New player in Caspian Sea power corridor (article for The Lebanese Foundation for Peace)

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New player in Caspian Sea power corridor
By Ari Rusila

US presence in Afghanistan may be less because of the al-Qaeda terrorists and more because of the brewing geopolitical competition over central Asia’s vast resources.

Competition – or development – of EU’s eastern gas supply routes has intensified this year. Both EU/U.S. backed Nabucco and Russia ’s South Stream have made deals to guarantee realization of new pipelines until 2015. The EU’s new “southern corridor” – Nabucco as essential part of it – has been dubbed a version of U.S. “Silk Road Strategy” aimed to block Russia from gas fields around Caspian Sea and its connection to Iran. Russia on the other hand wants direct access to EU markets without transit via Ukraine.

Until this summer the gas game has been seen as battle between Russia and the West. Now the world economic crisis and current low price of gas have brought a new player to game in the fuel sector – China .

With its financial strength China has now had ability to intensify its offensive towards the Caspian Sea energy sources especially in Kazakhstan (oil) and Turkmenistan (gas). Could the outcome be a loss for both Russia and the West whose companies could see the Caspian oil and gas flow to the East? Not necessary, but from now on one can not ignore China as a key player in region.

Kazakhstan

Back in the 1990s Kazakhstan made its mineral wealth to American, British, French and Italian companies easily available. The bulk of the generated profit was channeled to Kazakhstan ’s new partners. With its dependence on exports of raw materials, Kazakhstan was in danger of turning into a third world country.

However, the phenomenal rise in world’s prices for the hydrocarbons strengthened Kazakhstan and induced their leaders to rethink their old policies. Kazakhstan began to reconsider the agreements they signed earlier, and Astana specifically proclaimed the objective of establishing state control over the oil and gas sector. The Kazakh authorities brought pressure to bear on the foreign companies in a bid to force the latter to accept changes to the earlier signed contracts.

The national company “KazMunaiGaz” was made responsible for advancing Kazakhstan ’s state interests in the oil and gas field institutionally. Initially Kazakhstan leaders applied much the same tactic to pursue the same objective to one of Kazakhstan ’s three oil refineries, the Pavlodar refinery, which is located by the Russian border and technologically oriented to Russian oil refining. The facility was privatized in January 1997 and the government’s stake placed in management by the US CCL Oil Ltd. Company on the terms of a public-private partnership agreement. But the Kazakh government prematurely terminated the agreement a few years later and handed over a 51% stake to the OAO “Mangistaumunaigaz”. The company later brought its stock of shares to 58%, with 42% of the Pavlodar oil refinery’s stock capital owned by the state. After that the national company “KazMunaiGaz” bought 51% of the “Mangistaumunaigaz” stock of shares from Indonesia ’s Central Asia Petroleum and consequently gained control over the facility.

It was reported on the 16th of April 2009 that amid the world economic crisis Kazakhstan borrowed from China 10 billion dollars during N. Nazarbayev’s visit to Beijing . The Chinese CNPC Company bought a 50% stake of “Mangistaumunaigaz” for 1.4 billion dollars. Kazakhstan leaders are ousting western partners from the hydrocarbons market and refusing to meet Russian companies halfway, while losing ground to China . Chinese companies already own a third of Kazakhstan-produced oil, or more than 20 million tons per year. The purchasing of Kazakhstan ’s “Mangistaumunaigaz” assets by China ’s CNPC further tightens China ’s grip on the Kazakh oil market and weakens the positions of Russia and the West in Kazakhstan ’s fuel and energy complex.
Turkmenistan

Turkmenistan is also the target of China ’s policy that seeks to capture the Caspian Sea region resources. Ashgabat has long discussed the construction of a 6,500 kilometer gas pipeline from Turkmenistan to China to Japan . The construction project was due to be carried out in 10 years and was rather costly – $11 billion of which some $1.7 billion would account for the sea section of the pipeline. Later the easterly direction of Turkmen natural gas deliveries was sort of “updated”, namely the option for laying a pipeline to Japan was dropped, with China having been made the only terminal point of delivery.

