The terrorist assault on the United States has darkened prospects over the near-term for energy companies doing business in the Caspian Basin. Current uncertainty figures to discourage investment in the months ahead. Over the longer term, however, development prospects for natural resources could be bolstered by increased US interest in the region.
Caspian Basin nations are counting on oil and gas revenues to build their economies. Their resources are their only competitive advantage over larger and more developed Asian countries. So, especially in republics that don't border Afghanistan, officials are trying to project a business-as-usual image.
In Kazakhstan, for example, officials heralded the October 1 opening of a pipeline from west Kazakhstan to Novorossisk, Russia. The pipeline permits Tengizchevroil, a joint venture between Kazakhstan and Chevron, to begin pumping large quantities of oil to Western markets. Meanwhile, Georgia and Azerbaijan signed a deal in early October concerning the transport of gas from the Shah Deniz deposit. Under the deal, Georgia would receive up to $500 million in transit fees from Azerbaijan over 12 years. Overall, the deal could be worth up to $2.75 billion to Georgia's economy.
Despite the ceremonies and deals, the terrorism threat in Central Asia stands to squelch new capital investment. Chevron, BP Amoco and ExxonMobil invested in the Caucasus and Central Asia in order to gain alternative energy sources outside the presumably volatile Middle East. But now that Afghanistan has become the focus of American military plans, the Caspian region may be more unstable than the Gulf.
Peter Fusaro, president of a consulting firm called Global Change Associates, says the region's refineries and pipelines appear vulnerable to guerrilla attacks. "It doesn't take much to blow up a pipeline," says Fusaro. "Central Asia is still a very vulnerable place where a lot of bets have been made on major production."
The international market for energy now provides an additional element of uncertainty. Worldwide demand for oil and gas no longer seems inexorable. Energy prices have fallen since the terrorist attacks, and the Organization of Petroleum Exporting Countries (OPEC) may cut production to boost prices.
As a sign of new uncertainty, Caspain Basin nations are reevaluating their positions. Kazakh Energy and Natural Resources Minister Vladimir Shkolnik reportedly told Kazakh TV on October 2 that his country had no immediate plans to join OPEC. This past summer, Kazakhstan's bullish image grew when Saudi Arabia reportedly made overtures about inviting Astana to join the cartel. Now, Shkolnik seems to suggest that Kazakhstan might prefer to take its chances on further production rather than oblige itself to cut production in the future.
But plying the market with supply could bring meager results. Fusaro says that supply could fall driving prices up if terrorists bomb a critical pipeline or refinery. But even if that happens, other regions of the world, far away from Afghanistan, offer large quantities of oil. "These companies operate in 60 to 90 countries," says Fusaro, whose firm has advised BP Amoco and others. "We may see a shift to newer [global] areas of production." Even if Central Asia draws some hedges from Western companies, it will have to compete with Canada, Venezuela, and parts of Africa for those companies' cash.
Kazakhstani energy advisor Nurlan Kapparov used a late-September forum at Harvard's John F. Kennedy School of Government to urge multinational corporations to keep investing in his country. He sought to portray the Caspian Basin as a secure place to invest.
Russia, often viewed as a US competitor in the Caspian energy game, could end up diverting foreign investment from other regional players. Fusaro calls Russia's willingness to join a US-led antiterrorism coalition "good news" for the world oil supply. But Russia figures to pursue its own interests. The Eurasia Group, which studies the region's economies, says energy investment of some sort is crucial to Russia's long-term involvement. Russia's oil industry is in dire need of an upgrade. "They have flooded fields and damaged pipelines, and they need equity infusions from the West," says Fusaro.
If Russia wrangles some stakes for its energy companies as reward for supporting the West, there could be little capital available for investment in other Caspian countries like Kazakhstan. However, some analysts suggest it is too soon to predict new investment patterns. "Caspian energy is pretty far down on the US-Russia agenda," says Laurent Ruseckas, director of Caspian energy for Cambridge Energy Research Associates.
In the long term, a successful US engagement could make economic partners of the Central Asian nations. "The US military/intelliegnce gathering nvolvement in Central Asia and the supposed new rapprochement with Russia could bring a 'sea change' in the way all of these countries interact with each other," says Julia Nanay, a director with the Petroleum Finance Company in Washington.
"Lower economic growth may be in the picture for these countries in the immediate future. On the other hand, if the political/relationship landscape in this region is transformed, higher economic growth medium to longer term is definitely the likely outcome. It's all a moving target now," Nanay said.
In addition, the anti-terrorism campaign may prompt the US government to take greater overall interest in political, economic and social conditions in Central Asia and the Caucasus. That could translate into an increased level of stability in what has proven a volatile region since the 1991 collapse of the Soviet Union. In turn, stabilization would spur new investment.
Already, some influential US politicians are calling for a review of US policies toward the region.
Senator Sam Brownback, whose home state of Kansas exports agricultural equipment to Kazakhstan, took to the Senate floor recently to urge the lifting of economic sanctions against Azerbaijan. "It is a nation rich in oil reserves, a nation that borders Iran and could become vulnerable to the same extremist forces present in Afghanistan," he said. "We must ramp up our efforts to befriend and be proactive in Central Asia [and the Caucasus] or risk the consequences of emboldening our enemies."
Alec Appelbaum is a contributing editor to EurasiaNet.
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