COMMENT: Eurasian pipelines - a forecaster's nightmare

By bne IntelliNews April 29, 2009

Ariel Cohen in New York -

The world's leading experts who gathered at Columbia University's Harriman Institute for the conference, "The Architecture of Energy Export System of the Caucasus and Central Asia," believe that future uncertainties jeopardize western control of much of Eurasian energy.

The 1990s were a boom decade for Caspian oil. Western companies moved into the region in force. There were three important pipeline projects: Western and national oil companies built the Caspian Pipeline Consortium (CPC); the Baku-Supsa (both to the Black Sea); and the crown jewel, the Baku-Tbilisi-Ceyhan (BTC), to the Mediterranean.

The US was a major player in promoting pipelines that it saw as sources of revenue for the national development of Central Asian states as well as Georgia and Azerbaijan. International oil companies (IOCs) were anxious to control reserves as giant fields elsewhere approached exhaustion. And to a great degree, the 1990s Caspian oil were a success story for IOCs and for US geopolitics. Yet times have changed - natural gas remains mostly under Russian control.

Organized by Professor Jenik Radon, adjunct professor at the School of International and Public Affairs, the Columbia conference saw participants agree that the global economic recession, decline of European demand and the lack of available investment are among the key factors making westbound pipelines from Eurasia largely a pipedream. Add to that the increasing geopolitical "pull" of China, an increase in Russian clout in its so-called "near abroad" after the Georgian war and the possibility of a future Iranian route - if rapprochement with the US succeeds - and these uncertainties make the future pipeline map of 2019 a forecaster's nightmare.

Partners not threats

With the memorandum of understanding signed by the Azerbaijani National Oil Company (Socar) and Gazprom on March 27 as well as Presidents Ilham Aliyev and Dmitry Medvedev during energy talks in Moscow April 16-17, Azeri gas supply could also go to Gazprom.

Elin Suleymanov, consul-general of Azerbaijan in Los Angeles, indicated that in Baku Gazprom is perceived more as a partner, not as a threat, especially as Russia has promised to use its influence to help resolve Azerbaikjan's festering Nagorno-Karabakh territorial dispute with Armenia. Washington's strategic efforts to obtain significant Caspian gas for Europe could be simply too little, too late, as this option will have effectively been foreclosed by the Kremlin.

Martha Brill Olcott of the Carnegie Endowment pointed out that westward pipelines from Central Asia have improved the region's bargaining capacity. The reason that BTC and BTE could be built was because Russia had for many years grossly underpaid for the energy it took at the border and sold for market prices in Europe. However, today, Russia is paying a premium.

It is likely that Russia is paying the premium because domestic underinvestment and stagnant production have caused a shortage of available gas for export. Secondly, if Russia is overpaying for the gas - and the West dithers in building alternative pipelines - that will encourage Central Asian states to export gas via Russia. Finally, if Europe's top priority is a unified energy market, insufficient commitment and effort going into future projects such as the Nabucco gas pipeline and the Trans-Caspian Pipeline will diminish their chances of being built.

Energy demand and declining prices due to the global economic crisis make high-cost Eurasian energy less attractive for investors. For project financing, oil at $50 a barrel is much less attractive than oil at $75.

With projects of great geopolitical complexity taking 10 years and more to negotiate, and with multi-billion-dollar financing not readily available at the current energy price levels, the chances that by 2019 we will see much oil and gas flowing West from East in general, and West Caspian in particular - under Western ownership - look slimmer than two years ago.

Yet the growth in Chinese demand remains constant. China is consistently winning energy bids in Central Asia, such as in Kazakh oil and Turkmen gas, and the forthcoming construction of the Russia-China oil and gas pipelines could decrease the availability of resources for exports to the West.

Much ignored, the role of Turkey in Eurasian energy transit is crucial. According to Giorgi Vashakmadze, a former executive of the Georgia International Oil Corporation, the Baku-Tbilisi-Erzurum (BTE) pipeline was supposed to be a joint venture between Azerbaijan, Georgia and Turkey. However, the pipeline essentially ends at the Turkish border. From there, Turkish national oil and gas pipeline company Botas took over, negating the chance of a broad international cooperation in the gas area. As a result, the offshore Shah Deniz gas project in Azerbaijan was delayed and reduced in size in Phase One; and shrunk to one-half of the planned capacity in Phase Two. Turkish demands to acquire large amounts of gas seem to be almost lethal for Nabucco.

Russia is pressing on with the Bluestream and South Stream projects across the Black Sea to Turkey in order to build influence and prevent Caspian gas from taking a market share - in Turkey and for exports to Europe. Gazprom is enhancing its influence in Ankara at the highest level.

The West has also missed the opportunity to build a relationship with Turkmenistan, opening the door to Russia to secure Turkmen gas supplies. Turkmenistan needed a strong commitment by the West to agree to build a Trans-Caspian Pipeline to link up with Baku-Tbilisi-Erzurum. A 30bn cubic metre a year pipeline - twice the size of the suggested Nabucco pipeline, had to be built, Vachkamadze suggested.

The lack of a strong private sector leader; absence of a coherent European strategy; low energy prices; and the rise of China and Russia all seem to be contributing to a negative outlook for Eurasian energy pipelines to Europe.

Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies at the Heritage Foundation and the author of Kazakhstan: The Road to Independence. Energy Policy and the Birth of a Nation (SAIS-Johns Hopkins, 2008)

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