image losses from such a decision will not be of great
importance for Ashgabat as a business partner.

Some problems Russia also may have with Kazakhstan – the most
self-reliant and self-sufficient state in Central Asia, but Moscow
is not hopeless any way.

Firstly, the president of the Republic of Kazakhstan N. Nazarbaev,
realizing the China’s appetites (and not only in the sphere of energy
carriers supply), understands the necessity of balancing between the
interests of its neighbours – Russia and China.

Secondly, taking into consideration the high personal activity of N.

Nazarbaev in large-scale geopolitical (EurAsEC) and geo-economic
projects (the turn over of the Siberian rivers to Central Asia),
at present moment not only the prospects of the chairmanship of
Kazakhstan in the OSCE in 2010 are of great interest for him but
also the implementation of joint project with Russia on building the
"Eurasia" channel, which would connect directly the Caspian and Black
Seas on which perspective benefits Russia will try to capitalize.

The implementation of this project would allow Kazakhstan to pass
to the direct supply not only of energy carriers and oil products
to the consumers but also of the whole range of the export goods
of the country. In this case Kazakhstan would assume the additional
attractiveness, first of all, to the countries of South and South-East
Asia and China as transition country for ever growing cargo traffic.

In its turn Russia, besides definite economic dividends, will keep
those transport transition flows under the control of strategic
importance.

Besides, not only the growing economic but also the political
competitiveness between Kazakhstan and Uzbekistan for the role of the
regional leader allows Moscow using Tashkent as a kind of limiting
factor for the far too self-reliant policy of Central Asian states.

Uzbekistan, which possesses rather substantial human resources (about
27 million people) and has territorial conflicts and problems with
almost all its neighbours, is fit for this role.

Recently the naked irritation of Islam Karimov has been aroused by
the aspiration of Nursultan Nazarbaev to create the Union of Central
Asian States with interested Tajikistan and Kyrgyzstan, avoiding the
opinion of Uzbekistan and ignoring the passivity of Turkmenistan8.

At the same time the Caspian Sea gas export routs geopolitical game
should take into consideration the positions of too many relatively
independent actors: Kazakhstan, Turkmenistan, Uzbekistan9, Azerbaijan,
Iran and Turkey.

For better coordination of the positions of gas exporting countries
Russia goes on trying both from point zero and within the scope of
EurAsEC and SCO (Shanghai Cooperation Organization) to create some
supra-national or coordinating organ. So the formation of the common
price policy in the sphere of gas industry, which in fact means the
offering of the "European prices" to the Caspian region countries by
Russia, may serve for Russia another step in that direction.

The success of that policy depends firstly, on military and political
situation round Iran, secondly, on the interstate relations between
Kazakhstan, Turkmenistan and Uzbekistan and thirdly, on their relations
with Russia.

1Statistical Review of World Energy. , 2009.

2Statistical Review of World Energy. , 2009.

3Statistical Review of World Energy. , 2009.

4The gas production at "Stage-2" of Shah-Deniz has been planned to
begin in 2012 but due to economic and political reasons it can be
delayed for several years, till 2016.

5In June 2009 Gazprom signed an agreement with SOCAR on the supply of
Azerbaijani gas. From January 1, 2010 the purchase amount will be 500
million m3. 9.shtml

6The contract on Shah-Deniz gas field was signed on June 4, 1996
and came into vigour on October 17 of the same year. The parties
to the contract are British "BP Amoco" (25.5%), "Statoil" (25.5%),
State Oil Company of Azerbaijan Republic (10%), Russian "Lukoil"
(10%), French "Elf" (10%), Iranian OIEC (10%) and Turkish TPAO (9%).

7On the night of April 8/9, 2009, at the 487th kilometer of "Central
Asia-Center" (CAC) gas pipeline in Turkmenistan an explosion took
place which caused the suspension of the gas supply to Russia. The
Foreign Ministry of Turkmenistan made a statement in which it
blamed the affiliate company of Gaszprom – Gazprom export – in
arrangement of conditions for the explosion at CAC. In the opinion
of the Turkmen party Gazprom export abridged the amount gas taken
from CAC which caused the increase of loading in the gas pipeline
network

8In the context of the gradual exit of Turkmenistan from
self-isolation, Ashgabat recently has started to show interest in
that initiative of Astana.

9Uzbekistan, which annually exports rather significant amount of gas –
about 10 billion m3 – nevertheless, has no opportunity to become the
active actor in the redistribution of the volume and the direction
of export which directly touches the region of South Caucasus.