CC BY
82
Stanislav ZHUKOV
D.Sc. (Econ.), Senior Researcher, Institute of World Economy and International Relations, Russian Academy of Sciences (Moscow, the Russian Federation).
Oksana REZNIKOVA
Ph.D. (Hist.), Researcher, Institute of World Economy and International Relations, Russian Academy of Sciences (Moscow, the Russian Federation).
CENTRAL ASIA AND AZERBAIJAN: LONG-TERM ENERGY STRATEGIES
Abstract
This article looks at the current state of and prospects for development of the energy sector in the post-Soviet coun-
tries of Central Asia and Azerbaijan and gives forecasts of the possibilities of implementing long-term energy projects in these regions.
Introduction
Development of the energy sector in the five post-Soviet Central Asian countries and Azerbaijan is defined by two main factors. On the one hand, some countries of the region—Azerbaijan, Kazakhstan, and Turkmenistan—possess large reserves of commercial oil and gas. Uzbekistan and es-
pecially Kazakhstan also have large reserves of natural uranium. Relying on their rich energy resources, these three countries have set themselves up in the international division of labor as energy exporters. On the other hand, the energy sector in all the post-Soviet republics retains several characteristic features inherited from the Soviet past. No or very few large investments have been made in modernizing the production sector, transportation, and transport infrastructure, or the housing sector in the past twenty years, so everywhere the energy-output ratio of production and consumption remains high.
Special Features of the Energy Sector
Differentiation of the Region's Countries in Terms of Energy Potential
In terms of their energy potential, the five Central Asian countries and Azerbaijan can be divided into two groups. The first group, comprising Kazakhstan, Turkmenistan, and Azerbaijan, possesses large reserves of global oil and natural gas. The second group consists of Kyrgyzstan and Tajikistan, which do not have any significant reserves of hydrocarbon. Uzbekistan, which has sufficiently large reserves of natural gas and natural uranium, occupies an intermediate position between these two groups of countries. Local gas deposits are small and cannot be efficiently reoriented toward export, so most of the gas produced in this country is consumed in the domestic market.
In terms of oil reserves, Kazakhstan ranks 11th and Azerbaijan 19th in the world (see Table 1). In terms of current production, Kazakhstan is among the top twenty and Azerbaijan among the top
Table 1
The Central Asian Countries and Azerbaijan: Ranking in World Production and Reserves of Oil and Natural Gas
Production in 2009 Reserves as of 1 January, 2011
Oil Natural gas Oil Natural gas
% Score % Score % Score % Score
Kazakhstan 2.0 16 1.1 24 2.0 11 1.3 15
Kyrgyzstan — — — —
Tajikistan — — — —
Turkmenistan 0.3 40 1.2 23 0.04 46-48 4.0 5
Uzbekistan 0.1 46 2.2 11 0.04 49 1.0 19
CA-5 2.4 4.5 2.1 6.3
Azerbaijan 1.3 21 0.5 32 0.5 19 0.45 26
Caspian-4 3.7 5.0 2.6 6.75
S o u r c e: Calculated and compiled according to Oil & Gas Journal, 6 December, 2010, pp. 48-49.
Table 2
World Coal Reserves by Country in 2008, % of Total Reserves
1 Total Bituminous Coal and Anthracite
U.S. 27.6 U.S. 26.8
Russia 18.2 PRC 15.4
PRC 13.3 India 13.9
Australia 8.9 Russia 12.1
India 7.0 Australia 9.2
Ukraine 3.9 South Africa 7.5
Kazakhstan 3.9 Kazakhstan 5.3
South Africa 3.5 Ukraine 3.8
Other countries 13.6 Other countries 6.1
S o u r c e: Calculated according to 2010 Survey of Energy Resources, World Energy Council, 2010, pp. 10-12.
thirty largest oil producers. In terms of natural gas reserves, Turkmenistan ranks fifth in the world, only lagging behind Russia, Iran, Qatar, and Saudi Arabia. However, it is very likely that natural gas reserves in this republic are even larger than follows from the available international estimates. Relatively recently a new giant field, Iuzhny Yolotan-Osman was discovered there, the reserves of which the British consulting company Gaffney, Cline & Associates assessed at 4-14 trillion cu m in 2008.
