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RUSSIA UNTIES ITS END OF CASPIAN KNOT

By VLADIMIR SOCOR
Ground was broken last week on construction work for the pipeline that will bring oil from the Caspian Sea directly to Western consumer countries. The presidents of Azerbaijan, Georgia and Turkey, along with American officials and the managers of some of the world's leading oil companies, gathered on September 18 near Azerbaijan's capital to inaugurate the construction of the Baku-Tbilisi (Georgia)-Ceyhan (Turkey) oil export pipeline. Next month, those same countries and Western partners are expected to launch construction work on an export pipeline for Caspian natural gas.

Bringing Caspian fuels directly to consumer countries is the most important development in international energy economics and politics in the last 30 years. Caspian oil reserves are estimated to at least match those discovered in the North Sea a generation ago, or those of Alaska at about the same time. As the Middle East turns increasingly volatile now, Caspian reserves can make a critical difference -- both in terms of pricing and in diversification of energy supplies -- to the enlarging Euro-Atlantic world.

Provided, of course, that the Caspian pipeline routes promote competition and diversification by circumventing Russia or Iran. These two countries are themselves among the leading energy exporters, and they promote international political agendas of their own. Routing the Caspian pipelines via Russia or Iran would substantially add to the energy export flows they already control. It would give them stronger economic and political leverage on Caspian producer countries, as well as on consumer countries downstream.

The oil pipeline from Baku to Ceyhan on Turkey's Mediterranean coast is designed to supply mainly the southern European markets in the first stage, and additional European markets afterward, with the high-quality, light Azerbaijani oil. It is planned to become operational in early 2005, at an annual capacity of more than 20 million tons, to increase to more than 50 million tons annually by 2008. The line runs for 1,760 kilometers overland and is projected to cost $ 2.9 billion in the first stage until 2005, to be financed mostly by international banks and lending institutions. The Baku-Tbilisi-Ceyhan consortium (BTC), whose shape was finalized last month, will directly finance some 30% of the cost.

Operated by British Petroleum with a 38% stake, the BTC consortium includes Azerbaijan's State Oil Company as the second-largest shareholder at 20%, as well as Norway's Statoil, the American companies Unocal and Delta Hess, Turkish Petroleum, Italy's Eni, France's TotalFinaElf, and Japan's Itochu and Inpex companies. The consortium's configuration reflects world-wide interest in bringing Caspian oil to market, as well as the companies' risk-sharing strategy, which is a characteristic of Caspian energy projects.

With an operating life projected at 40 years, the line will be dedicated primarily to the Azeri-Chirag-Guneshli (ACG) offshore oilfields in Azerbaijan's sector of the Caspian Sea. This is the extraction project known as the "contract of the century," originally signed in 1994 and valued at more than billion. Of that sum, $ 5.2 billion is earmarked to bring these fields to full production at some 50 million tons annually by 2008. Operated by British Petroleum, with a 34% stake, the ACG consortium includes Unocal, ExxonMobil, Delta Hess, Devon, Statoil, Azerbaijan's State Oil Company, Russia's Lukoil, Turkish Petroleum, and Itochu, with stakes ranging from approximately 10% to 3%. Lukoil, which is Russia's biggest oil company, with a 10% stake in the ACG extractive project, once indicated an interest in joining the BTC pipeline project as well, but renounced that under pressure by the Russian government, which opposes that pipeline.

Initially, Moscow opposed both the extractive project and the pipeline. Once it realized that the Western companies were determined to go ahead with ACG, Russia reconciled itself to the development of those fields and allowed Lukoil to get a piece of that action. But it grew shrill in opposing the Baku-Tbilisi-Ceyhan pipeline, hoping thereby to discourage Western investment in that project, and to promote instead a pipeline route to
Russia's Black Sea port of Novorossiisk. Only recently did Moscow accept the inevitable and tone down its opposition to BTC.