A more important development for Turkmenistan in 2006 was the republic’s president S. Niyazov’s visit to China in early April. The main agreement in a package he signed in Beijing was the General intergovernmental agreement on the implementation of the Turkmenistan – China gas pipeline project and on selling natural gas from Turkmenistan to the People’s Republic of China in the volume of 30 billion cubic meters annually for 30 years since the time the gas pipeline was commissioned, which was due in 2009.

The new Turkmenistan-China gas pipeline will be nearly 6,500 kilometers, with over 180 kilometers due to be laid in Turkmenistan, 530 kilometers in Uzbekistan, 1,300 kilometers in Kazakhstan, and over 4,500 kilometers in China. The overall cost of the project is around $20 billion. 17 billion cubic meters of Turkmen gas were due to be annually exported through the development of new gas fields, while the remaining 13 billion cubic meters of annual gas exports through the construction of gas purification and treatment plants at the largest gas condense field Bagtyyarlyk.

The construction of the pipeline (Turkmenistan-China) got under way in 2008 when a Russian company “Stroytransgaz” won 395 m€ contract for laying the Turkmen section of project and also plant to purify and dehydrate gas and a gas-measuring station. The Turkmen stage is expected to be finished by December 2009 and the entire pipeline in late 2010.

Iran?

On February 21st 2009 the Iranian and Turkmeni governments signed an agreement that will give Iran the rights to develop the Yolotan gas field in Turkmenistan . The deal will help Iran resolve gas supply problems in its north-eastern provinces. Turkmenistan will sell Iran an additional 350 billion cubic feet of gas annually, more than doubling current supplies of almost 300 bcf a year, according to the agreement first disclosed by Iran ’s official media and later confirmed by Turkmenistan .

Iran also recently offered to invest $1.7 billion for a 10 percent stake in the second phase of Azerbaijan ’s huge Shah-Deniz gas field which will come on line by 2014. Iran already has a 10 percent share in the first phase and it wants to import large volumes of gas from the Azeri field. For Iran , the deals could not be better suited to its objectives. It’s economically unlivable currently to supply gas to its isolated, north-eastern third of the country. Getting gas from Turkmenistan would therefore make more Iranian gas available for export to Turkey .

Turkmenistan-Afghanistan-Pakistan-India (TAPI)

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline on the other hand would feed natural gas into downstream economies that are desperate for natural gas supplies. Afghanistan is the first of these, and energy shortages are rarely discussed as one of the problems of their economy, but with only 10 – 12% of the populace having access to electricity and with only limited natural gas resources (perhaps enough for a 100 megawatt power station), the country needs to import natural gas in large volumes. Pakistan is still desperate for help with natural gas and other energy fuels. But so far there is no pipeline to help.

There is some base to claim that U.S. military involvement in Afghanistan is directly related to the large reserves of natural gas in Turkmenistan . While the U.S. military may be a wholly owned subsidiary of the international (i.e. American and British) oil companies), its anyway clear that demand to increase troop levels in Afghanistan jumped a bit along with the recently publicized discovery of the very large large natural gas reserves in the Yoloten-Osman gas field in southern Turkmenistan.

Some geo-political remarks

In March 1999, the U.S. Congress adopted the Silk Road Strategy Act, which defined America’s broad economic and strategic interests in a region extending from the Eastern Mediterranean to Central Asia. The act was revised in 2006 to include the energy interests of the US as one of the primary reasons for the US to be in Afghanistan – note no reference to Osama Bin Laden or Al Qaeda.

The Silk Road Strategy (SRS) outlines a framework for the development of America ’s business empire along an extensive geographical corridor. The successful implementation of the SRS requires the concurrent “militarization” of the entire Eurasian corridor as a means to securing control over extensive oil and gas reserves, as well as “protecting” pipeline routes and trading corridors. This militarization is largely directed against China , Russia and Iran .