Figure 1
Identified World Reserves of Uranium by Country, % of Total Reserves at the Beginning of 2009
Namibia 4.5 r Bra South Africa 4.7 _. 1 T Nige U.S. 7.5 Canada 8.6 ->/ \ \ M^J Russia 9.0 Kazakhstan 13.2 Australia 26.6 zil 4.4 ria 4.4 Ukraine Ot 3.5 PRC 2.7 Uzbekistan 1.8 ^^^^ Jordan 1.8 India 1.3 ~~ "— Mongolia 0.8 Other countries 5.2 her countries 13.6
S o u r c e: 2010 Survey of Energy Resources, World Energy Council, 2010, p. 209.
After carrying out additional drilling and three-dimensional seismic research of the Yolotan-Osman group of fields in November 2010, the Turkmengeologia State Company raised the estimate of its reserves to 21 trillion cu m.1 The reserves in the Turkmen part of the Caspian Sea, where America's Chevron and ConocoPhillips oil and gas companies are beginning geological exploration, could reach 6 trillion cu m of natural gas.
In terms of coal reserves, Kazakhstan ranks seventh (see Table 2) and Uzbekistan 16th in the world.
In terms of identified uranium reserves, Kazakhstan ranks second in the world after Australia (see Fig. 1). Approximately 70% of Kazakhstan's uranium reserves can be extracted by means of underground leaching, the cheapest and most environmentally friendly method.2 Uzbekistan ranks twelfth on the list of countries with the largest uranium reserves.
Unequal endowment with energy resources also predetermines the differences in energy consumption structure.
Structure of Energy Resource Consumption
The structure of primary energy consumption is the most diversified in Kazakhstan (see Table 3). Coal (43% of the total demand for primary energy resources in 2008) accounts for about half of the total energy consumption in this country. In so doing, the contribution of this mineral fuel to the energy balance is gradually decreasing. Natural gas accounts for around 40% of energy consumption and oil for 17%. All in all, coal, oil, and gas provide 98% of Kazakhstan's energy needs.
Table 3
Structure of Primary Energy Resource Consumption in the Central Asian Countries and Azerbaijan, %
Azerbaijan Kazakhstan Kyrgyzstan Tajikistan Turkmenistan Uzbekistan
|| On average for 2000-2008 ||
Coal 0 51 20 2 0 2
Oil 36 19 20 16 26 12
Natural gas 62 28 24 24 74 84
Hydropower 2 1 36 58 0 1
Other 0 1 0 0 0 1
1 See: "Review of the Russian and CIS Markets," Platts, Issue 7, November 2010.
2 See: E. Butyrina, "'Kazatomprom' nameren do 2050 goda dobyt okolo 1,200 tys. t urana," Panorama, No. 22, 9 June, 2006; "Uranium and Nuclear Power in Kazakhstan," available at [http://www.world-nuclear.org/info/inf89.html].
Table 3 (continued)
n n
Azerbaijan a (fl JZ ^ a z a * an (fl z > > * Tajikistan Turkmenistc Uzbekistan
Share of net import
in consumption, % -140 -111 52 38 -252 -15
Share of hydropower
in electricity generation, % 10 12 86 99 0 16
| 2008 |
Coal 0 43 19 4 0 2
Oil 31 17 29 21 28 9
Natural gas 68 39 22 18 73 86
Hydropower 1 1 31 55 0 2
Other 0 0 0 3* 0 0
Share of net import
in consumption, % -333 -109 73 41 -265 -23
Share of hydropower
in electricity generation, % 9 9 90 98 0 23
* Including direct import of electricity.
S o u r c e: Calculated on the basis of International Energy Agency data.
Hydrocarbons hold absolute domination in the energy consumption of Azerbaijan and Turkmenistan. Whereas natural gas is fuel number one in both countries, coal is hardly used at all. Low development of new renewable sources of energy aside, Azerbaijan and Turkmenistan have a more developed energy consumption structure than many developed countries.
Kyrgyzstan and Tajikistan rely primarily on hydropower, whereby this sector accounts for more than 90% of electricity generation.
Four states—Azerbaijan, Kazakhstan, Turkmenistan, and to a much lesser extent Uzbekistan— are net energy exporters. Kyrgyzstan and Tajikistan cover 43% and 41% of their energy resources by means of import, respectively. In so doing, it should be kept in mind that most of the oil and petroleum products imported by Kyrgyzstan are re-exported to China.
