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Kazakhstan

Kazakhstan Seeks to Break Eurasian Transport Logjam

Gregory Gleason Sep 13, 2000

In one of the world's most closely watched oil-producing regions, a long-standing transportation logjam appears to be breaking up. The catalyst for change is the discovery of huge reserves in the Kashagan oil field on Kazakhstan's Caspian Sea shelf. Indeed, the Kashagan find may alter the transportation equation in the Caspian region, giving Kazakhstan perhaps the key voice in regional pipeline politics.

Early indications are that the Kashagan find is providing a boost for a US-led effort to construct a pipeline from Central Asia, via Azerbaijan and Georgia, to facilities in Turkey. At an August 28 press briefing in Almaty, visiting US Secretary of Energy Bill Richardson confirmed that Kazakhstan had agreed to send its oil across the Caspian to Azerbaijan for transport through the planned pipeline route, known as Baku-Ceyhan.

Some oil industry officials suspect that the Kashagan field might be one of the world's last great untapped sources of oil. After the results of the initial drilling were announced at a highly publicized ceremony in July, Kazakhstan's President, Nursultan Nazarbaev, claimed that the Kashagan structure could yield "six times more oil than the next largest field in Kazakhstan, the Tengiz field."

If such projections are accurate, Kazakhstan may face the dilemma of having production capabilities that far outstrip its ability to get its oil to market. Hence, the renewed interest on the part Kazakh authorities in the construction of the Baku-Ceyhan pipeline.

Kazakhstan is heavily dependent on primary commodity exports for generating foreign exchange and producing government revenue. Gas, oil and metal products amount to nearly 72 percent of Kazakhstan's exports and perhaps as much as 50 percent of government revenue.

Kazakhstan's Minister of Economy, Zhaksybek Kulekeev, recently announced that Kazakhstan oil and gas production was expected to double in the coming five years. With expected production increases in existing fields alone, pipeline capacity soon will be exhausted. When the new Kashagan oil comes on line, Kazakhstan could end up sending as much as 20 million tons of oil annually to market through the planned Baku-Ceyhan pipeline.

Since the collapse of the Soviet Union, the countries of the Caspian Basin – including Azerbaijan, Kazakhstan and Turkmenistan – have sought to break their dependency on Russian-dominated oil and gas transport routes. At present, the Caspian countries are effectively dependent of the Soviet-era transport infrastructure. Establishing new transport routes would enable Caspian Basin states to establish new and potentially lucrative markets for their fuel resources.

The Russian pipeline system dates from the Soviet era when Caspian Basin oil and gas was targeted for European markets. The US government sought to encourage the efforts of Caspian countries to develop new infrastructure that encouraged regional stability through energy independence. In particular, The United States advocated the construction of a new pipeline reaching from the oil port of Baku in Azerbaijan to the Turkish Mediterranean port of Ceyhan.

Since gaining its independence, Kazakhstan has attempted to keep its export options open. Alternatives to the Baku-Ceyhan route include a Trans-Asian route. In the summer of 1997, Kazakhstan and China concluded a $9.5 billion agreement on oil production and shipment. In 1998 the China National Petroleum Corporation bought a 60 percent stake in the Aktobemunaigaz oil production enterprise for $325 million and pledged to invest $4 billion in it over the next 20 years.

Kazakhstan and China have considered jointly constructing a 1,800-mile (3,000 km) oil pipeline from Western Kazakhstan to China at an estimated cost of up to $3.5 billion. Despite public enthusiasm for a such an oil corridor, both Chinese and Kazakhstan officials privately have questioned whether the Trans-Asian pipeline would be commercially viable.

Already, international joint ventures in Kazakhstan's oil sector have drawn substantial foreign investment into the country. In 1993, Chevron and Kazakhstan joined forces to form a $20 billion joint venture, Tengizchevroil, to develop Kazakhstan's Tengiz oil field. Tengiz production has increased annually from 60,000 barrels per day in 1994 to the current level of 210,000 barrels daily.

Most of the Tengiz oil is shipped through the Russian pipeline system. Russian pipelines will already be working at capacity with the planned increases in output in the region. Given the opposition from the US, the southern Iranian route has not proved financially possible. The China route, while not commercially viable, may be made so through massive government subsidies. Its completion is nevertheless still far off in the future.

Meanwhile, the Baku-Ceyhan route has encountered stiff opposition. Russian industry and government officials have criticized the planned pipeline as costly and unnecessary. Iranian industry and government officials have insisted that Baku-Ceyhan was deliberately aimed at circumventing possible Iranian routes to the Persian Gulf. Also, some Western oil analysts and financial specialists wondered whether geopolitics was clouding the question of the commercial viability for the Trans-Caspian route.

Complex negotiations among the governments of the region and the commercial partners slowed as construction deadlines approached and financing arrangements failed to materialize. Those delays, and other factors, had caused Kazakh support for Baku-Ceyhan to wane.

The Kashagan discovery is creating new enthusiasm for Baku-Ceyhan construction. Still, the long-term commercial viability of Baku-Ceyhan may well hinge upon Kazakhstan's intention to follow through on its production commitments. Kazakhstan's new Kashagan oil field thus surely will bring more than oil revenues; it may also make Kazakhstan the swing vote in the political dynamics of the entire region.

Gregory Gleason is Associate Professor of Political Science at the University of New Mexico and a Fellow-in-Residence at the Oppenheimer Institute for Science and International Cooperation.

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