Business & Economics:
TALK OF CIS OIL CARTEL MORE ABOUT STYLE THAN SUBSTANCE - EXPERTS
Alec Appelbaum: 12/07/01

Russia's and Kazakhstan's growing stature as energy producers is fueling talk of a new oil and gas alliance comprising former Soviet states. Such a cartel could pose a threat to OPEC's ability to manipulate oil and gas prices. But industry analysts say calls for the formation of a Russia-centered energy producers' club may have more to do with style than with substance.

At a press conference the night before the November 30 CIS summit, Kazakhstan's president, Nursultan Nazarbayev, urged member states to forge a "gas and oil alliance." Nazarbayev's vague remarks indicated that oil- and gas-producing states Turkmenistan, Uzbekistan and Azerbaijan would be "invited" to join a "sort of alliance," and that he had "proposed the idea" to Russian President Vladimir Putin.

Nazarbayev's appeal comes at a time when OPEC is grappling with a production crisis. The cartel is trying to get world oil producers to cut production to stabilize prices. OPEC intends to cut production by 1.5 million barrels per day starting January 1, and it was seeking an additional 500,000-bpd cut from producers that are not members of the club.

Russia had been reluctant to go along with OPEC's call for cuts, but finally relented. [For background see EurasiaNet's business and economics archive]. On December 5, Moscow announced that it would reduce production by 150,000 barrels per day, or about 5 percent of Russia's daily exports. The Russian announcement, however, slowed but did not halt the decline in prices.

Moscow's gesture, which OPEC called a "step in the right direction," confirmed for investors that Russia, which is responsible for about 9 percent of worldwide oil production in 2001, has no interest in sending oil prices into free fall. From Moscow's standpoint, the cuts will coincide with the winter quarter, when weather conditions have traditionally slowed production.

The anti-terrorism campaign in Afghanistan, along with recent Middle East turmoil, have heightened the interest of Western consumer states, especially the United States, in broadening access to energy resources in the CIS. American Energy Secretary Spencer Abraham met with Russian energy officials on November 28, after which he acknowledged Russia's growing prominence in the energy sector. "Russia is emerging as a separate nucleus of the energy equation; we respect that," Abraham said. According to Russian press reports, Abraham was sympathetic to efforts among unnamed executives to "stall" oil prices around $20 per barrel.

Laurent Ruseckas, who follows Caspian issues at Cambridge Energy Research Associates, points out that Kazakhstan and Russia have nothing to lose from remaining independent with respect to OPEC.

Experts are skeptical about the feasibility of a CIS cartel. If it did come into being, some add, it would probably be focused more on joint marketing efforts than on price setting. That Nazarbayev is promoting a new oil and gas alliance, some experts say, may be an attempt to mask his real intention -- locking Russia in as a customer and ally as both countries' oil and gas markets grow. Nazarbayev may also be trying to get the attention of the United States.

Central Asian resources look more attractive than ever, but officials in the land-locked region continue to face the problem of getting oil and gas to European and American markets. The Kazakhstani energy ministry claims it will increase annual production from 40 million tons to 100 million tons in this decade. This increase in production will only make economic sense if the republic finds customers beyond its borders - and probably west of Russia as well.

Kazakhstan has reason to fear that Russian companies will develop pipelines and distribution systems that would overwhelm Kazakhstan's own distribution efforts, experts say. It also wants to sell gas to Russia and, via Russia, to Europe.

Currently, Kazakhstan is dependent on investment by Western conglomerates. ChevronTexaco heads the largest oil exploration effort in the country and ExxonMobil, the world's largest energy company, has also made big investments. "New pipelines will probably go through Russia," notes Julia Nanay, who studies the region with the Petroleum Finance Group in Washington. The Kazakhstanis are "going to be a superpower in oil as well in 10 years, and maybe they want some element of cooperation to make sure Russia doesn't cut them off."

At present, Russia, Kazakhstan and other CIS energy producers understand that they can count on OPEC to manipulate prices so that they never fall too low. If they formed their own cartel, they would tether their fragile systems and separate, aggressively pro-development agendas together. Players in the region are concerned with individual advantage these days; Russian energy executives have sent conflicting signals for months about their participation in the construction of an oil pipeline from Baku, Azerbaijan to Ceyhan, Turkey.

Most recently, Lukoil executives saw a presentation by BP, the project's lead investor, and have been indicating that they find the idea of participating in the pipeline more attractive. A cartel would squelch such opportunism. Moreover, a cartel would not sit well with international players. It would "help keep America's economic and political interests focused on Central Asia," which would in turn offend China, notes a China expert who spoke on condition of anonymity.

And logically, Kazakhstan could not unilaterally cut production because so much of its oil belongs to joint ventures where foreign companies control decision-making. Meanwhile, Kazakhstan can control the pace and size of gas contracts with Russia, and gas sales will drive its economic future.

According to the trade publication Petroleum Economist, Russian intransigence on taxation and sales of gas has caused concern for Kazakhstani officials over their ability to export production from several fields, including the Kashagan field. Kazakhstani leaders are pressing Gazprom, Russia's natural gas monopoly, to admit other suppliers for European markets. The danger, as Kazakhstani officials see it, is that if multinational companies feel they will be unable to profitably sell gas from these fields, they may stall or shrink their investment.

Ruseckas sees Nazarbayev's vague talk of an "alliance" as a tactic to alert Russian President Putin to his interest in a gas partnership. In a few years, Russia will have to choose between expensive exploration projects for its own gas, and quick, reliable purchases from Kazakhstan. By laying a flattering foundation with talk of alliances, Nazarbayev is trying to make his resources as attractive as he can to the region's undisputed leading power.

Editor’s Note: Alec Appelbaum is a contributing editor to EurasiaNet.