Even so, the Russian government stayed away from the Sept. 18 inaugural ceremony in Azerbaijan. Moreover, on that very day, Russian Foreign Affairs Minister Igor Ivanov used his appearance at the Eurasia 2002 summit in New York to insist that the BTC pipeline project is commercially unprofitable, that Azerbaijan does not have enough oil to fill the pipeline, and that the project's real goal is "to oust Russia from regions where it has historic, legitimate interests. Russia can't accept that." Ivanov again urged Western oil companies to export Azerbaijan's oil via Russia, as is the case – he pointed out -- with the oil from Kazakhstan. Meanwhile, the two consortia and Azerbaijan itself plan to export almost the entire available output to the Ceyhan terminal, sending only symbolic annual volumes on the "northern route" to Novorossiisk.

At BTC's inaugural ceremony, Georgian President Eduard Shevardnadze credited the United States as the "world leader" and Turkey as "regional leader" for promoting the East-West energy corridor, of which this oil pipeline and the planned, twin gas pipeline are centerpieces. Mr. Shevardnadze described these projects as vital to "integrating Georgia and Azerbaijan into the Euro-Atlantic space" -- a vision that Mr. Ivanov was publicly opposing that same day.

Clearly, the BTC project has acquired an unstoppable momentum. Moscow's fallback position -- in tandem with Iran -- is to limit the scope of the East-West energy corridor by opposing trans-Caspian pipelines that would bring oil and gas from Kazakhstan and Turkmenistan, via Azerbaijan, Georgia and Turkey, to European countries. Geographically and economically, Turkey is the predestined transit country for such pipelines. To play that role, Turkey should act faster in linking up its pipeline networks with those of Greece.

Georgia is the sole available exit for westbound pipelines from the Caspian basin. This fact may well figure in Moscow's calculations when it seeks to fan chaos in that country, to intervene militarily there and to topple Mr. Shevardnadze in the name of "antiterrorism." Last month, moreover, Russia's military staged the biggest demonstration of force ever in the Caspian Sea. The naval exercises appeared designed at least in part to back up Moscow's political veto on trans-Caspian pipelines. At present, Russia enjoys a near-monopoly on the transit of Caspian oil, having preempted almost all of Kazakhstan's exports for years to come. It also transits the bulk of Turkmenistan's gas exports.

While the oil and gas pipelines from Azerbaijan are laid, the U.S. and especially the European Union should encourage Kazakhstan and Turkmenistan to participate in the trans-Caspian projects, bringing their oil and gas to Europe via Turkey. The resulting, aggregate export volumes would help reduce the Middle East producers' financial and political clout over consumer countries, without transferring some of that clout to Russia or to Russian-led cartels.

These pipelines can cement the Caspian producer countries' independence, anchoring them irreversibly to the Western consumer countries. The Kremlin's attitude toward westbound Caspian pipelines will provide a major indicator of President Vladimir Putin's actual, as distinct from declared, willingness to cooperate with the West.

/// The Wall Street Journal Europe, 27-29 Sep, Mr. Socor is a Senior Fellow of the Washington-based Institute for Advanced Strategic and Political Studies.

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Turkmen sector of Caspian – Priorities for development

Ashgabat, 4 Sep- Caspian sector of Turkmenistan extends for 500 km from Cape Suw to Esenguly. Total area of Turkmen sector is about 78000 square kilometres. More than 65% of Turkmen area of Caspian is up to 100 meters deep.

Local and foreign experts have carried out geophysical research and survey for qualitative and quantitative estimation of hydrocarbon resources in Caspian sector of Turkmenistan.

As a result of prospecting, more than 10 deposits of oil and gas have been opened. These areas are graded into zones according to their perspective importance in the light of new model of development of hydrocarbon resources in the Caspian sector of Turkmenistan.

According to estimates of experts, Turkmen sector of Caspian contains about 110 billion tons of oil and 5.5 trillion cubic meters of gas at depths between 20000 and 7000 meters. These estimates are exclusive of Block-1 and Cheleken where Petronas and Dragon are already at work.

Turkmenistan places priority on participation of foreign investors in development of hydrocarbon resources in its sector of Caspian.

President Niyazov introduced a licensing programme in 2000 to attract investors for Turkmenistan’s offshore hydrocarbon resources. This programme contains list of license territories for exploration and development with use of modern technology.

