2008 In Review: Russia, EU See Caspian Energy Dreams Deferred

Entering the year, Russia appeared to have the upper hand in securing a lion's share of the immense natural gas and oil reserves in the Caspian basin.

Gazprom, confident in the strategic advantages it had over outsiders through its access to Soviet-era infrastructure in the region, significantly upped the ante at the beginning of 2008. The Russian gas giant, after signing a deal in 2007 with Turkmenistan and Kazakhstan for the construction of a new pipeline along the northeastern Caspian shore, offered to buy gas supplies from those two countries, as well as Azerbaijan, at "European prices."

To sweeten the deal further, Baku and Ashgabat were told Gazprom would buy as much gas as they could provide. In turn, Russia would have plenty to fulfill its domestic needs and have more than enough left over to resell to the West.

"The Europeans need the gas, the Russians can provide this gas, and because of the political and economic decision-making structure, Russia is much faster than the European Union in making key decisions," Federico Bordonaro, a Rome-based analyst with the "Power and Interests News Report," said earlier this year in summing up Russia's philosophy.

But things didn't turn out as Moscow planned.

Prices In Freefall

For one, oil prices went into a freefall in the second half of the year, plunging from $150 a barrel in July to around $40 by mid-December.

The effects were felt throughout Russia's energy sector. No longer flush with cash, doubts were raised as to whether LUKoil and Gazprom could afford to finance their expansionist plans in the Caspian.

To date, neither Azerbaijan nor Turkmenistan have accepted Gazprom's offer.

The European Union was another major party in the hunt for Caspian contracts.

While some of the region's energy supplies already reach Europe via the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and the Baku-Tbilisi-Erzurum (BTE) gas pipeline, obtaining additional supplies is seen as a top priority for Brussels.

Disputes between Russia and Ukraine and Russia and Belarus that have disrupted gas supplies in recent winters have put a scare into the EU, which depends on Russia for about 40 percent of its natural-gas imports.

The situation has led the EU to actively seek routes for energy imports that bypass Russia.

Brussels is hoping the Nabucco pipeline project will one day bring 30 billion cubic meters (bcm) of gas annually from the Caucasus and Caspian regions through Turkey to Bulgaria, Romania, and on to Western Europe. But it would require some of that gas, if not most of it, to come from Azerbaijan and/or Kazakhstan and certainly from Turkmenistan.

Prodded To Negotiating Table

And 2008 didn't bring the desired breakthrough for Europe either.

At the start of the year, the biggest obstacle to this was the lack of a trans-Caspian pipeline that could bring Turkmen, and maybe Kazakh, gas from the east Caspian to Azerbaijan, then on to Nabucco. An additional complication was that the governments in Azerbaijan and Turkmenistan had not been on friendly terms for more than a decade, but intense lobbying by EU and U.S. officials prodded the two countries to the negotiating table.

The Georgian-Russian war that broke out in August initially appeared to place that progress in jeopardy, but when the fighting stopped the BTC and BTE were undamaged, and the EU's resolve for a route to Caspian resources strengthened. In November, EU officials met and agreed to form a Caspian Development Consortium in early 2009 tasked specifically with securing contracts for Caspian gas.

But due to the growing global economic crisis that marked the end of 2008, the EU, like Russia, may find it hard to come up with the money to realize its Caspian dreams. While the commitment is there, by year's end not one segment of pipe had been laid along any of the EU's proposed Caspian routes.

Looming in the background stands China, a relative newcomer in the quest for Caspian contracts.

China's National Petroleum Corporation stands as the only foreign company to sign a Production Sharing Agreement (PSA) agreement to work on Turkmenistan's mainland. Chinese companies in 2008 inked contracts to explore for oil and gas in Uzbekistan, and construction started on several new railway lines to bring more Kazakh oil to China by train.

"China has traditionally been reluctant to buy or to rely on the open market for some of its energy imports," Gareth Leather, a China expert for the London-based "Economist Intelligence Unit," told RFE/RL in May. "So what it has been doing is going into a country and investing in the infrastructure, which is needed to extract these raw materials. And so for the countries concerned, they are obviously very welcoming to Chinese investment because not only do they get a chance to sell their raw materials, but also the Chinese build the infrastructure as well, and so they're seen as benefiting in two ways."

China appears poised to increase its presence in the Caspian in 2009.

Early in the year, two pipelines connecting Central Asia to China will start operations. The last section of the Kazakhstan-China oil pipeline should be completed in the second half of 2009 and, when fully operational in 2011, is to carry some 20 million tons of Kazakh oil to China annually.

The first stage of the Turkmenistan-China gas pipeline is due to be finished in 2009 and, when fully operation in 2011, is to carry 30 bcm of gas to China per year.

Copyright (c) 2008. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.