Whereas these countries greatly differ from each other in terms of endowment and consumption structure of energy resources, they are much closer in terms of rate of energy consumption.
World Leaders in Energy Efficiency
The Central Asian countries, particularly Turkmenistan and Uzbekistan, are among the world leaders in terms of energy resource consumption per unit of GDP (see Table 4). The Soviet econo-
my in its time and the post-Soviet expanse in recent years were not part of the global drop in the energy-output ratio of production. Of course, it may be thought that energy resource availability is the competitive advantage. However, the trend toward introducing energy-saving technology initiated by the 1973 oil crisis continues to gain momentum. Whereby during times of high (compared to long-term average) prices for energy resources, the transfer to energy-saving technology only accelerates.
Table 4
Ranking of the Post-Soviet Countries in the Global Rating of GDP Energy-Output Ratio
According to the Exchange Rates and Conditions in 2000 According to Purchasing Power Parity in 2005
1990 2000 2007 1990 2000 2007
Turkmenistan 1 1 5 Turkmenistan 2 2 3
Kyrgyzstan 2 16 14 Uzbekistan 3 3 2
Ukraine 3 2 2 Azerbaijan 6 8 59
Uzbekistan 4 3 4 Armenia 7 36 66
Belarus 6 13 19 Kyrgyzstan 10 27 25
Azerbaijan 7 12 41 Belarus 11 20 28
Kazakhstan 8 9 6 Kazakhstan 12 12 10
Armenia 9 32 46 Ukraine 14 6 8
Moldova 10 8 9 Moldova 15 17 17
Tajikistan 11 5 5 Russia 21 15 20
Russia 15 6 11 Georgia 26 42 68
Georgia 27 36 48 Tajikistan 32 18 18
S o u r c e: Calculated according to World Bank World Development Indicators 2010.
According to the data for 2007, all the post-Soviet economies, apart from Armenia, Georgia, and Azerbaijan, ranked among the top twenty countries with the highest energy resource consumption per unit of gross domestic product according to the exchange rate in 2000. When using GDP purchasing power parity indices for the national currencies, the picture did not essentially change. Turkmenistan, Uzbekistan, Kazakhstan, Tajikistan, and Kyrgyzstan remain among the highest energy-consuming economies of the world.
This means that economic growth in these countries is closely correlated with the amount of energy resource consumption. To prove this thesis, it is enough to look at graphs 1 and 2, for example, which show that the growth curves of GDP and energy consumption in Tajikistan and Kyrgyzstan largely coincide.
Moreover, the data in graphs 1 and 2 make it possible to conclude that the electricity intensity of GDP in Tajikistan and Kyrgyzstan did not drop before 2007/2008, rather it grew. The Soviet energy
Graph 1
Tajikistan: GDP and Energy Consumption Dynamics, Indices for 1990 Taken as 100
PER* consumption - Electricity consumption GDP
* Primary energy resources.
S o u r c e s: Calculated and compiled on the basis of International Energy Agency data and national statistics.
Graph 2
Kyrgyzstan: GDP and Energy Consumption Dynamics, Indices for 1990 Taken as 100
PER* consumption - Electricity consumption GDP
* Primary energy resources.
S o u r c e s: Calculated and compiled on the basis of International Energy Agency data and national statistics.
inheritance allowed these countries (like all the other post-Soviet republics) to avoid complete economic and social collapse and even maintain positive growth rates in the 2000s.
We will return again to this situation. Here it is important to state that it is extremely difficult to make a forecast of the future consumption and production of energy resources for Central Asia and Azerbaijan.
■ First, this is because oil and gas production is not determined by the development of internal conditions, but by demand in the foreign markets, the inflow of foreign investments, and the political stability of the region.
■ Second, in our opinion, the economic and energy transition period in post-Soviet states, particularly in the poorest republics that do not have their own hydrocarbon reserves, is still not over.
The energy industry inherited from the Soviet Union is close to total dilapidation. And third, the prospects for economic development of the countries being examined are extremely uncertain.
These circumstances make it expedient to analyze the prospects for internal and external demand for energy resources separately.