The programme, to be realized by the year 2010, provides attractive terms for foreign petroleum companies to invest in 32 licensable blocks in Caspian. Negotiations for several blocks with a number of foreign companies are already underway.

Russian companies Itera, Zarubezhneft and Rosneft have shown interest in some offshore blocks. In November last year these companies signed protocols on intentions to jointly develop some offshore and mainland blocks in Turkmenistan.

The most important direction for development of Turkmen sector of Caspian is creation of a comprehensive coastal base for prospecting and exploitation of hydrocarbon resources.

Turkmenistan is interested in creating its own drilling platforms and extraction installations in Caspian. This will be helpful for further exploration either within own resources or jointly with foreign companies.

Dragon Oil and Petronas Cariagali are already working in Turkmen side of Caspian. Chelekeniangummez, Jeitun and Jigalibeg deposits of Cheleken and Garagol-Deniz, Diyarbeker, Magtimguly and Ovez deposits in Block-1 are being investigated, explored and developed.

Industrial production of oil is conducted in two deposits – Jeitun and Jigalibeg – of Cheleken. Dragon Oil is operator for these deposits. Dragon is working on these deposits under a 25-years agreement with government of Turkmenistan. The agreement is extendable for a period of no less than 10 years. In the year 2001 the volume of production was 320000 tons.

Garagul-Deniz, Diyarbeker, Ovez and Magtimguly deposits in Block-1 are being handled by Petronas. The company has a working agreement with Turkmen government for 28 years. In 2002 Petronas drilled four probe holes. The fourth hole, drilled in Makhtumguly-2A deposit, promises significant hydrocarbon yield. Initial tests show daily output of 1937 tons of oil and 539000 cubic meters of gas.

Success of Dragon and Petronas leads to the conclusion that significant new hydrocarbon resources are accessible in Turkmen sector of Caspian. Experts of these companies estimate that about US $ 3 billion will be spent for development of deposits under contract of these companies. /// Neutral Turkmenistan

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Kazakh pundit says militarization of Caspian region inevitable

Almaty, 30 Aug—The militarization of the Caspian Sea is an inevitable process, Dosym Satpayev, director of the risk assessment think-tank, has suggested. He said that Russia had started stepping up its military presence in the Caspian to ensure security there because it believes the European Union, the USA, China and Japan plan to lessen their dependence on OPEC in the future. He also said that Azerbaijan relied on Russia for regional security and that Russia's Rosneft and Kazmunaygaz (Kazakh oil and gas) had started joint preparations for active oil and gas development in the northern part of the Caspian. In turn, this will prompt the USA, Iran and China to step up their activities there to defend their strategic interests in the Caspian region, Satpayev said. He added that the still undefined status of the sea has also contributed to militarization. Following is the text of the report entitled: "The Caspian of khaki colour" by Kazakh newspaper Novoye Pokoleniye on 30 August; subheadings inserted editorially:

Caspian and Persian Gulf
Since the early 1990s the Caspian Sea has often been compared with the Persian Gulf. Some need this in order to increase the significance of their role in the Caspian region and others in order to understand its prospects. On the whole, these comparisons are not groundless, even though most of them are pessimistic. An analysis of the latest trends in the Caspian shows that this analogy is only just starting to fully justify itself. Caspian geopolitics are entering that stage of evolution when the right of force may outweigh the force of right. This becomes even more likely given the still undefined legal status of the Caspian Sea.

Like the Persian Gulf, the Caspian region has also started assuming clear features of militarization, which is the logical continuation of increasingly close intertwinement of geopolitics and geoeconomics.

First sign of Caspian militarization
The first sign of such militarization was an incident in 2001 involving areas disputed between Azerbaijan and Iran. Ships from the Iranian navy then blockaded [the route of] an Azerbaijani geological vessel that was prospecting for oil for British Petroleum. This incident demonstrated that the force factor in the relations between the Caspian littoral states had increased. As a result, virtually all Caspian littoral states started actively stepping up their military presence in the Caspian.

