Business & Economics:
NAZARBAYEV REASSURES RUSSIA ON ENERGY COOPERATION
Sergei Blagov: 3/20/07

Kazakhstani President Nursultan Nazarbayev, on a visit to Moscow, reaffirmed his country’s commitment to maintaining broad energy ties with Russia. Despite Nazarbayev’s pledge, however, Russian leaders remain concerned that Kazakhstan is trying to stake out a more independent energy position.

Nazarbayev held talks with Russian President Vladimir Putin on March 19 in the Kremlin. The two leaders discussed plans to expand nuclear energy cooperation, but it was the oil-and-gas development matters that garnered the most attention from experts.

Kazakhstani officials sought to downplay the impression that they are interested in pursuing a separate export strategy that could undercut Russian energy profits. Nazarbayev insisted in Moscow, for example, that Kazakhstan and Russia were energy partners, not competitors. Kazakhstan remained committed, the president added, to exporting a major share of its energy resources via Russian pipelines. “Between Kazakhstan and Russia no economic or political problems exist,” Nazarbayev said at a joint news conference.

In 2006, Kazakhstan funneled 43 million tons of crude oil and 24 billion cubic meters (bcm) of gas via Russian pipelines, Nazarbayev revealed. In April last year, Nazarbayev and Putin forged a far-reaching transit pact covering resources from Kazakhstani oil fields to be shipped via Russia to Europe. Under that agreement, Russia and Kazakhstan agreed to more than double crude oil deliveries via the Baku-Novorossiisk pipeline owned by the Caspian Pipeline Consortium (CPC): from 28 million tons a year in 2005 up to 67 million tons eventually.

To a great extent, Nazarbayev’s message pleased Russian leaders. A commentary published by the official RIA Novosti news agency expressed satisfaction with Astana’s energy stance. “If Georgia is the symbol of a full-tilt flight [from Russia], if Ukraine is the embodiment of ambitions of a republic that, since Soviet times, has felt like the second among equals, Kazakhstan is the eternal alter ego of Russia in the CIS space,” the commentary stated.

At the same time, Nazarbayev did not appear to fully dispel worries among Russian officials that Kazakhstan could one day mount a serious challenge to Russia’s regional energy dominance. Several factors are fueling apprehension in Moscow, particularly Astana’s ongoing exploration of a trans-Caspian pipeline, as well as attempts to foster broader energy ties with China.

The political transition in Turkmenistan following the sudden death last December of that country’s despotic ruler, Saparmurat Niyazov, has generated new optimism about trans-Caspian project’s prospects. [For additional information see the Eurasia Insight archive]. Azerbaijan has taken the lead in trying to persuade both Turkmenistan and Kazakhstan to commit to the project, which has aroused Moscow’s concerns because it would circumvent Russian pipelines. [For background see the Eurasia Insight archive]. In late February, Azerbaijani Foreign Minister Eldar Mammadyarov visited Astana. According to Azerbaijani media reports, Kazakhstani officials reportedly expressed keen interest in the project, but told Mammadyarov that they would have to proceed cautiously, given Russia’s stout opposition to the trans-Caspian concept.

Russia is likewise wary about rapidly expanding Kazakhstani-Chinese energy ties. Kazakhstan’s national oil and gas company, KazMunaiGaz, and the China National Petroleum Company (CNPC) have pledged to jointly draft a feasibility study for the construction of a gas 30 bcm/year pipeline from Kazakhstan to China. The first phase of the pipeline with an annual capacity of 10 bcm is slated to become operational in 2009. The second phase would go into effect in 2012.

The Kazakhstani plan poses a quandary for Russian energy policymakers. Earlier this month, officials in Moscow outlined plans to build a new export gas pipeline along the East Siberia-Pacific oil pipeline, currently under construction. In March 2006, the Kremlin pledged to raise gas exports to China from both Eastern and Western Siberia up to 30-40 bcm/year from each region. Russia also announced plans to build a new $10 billion pipeline, dubbed Altai, tentatively due for commissioning in 2011. All these pipeline projects, if realized, would render Russia and Kazakhstan direct competitors in the Chinese market – a situation that Beijing could use to its advantage in price negotiations.

“Kazakhstan has an apparent advantage in the competition for [cooperation with] China, on which Moscow has put an increasing focus. In addition, the expected changes in Turkmenistan can fundamentally change the "gas equation" not only in the region, but globally,” the RIA Novosti commentary said.

Already there are indicators of problems in Kazakhstani-Russian energy relations. Last May, the Russian energy giant Gazprom announced an intention to form a joint venture with Kazakhstani-led consortium to process up to 15 bcm/year of gas from the Karachaganak field at its Orenburg gas processing plant. However, almost a year after the announcement, the venture remains to be finalized. Gazprom previously imported 8 bcm/year of Karachaganak gas for its Orenburg plant. Members of the Karachaganak Petroleum Operating (KPO) international consortium were reported uneasy with low prices offered by Gazprom and were understood mulling to funnel Karachaganak gas to China.

While the maneuvering continues in the oil-and-gas realm, Russia is interested in developing other forms of energy cooperation with Kazakhstan. During his talks with Nazarbayev, Putin made it clear that he would like to see the two countries intensify nuclear energy cooperation. To this end, Kazakhstan confirmed interest in joining Russia's project of an international uranium enrichment center, and Nazarbayev invited Putin to visit Kazakhstan this summer to discuss uranium enrichment, as well as the joint development of Kazakhstani uranium deposits.

Moscow has long sought to forge an expansive nuclear energy partnership with Kazakhstan. In February 2002, the Kremlin offered to help revive plans to build a nuclear power plant at Balkhash, roughly 400 kilometers north of Kazakhstan’s commercial capital of Almaty. Plans for the plant were originally developed during the Soviet era, but were put on hold after the 1991 collapse of Communism by the Nazarbayev administration, amid financial and ecological concerns. Last year, however, Kazakhstani officials indicated renewed interest in the project.

Russia is also interested in developing Kazakhstan’s uranium-mining sector in a bid to supplement its own domestic production. In July 2006, Russia and Kazakhstan agreed to launch three joint ventures covering uranium mining and enrichment, as well as a project to develop new types of nuclear reactors for domestic use and possible exports to third countries. The total cost of the three Russian-Kazakhstani joint ventures was estimated to reach $10 billion. The mining joint venture was expected to produce 5,000-6,000 tons of uranium a year at southern Kazakhstan’s Budyennovsk deposit, which has estimated reserves of 250,000-300,000 tons. Russia expected uranium from Budyennovsk to be enriched in Angarsk, Siberia. However, details of the ventures have not yet been announced.

Editor’s Note: Sergei Blagov is a Moscow-based specialist in CIS political affairs.