Business & Economics:
KAZAKHSTAN: ASTANA SET TO MAKE AN ENERGY EXPORT BREAK WITH RUSSIA
Joanna Lillis: 5/02/08

Efforts to construct a trans-Caspian pipeline that would dent Russia’s energy-export dominance in the region continue to make incremental progress.

Much attention in recent months has focused on construction of a natural-gas pipeline across the Caspian. [For background see the Eurasia Insight archive]. But it may prove that the first route under the sea would carry oil, and link in to the Baku-Tbilisi-Ceyhan (BTC). Attention is shifting to an oil transport route after Kazakhstan’s senate in late April ratified an energy export treaty with Azerbaijan. President Nursultan Nazarbayev’s signature is widely considered a formality.

The treaty sets out the conditions for shipping Kazakhstani oil to Western markets via a route that bypasses Russia, which currently enjoys a stranglehold on pipelines out of Central Asia. Treaty ratification also marks the start of an ambitious $3 billion project, the Kazakhstan Caspian Transportation System (KCTS), to build the infrastructure needed to ship the oil across the Caspian Sea. The first phase of the project involves construction of a pipeline that links the production center of Yeskene to the Caspian port facility at Kuryk. Beyond that, the Kazakhstani government is prepared to spend up to $10 billion in creating an energy export hub at the western coastal city of Aktau, according to a report distributed by the RIA Novosti news agency. Construction of the hub could take up to five years.

Kazakhstani officials indicated that exports bound for BTC in Azerbaijan would initially be transported by tanker. But Astana has expressed intent to examine the feasibility of an underwater pipeline. “Construction of a new, sub-sea pipeline is a sophisticated process that requires a [sophisticated] technical solution,” the Trend news agency quoted Duysenbay Turganov, Kazakhstan’s deputy energy minister, as saying during a late April visit to Baku.

“The issue is still open and is being worked on. It will depend on technical capabilities in the oil industry. Because it is a serious project, it will require a thorough approach,” Turganov continued.

Sources in Kazakhstan suggested that the government would be willing to commit to exporting 23 million tons of oil per year initially via the BTC, rising to a possible 38 million tons after the KCST is completed. Current expectations are that the launch will take place when the troubled Kashagan project comes online, which is now – after a series of delays – expected in 2011. [For background see the Eurasia Insight archive].

Kazakhstan officially committed to the BTC in 2005 – the day before the pipeline was officially inaugurated – after much speculation about whether it would join a route bypassing Russia. The treaty just ratified by parliament was signed between Nazarbayev and his Azerbaijani counterpart, Ilham Aliyev, in 2006. “It is hard to overestimate the significance of the agreement just signed,” Nazarbayev said at the time. “We have now secured the third alternative way for exporting our hydrocarbons.”

Kazakhstan hopes to double its oil output by 2015 and become one of the world’s top 10 energy producers. Accordingly, Astana has moved vigorously to explore additional export capacity options. Most of Kazakhstan’s oil is currently shipped via the Caspian Pipeline Consortium (CPC) from the Tengiz field in western Kazakhstan to the Russian port of Novorossiysk. [For background see the Eurasia Insight archive]. A smaller portion of oil goes eastwards to China via the Atasu-Alashankou pipeline, which opened in 2005 with a capacity of 10 million tons a year, rising later to 20 million tons. [For background see the Eurasia Insight archive].

Kazakhstan has long been lobbying to more than double the export ability of the Russian-controlled CPC, which currently has an annual capacity of about 30 million tons. An expansion agreement reached in 2005 has stalled, as has a deal reached last year between Nazarbayev and Russian President Vladimir Putin to expand capacity to 40 million tons a year.

Kazakhstan produced an estimated 67 tons of oil in 2007, of which about 60 tons were exported. This year, the export total is projected to exceed 70 million tons. Once the Kashagan field starts pumping oil, exports are expected to make a quantum leap.

Experts say Russia is the main stumbling block to CPC expansion. Evidently, the Kremlin is holding out for a significant increase in its share of the pipeline’s profits in return for its consent for adding capacity.

In March this year shareholders rejected an initiative from Chevron, which owns 50 percent of the Tengizchevroil venture operating the Tengiz field, to start financing the expansion of the pipeline. This setback appeared to spur Kazakhstani efforts to develop new export routes, and might have been a direct catalyst for senate ratification of the BTC pact.

“The trans-Caspian system of transporting hydrocarbons is a compromise since Russia does not leave much of a choice in terms of transportation,” said Maria Disenova, an analyst at the Institute for Economic Strategies-Central Asia.

“There is much work to be done, but the most important thing is that there is economic interest in this and willingness to go ahead with the project, unlike in the case of CPC,” Disenova said. She characterized the BTC pact as a “breakthrough” for Kazakhstan, as Astana will likely discover great benefits in reducing its export dependency on Russia.

Azerbaijan is taking fast action to boost ties with Kazakhstan. On May 1, for example, President Aliyev issued an executive order to establish an Azerbaijani consulate in Aktau. Meanwhile, in an effort to bolster Astana’s interest in the Azerbaijani export option, Baku’s envoy to Kazakhstan, Lyatif Gandilov, announced that the Baku-Supsa pipeline would also be made available for the export of Kazakhstani oil, the Trend news agency reported.

For now, Kazakhstan is content with taking a go-slow approach. The potential construction of a trans-Caspian oil pipeline will likely depend on the performance of the KCTS, suggested Disenova. “I think that the feasibility of a trans-Caspian pipeline would depend on how well the trans-Caspian system of transporting hydrocarbons would work,” she said. “If the latter works well and is able to absorb additional volumes of oil from Kazakhstan, then there would be no need for a pipeline. However, if it does not work then probably it would be economically feasible to construct a pipeline.”

Editor’s Note: Joanna Lillis is a freelance writer who specializes in Central Asia.