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Volume 6, issue #18 - Tuesday, September 25, 2001

Russia appears to be leading in Caspian Sea resources export race

22-08-01 Russia appears to be leading in the race for exports of Caspian Sea resources. A new pipeline across Russian territory has been completed, and the idea of a natural gas pipeline from Central Asia to Turkey has fallen victim to a competing project from Moscow. Both undertakings mark setbacks for American policy. The view of Yuzhnaya Osereika Bay must have been enchanting once.
But the beauties of idyllic nature near Russia's Black Sea port of Novorossiisk have long since yielded to hectic construction; instead of luxuriant foliage, pipes and beams now sprout here. Dozens of workers are putting the finishing touches to a new oil terminal. Oil storage tanks in the hilly hinterlands are waiting for the black gold to begin to flow. And, after years of nail-biting for international investors, there is no longer any doubt that it will flow.
The last segment in a new pipeline that runs from the Tengiz oil fields in Kazakhstan, across the Caspian Sea to Russia's Black Sea coast, was laid in March. Since then, the 1,580 km of pipe have been pumped full, and the first tanker laden with Kazakh oil is scheduled to take to the water this August.

When the oil valve is opened at Novorossiisk, it will mark the end of an important stage in a political and economic race. Many observers have characterized this contest as a new "Great Game," an international tug of war over the exploitation and export of mineral reserves from around the Caspian Sea. With proven oil reserves of between 18 and 34 bn barrels, this region has deposits comparable to those of the North Sea or the USA.
But the Caspian Basin's geological composition is still poorly researched, and optimistic estimates place the potential reserves at about 10 times that much. Such a wealth of oil is surpassed only by the Gulf region. And that does not include extensive natural gas deposits.
The prospect of such enormous energy resources drew many multinational oil companies to a region that had been off limits to foreign investors during seven decades under communism. But the fall of the Soviet Union and the creation of new states around the Caspian Sea reshuffled the cards. To whom would this bonanza fall? And who would control the oil and gas exports?

Those were two frequently asked questions during the 1990s. The declared goal of the United States was, and remains, to push the exploitation of these energy reserves by political means. Not only does Washington hope in this way to reduce America's dependence on oil from the Gulf and generate lucrative business for US firms, it also wants to strengthen its political influence in the Caspian region and loosen the dependence of former Soviet republics on Russia.
Moscow's economic and political dominance in Central Asia and the Transcaucasus has in fact slowly eroded over the past decade. Oil companies from all over the world are exploring and in some cases already producing in Azerbaijan and Kazakhstan; Turkmenistan has also attracted Western firms, but with less success.
Yet the dream these countries and companies have of a shower of petrodollars can only be realized if suitable export routes are found for these energy resources. Until just a few years ago, only a minimal portion of the Caspian region's oil and natural gas production reached world markets. Because of the limited export infrastructure, nearly everything was either consumed locally or, at best, sold to the big northern neighbour, Russia.
All the export pipelines, dating from the Soviet era, led across Russian territory. But Russia, which is also an oil and gas producer and is deeply irritated by the activities of Western companies in its backyard, makes its pipelines available to the competition only in exchange for a great deal of money or major political concessions.

During the Clinton era, the USA launched intense diplomatic efforts to break this Russian stranglehold. Its policy bore initial fruit in the spring of 1999, when a new oil pipeline was put into operation, running from the Azerbaijani capital of Baku, across Georgian territory to Supsa on the Black Sea.
Suddenly, for the first time since the petroleum pioneers Rothschild and the Nobel Brothers, Azerbaijani oil flowed westward, making a great arc around Russian territory. The new pipeline not only turned out to be profitable for the consortium headed by the British-American concern BP, it also brought welcome revenues to an impoverished Georgia in the form of transit fees and investments. What made it especially bitter for Moscow was that the new link soon outran the so-called northern route, so that today only a trickle of oil flows through the competing Russian pipeline from Baku to Novorossiisk.
But those who thought that this meant Russia had lost the race for oil exports were soon disabused of that view. The western route to Supsa has only a modest capacity of 5 mm tpy, just enough for the so-called early oil from Azerbaijan; increased production volume will call for expanding pipeline capacity. So a dispute arose some time back over the courseof a second line capable of 50 mm tpy, known as the main export pipeline.
By far the shortest route would be to connect Azerbaijan to the pipeline network of its southern neighbour, Iran. But because of US sanctions policy toward the Tehran regime, there was little prospect from the outset of using that route.