Russian and Iranian Caspian fleet
Russia already has its Caspian Flotilla in the Caspian, which is made up of four groups of ships and cutters (totalling 32). And for those who did not understand, Russia held demonstration military training exercises in that region jointly with Kazakhstan and Azerbaijan [in August]. Iran, which has a similar flotilla, in reply to Russia's military initiatives, also demonstrated its military potential. The stepping up of the Iranian factor over recent years has resulted in Turkey giving military aid to Azerbaijan and providing it with military advisers.

Azerbaijan and Kazakhstan to get US military aid
A package of documents worth 4.4m dollars was signed during a visit by the US Deputy Assistant Secretary of Defence [for Eurasia Policy] Mira Ricardel to [the Azerbaijani capital] Baku in March. The documents provide for the provision of US military aid to improve Azerbaijan's potential for monitoring the [Azerbaijani part of the] Caspian region and its airspace.

As for Kazakhstan, a meeting of the Kazakh-US working group for defence and security was held in [the former Kazakh capital] Almaty in June. It was decided to allocate 5m dollars for Kazakhstan to build a military town in [the western town of] Atyrau with [subsequent] deployment of a motor-rifle brigade there. The commander of the Kazakh Western Military District, Ratmir Kamratov, said that four battalions would be stationed in that town to ensure security in those Kazakh regions where oil was extracted.

US and Russian Caspian intentions
In the view of some experts, the USA's medium-term task is to establish a military and political alliance of oil-rich Caspian littoral states with a Turkey-Israel axis.

In response, Russian Defence Minister Sergey Ivanov spoke about the possibility of setting up a Caspian military grouping [during the August military training exercises in the Caspian], which would include Russia and Kazakhstan, and Azerbaijan in the future.

Caspian's legal status
One of the reasons for militarization is the unsuccessful talks on the legal status of the Caspian. The April summit of the heads of the Caspian littoral states in [the Turkmen capital] Asgabat and the July meeting of a special working group on the Caspian in [the Iranian capital] Tehran showed that there were still serious differences between the participants in the talks on the Caspian status.

Caspian-littoral states' stance on sea status
Azerbaijan, Kazakhstan and Russia have virtually agreed on the division of the Caspian along the median line. They also agreed that the sea bed should be divided but sea surface should be in common use. Iran still insists that the sea should either belong to all the [Caspian littoral] states or be divided equally i.e. each Caspian littoral state should own 20 per cent of the sea.

Turkmenistan advocates the sectoral division of the sea bed and sea surface and the allocation of a 20-mile zone in the centre of the sea for free navigation taking into consideration the existing state borders.

Iran's interests in Caspian region
It should be noted that Iran has no strong economic interest in Caspian deposits. Iran is more concerned over maintaining its political influence in the Caspian region. But for this it should have certain leverage to put pressure on its neighbours. This leverage is the legal status of the Caspian Sea. If Caspian oil is not so important for Iran, it is for the other Caspian littoral states, particularly, taking into consideration forecasts that the role of Caspian oil will increase on the world market.

OPEC, Russia, China, the USA and Europe
It is no secret that not only the European Union but the USA, China and Japan are also interested in reducing their dependence on OPEC in the future.

In the view of a number of Western analysts, Russia understands this and has started actively working on setting up a gas and oil cartel with some Caspian littoral states, which could become a serious competitor to OPEC. For this, it is necessary to ensure security in the Caspian region, which is prompting Russia and its partners to step up its military presence in the Caspian.

One should not forget that preparations have started for active oil and gas development in the northern part of the Caspian Sea. Russia's Rosneft [Russian oil] and Kazmunaygaz [Kazakh oil and gas] started preparations on 12 August to implement a project for the joint development of the [Kazakh] Kurmangazy deposit on the Caspian shelf.

Russia is Azerbaijan's guarantor
Russian experts noted that Russia's military training exercises were also largely aimed at defending the interests of Russia's oil and gas business.

It is also reported that one of the reasons why Azerbaijan signed an agreement with Moscow on the division of the Caspian Sea is that Russia will guarantee security in the oil extraction zones. Of course, Baku is, above all, interested in such guarantees because of the deposits that are being disputed with Turkmenistan.