As said the new pipeline will run through Uzbekistan and Kazakhstan to Xinjiang in western China . Xinjiang is becoming increasingly important as a transit route for gas pipelines from Russia and Central Asia . Given the vast region’s location several thousand kilometers inside China , it is impractical for the Chinese to protect fully the long stretches of pipelines through Xinjiang’s vast mountains and deserts so they are trying to eliminate the militant groups before the pipelines become operational. So far the unrest in Xinjiang has be seen based to ethnic questions. The energy aspect explains why China ’s response to unrest is and will be strong also in future.

Summit of the Shanghai Cooperation Organization that was called in Yekaterinburg on the 16th of June, besides some universal ideas in statements and declarations, the SCO Energy Club has to this day failed to come up with a cooperation model that would suit all member-states. China ’s actions on the ground will lay the basis for actual energy cooperation in the SCO framework since instead of some remote private owner China as state (via state owned company) is implementing the projects. Promoting energy cooperation in SCO framework must from now on take the “Chinese Factor” seriously.
The bad news for Russia is that there is a customer willing to take all the gas that Turkmenistan has for sale: China . It has been steadily gaining access to the energy wealth of Central Asia , while ousting American, European and Russian companies from the area. Beside oil and gas the Chinese are simultaneously planing to transport also the mineral resources in question to China ’s western border.

For contest between EU’s Nabucco and Russia ’s South Stream China ’s actions favor the later. Today’s arrangements are securing gas for South Stream while Nabucco is still searching the supply. It is clear that Nabucco should be filled with Iraqi and/or Iranian gas and political aspects related to this may delay finding (private) investors and the implementation of the project as whole. In bottom line while Russia is taking its part from old gas fields and China from old and new gas fields the Nabucco pipe still is more than half empty.

Implications on the Balkans

Gas dispute between Ukraine and Russia last winter hit especially heavy Balkans and central Europe , it also gave boost to implement alternative supply routes as soon as possible. When China now is taking the main part of gas which was originally planned to fill Nabucco pipeline it probably delays this project orchestrated mainly EU commission.

Nabucco is now desperately seeking gas from Iraq and Iran but increasing pressure over Iran’s controversial nuclear program is making political problems to west as well internal dispute between Baghdad and its Kurd dominated northern province are not helping situation soon. Besides Tehran plans to move ahead with the Persian pipeline to Europe independent of the planned Nabucco gas project with Russian support.

Bulgaria has been pressed by Brussels to favour Nabucco and to put an obstacle in the way of South Stream. That is why Russia has been very active with Turkey and with Romania , trying to find alternatives and show Bulgaria it can implement this project without it. However now Bulgaria and Russia have agreed to set up a number of working groups to focus on the development of South Stream indicated that Bulgaria is committed to the project.

Russia and Turkey have agreed on the construction of South Stream pipeline under the Black Sea soon after the EU signed a deal with Ankara on the Nabucco pipeline. The Ankara protocol also involves plans to extend the existing Blue Stream gas pipeline between Turkey and Russia . On September 1st Russia side proposed creating a joint working group with Croatia ’s gas transmission system operator, Plinacro, to examine a possible branch-off from the projected South Stream system into Croatia from Serbia . South Stream has been successful also at economical front as French power group EDF said it was in talks to take part in South Stream.

While putting latest developments of Nabucco/South Stream projects to context of Chinese invasion to Caspian Sea gas game the bottom line from my point of view is that for South Stream the consequences are smaller than for Nabucco and related more to prise than supply: Nabucco still lacks gas while Russia (and later clients) must pay ca market price about gas from Kazakhstan, Turkmenistan and Azerbaijan. Also Ukraine will be deprived of its status as an important transit country to Turkey .

Ari Rusila is a development project management expert and freelancer from Finland with a special interest in the Balkan and Black Sea regions

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