For political reasons, Washington pushed for a main pipeline running from Baku through Georgian and Turkish territory and reaching the Mediterranean near the Turkish city of Ceyhan. That would kill several birds with one stone: creation of an important energy transversal that avoids Russia and Iran; a political and economic upgrading of Georgia; binding Turkey more tightly to the West and relieving the Bosporus Strait, which, according to the Turks, cannot handle a further expansion of tanker traffic from and into the Black Sea.
But, at an estimated cost of $ 2.9 bn, the Baku-Ceyhan project seemed commercially risky. Too little oil is still being produced in Azerbaijan to justify an undertaking of that magnitude. So, while the countries involved had given their approval years ago, the oil companies remained sceptical for a long time. Only recently has the enterprise received some renewed impetus with the start of detailed technical studies along the 1,730 km stretch.
By contrast, construction of a 1,580 km pipeline between the Tengiz oil fields in Kazakhstan and Novorossiisk moved ahead with dispatch. With an annual capacity of 28 mm tons, later to be expanded to 67 mm, this is the first important export pipeline from the region around the Caspian Sea. At a cost of $ 2.6 bn, it is presently ranked as the largest investment project in Russia being carried out with foreign participation.

Moscow's diplomacy can count it a success that the new pipeline runs through Russian territory. For one thing, it keeps Kazakhstan dependent on its northern neighbour, and for another, Russia can count on revenues of more than $ 20 bn in transit fees and taxes during the pipeline's anticipated 40-year life span.
The pipeline also constitutes a blow to the Baku-Ceyhan project, which is highly unpopular in Moscow. In order to operate profitably, the Baku-Ceyhan route would have to carry oil from other sources in addition to Azerbaijan. Supporters of the pipeline had therefore hoped for oil from Kazakhstan, shipped from there to Baku by tanker or via an underwater line. But there will be no Kazakh oil running that way in the foreseeable future, since there is now a much shorter route up to Novorossiisk. Since Putin came to power, Moscow has also played another trump card by steadily doubling, to more than 17 mm tons, the quota of Kazakh oil that may be fed into the rest of Russia's pipeline network.
It is speculated that if the Baku-Ceyhan pipeline is ever built at all it will not begin operating before the year 2006 at the earliest. Until then, Russia will maintain its dominance in the region's export pipelines. This does not mean that the USA is totally losing out in Central Asia.
America's Chevron Oil, for example, has been able to considerably expand its activities in Kazakhstan of late; the Tengiz oil fields, opened up under its leadership, produced 10.5 mm tons of crude oil last year, nearly 20 % of the aggregate produced in the Caspian Basin. Western firms were also in charge of constructing and financing the Tengiz-Novorossiisk pipeline. But this does not change the fact that the American government failed to achieve one of its principal goals in the region: creation of a high-capacity western oil corridor.

There are signs of a similar setback for the US in the natural gas sector. For years, Washington pushed for the desert republic of Turkmenistan to find new options for exporting its sizable gas reserves. Aside from a small pipeline to Iran, Turkmenistan is totally dependent on Russia as recipient of its gas exports, and in the past Moscow has not hesitated to shut the valve now and again.
But American support for alternative routes has been fruitless. Two projects have bogged down: a pipeline from Turkmenistan via Afghanistan to Pakistan, and a trans-Caspian underwater pipeline to Azerbaijan. Like the Baku-Ceyhan oil route, a natural gas line from Turkmenistan through Azerbaijan and Georgia to Turkey was intended to form a western corridor and thus create new geopolitical realities in the Caspian region.
What is going to be built instead, however, is Project "Blue Stream," a link between Russia and Turkey. Construction of the technically tricky core of the undertaking, laying a pipeline on the floor of the Black Sea, is scheduled to begin in September. If everything works and the gas begins to flow, Moscow will have won another round in the game of pipeline poker. With this new export route, Russia will assure itself of high revenues and tie NATO member Turkey more closely to itself economically. Even now, Turkey covers somewhere between 70 and 80 % of its gas needs from Russian sources. Construction of "Blue Stream" will further increase this dependency.

Source: Neue Zürcher Zeitung AG


copyright Alexander Wostmann