Possible aftermath of extremist activities
One of the real reasons for the Caspian region becoming militarized is that there is quite a real threat of extremist activities in zones where oil is actively extracted by Azerbaijan, Kazakhstan and Russia. In the view of any terrorist organization, sabotage in the Caspian region may result in fairly serious consequences:

1. It may provoke interstate conflicts, particularly, if sabotage is carried out in [an area of] disputed oil and gas deposits.

2. It may deliver a blow to the economic security of those states whose budgets depend on exports of Caspian oil.

3. It may worsen the investment climate, which will also strike a blow at, primarily, the economies of Kazakhstan and Azerbaijan.

4. Acts of terrorism, for instance, the explosion of operative oil pipelines or tankers may create serious environmental problems, which also may result in interstate friction.

Conclusion
However, it should not be ruled out that some Caspian littoral states will use statements on combating terrorism to justify their military presence in the region. So, the militarization of the Caspian region is an inevitable process.

Russia has stepped up its economic activities in the Caspian region and started developing deposits in the northern part of the Caspian and now it has started stepping up military activities there.

However, as Russia becomes active there, the USA, Iran and China will also try to preserve their strategic interests there. This will have the domino effect of increasing the level of political and investment risks in the Caspian region. /// Novoye Pokoleniye, Almaty

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You Can't Call This Pipeline A Pipedream Now

Turkmenistan received another cause for cutting prices for fuel for Russia
Gasprom made attempts to reach accords with Turkmenistan on purchasing natural gas in Turkmenistan. Over the past several months the delegation of the Russian monopoly visited Ashkhabad at least twice. However, authorities of Turkmenistan still insist on prices that are too high for Russia. Meanwhile, now they have more grounds for discords. Recently, the Asian Development Bank announced about its intention to allocate USD 1.5 million for studying the route of the gas main from Turkmenistan to Pakistani Arabian sea via Afghanistan. Such decision is hardly able to bring optimism to Gazprom, which is going to start research activity on the project of construction of a gas main from Iran to India via the territory of Pakistan. It was Ashkhabad, which in early 90th had generated an idea of export of the Turkmen gas. However, way via Russia to West was initially closed –the Russian Gazprom naturally was not interested in competition, therefore the Turkmen gas is not being supplied to the Western markets. That very period of time Turkmenbashi initiated a project on setting an alternative route – to the Indian ocean.

If the final decision to be made by the Asian Development Bank on September 20 is positive the authorities of the state will gain another point for contacts with Russia – we failed to sign agreement on cooperation in gas sphere. The qualitative parameters of this agreement were accorded yet in mid 2001. Interaction of the both states in gas sphere supposed joint exploration of fields on the territory of Turkmenistan, as well as delivery of gas to Russia starting this year. The volume of purchase had to reach from 2 billion cubic meters in 2002 to 80 billion cubic meters in 2012. While during the first five years Russia was planning to buy at least 10 billion cubic meters of gas from Turkmenistan.

However, by the end of this year, when the presidents of the both states met they had failed to agree on final prices for Turkmen gas and the intergovernmental gas agreement was frozen again. Presumably, Gazprom as well failed to solve the price problem independently. While speaking about the visits of the representatives of the Russian companies the Turkmen authorities make some caustic remark remarks saying that they understand concerns of the Russian monopoly – for providing contract deliveries of gas planned for winter, Ukraine need to have enough reserves of fuel. However, the state is interested in signing only long term contracts, foreseen for delivery of al least 30 billion cubic meters of gas annually.

Nevertheless, it should be reminded that at the January meeting between Niyazov and Putin the presidents hinted that the main term for signing a long term agreement is creation of so-called “gas OPEC” – an organization, which would unite gas producers in Russia and Asian states. However, Ashkhabad hinted that it is not going to give up the perspectives of somewhat misty bilateral cooperation with Russia for more misty future alliance, participants, aims and markets of which are not defined yet. /// First published by Nezavisimaya Gazeta via Turkmenistan.ru

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