Forecast of Internal Demand for Energy Resources
Keeping in mind that internal demand for energy is dictated by economic growth, let us begin with a forecast of the development rates of the Central Asian republics and Azerbaijan. Table 5 summarizes the forecasts we already know with respect to long-term GDP growth in the countries being examined. The estimates of Poncet and the Asian Development Bank (ADB) are made on the basis of production function within the framework of neoclassical ideas of the driving forces and limitations of economic growth. The estimates of Felipe, Kumar, and Abdon are mainly based on modeling the export capabilities of developing countries at different levels of development in the processing industry sector.
Table 5
Forecasts of Average Annual GDP Growth Rates in 2011-2030, %
Poncet, 2006 ADB, 2009 ** Felipe, Kumar, Abdon, 2010
Kazakhstan 4.7 3.8 -0.05-0.8
Kyrgyzstan 3.6* 3.2 0.7-3.0
Tajikistan 5.6* 3.8 2.5-3.3
Turkmenistan 0.9* 6.9 1.2-2.0
Uzbekistan 4.8 4.9 2.5-3.5
Azerbaijan 3.0 8.6 0.6-1.2
* 2005-2020. ** 2005-2030.
S o u r c e s: S. Poncet, "The Long Term Growth Prospects of the World Economy: Horizon 2050," CEPII Working Paper, No. 2006, 16 October, 2006; Energy Outlook for Asia and the Pacific, Asian Development Bank, October 2009; J. Felipe, U. Kumar, A. Abdon, Using Capabilities to Project Growth 2010-2030, Asian Development Bank, 28 June, 2010.
The variance in the estimates, particularly with respect to Azerbaijan, Kazakhstan, and Turkmenistan, is impressive. On the whole, we do not think that either the neoclassical paradigm of fore-
casting, or the method offered by Felipe, Kumar, and Abdon is suitable for forecasting long-term growth in raw material economies. It is currently impossible to build an econometrically satisfying model of demand for energy resources depending on the dynamics of economic development of the post-Soviet republics in the same way as it is done with respect to established developed and developing countries.
Table 6
Forecast of the Demand for Primary Energy Resources in the Central Asian Countries and Azerbaijan
Forecast
International Energy Agency Authors Consumption
GDP growth rates, PER consumption in 2030, million toe GDP growth rates, PER co nsumption in 2030, million toe in 2008, Actual, million toe
2009-2030, % 2011-2030, %
Kazakhstan 4.1 104.1 4.0 100 71
Kyrgyzstan * * 3.0 4 2.9
Tajikistan * * 3.0 4 2.5
Turkmenistan 5.4 35.6 6.0 25 18.8
Uzbekistan 4.3 67.2 3.5 75 50.5
CA-5 208 145.7
Azerbaijan 2.8 17.3 4.0 17 13.4
6 countries 225 159.1
* Estimates are not given separately for these countries.
S o u r c e s: Calculated and compiled on the basis of World Energy Outlook 2010,
| International Energy Agency data; and authors ;' estimates. -II
Relying on simple interdependencies between macroeconomic aggregates, taking into account the dynamics and structure of economic growth of the six countries over the past fifty years, as well as on an in-depth analysis of the factors of their economic growth,3 and our own experts' estimates,
3 An in-depth analysis of the economic growth of the Central Asian states and Azerbaijan is given in the following works: S. Zhukov, O. Reznikova, "Tsentral'naia Azia v mirovoi politike i ekonomike,"Mirovaia ekonomika i mezhdunar-odnye otnoshenia, No. 12, 1994; S. Zhukov, "Kazakhstan, Kyrgyzstan i Uzbekistan v sotsialno-ekonomicheskikh struk-turakh sovremennogo mira," Mirovaia ekonomika i mezhdunarodnye otnoshenia, No. 3, 1997; S. Zhukov, O. Reznikova, "Rossia-Tsentral'naia Azia: novaia model ekonomicheskogo vzaimodeistviia," in: Rossia i Iug: vozmozhnosti i predely vzaimodeistviia, Finstaninform Publishers, Moscow, 1996; S. Zhukov, O. Reznikova, Tsentral'naia Azia v sotsialno-eko-nomicheskikh strukturakh sovremennogo mira, Moscow Public Scientific Fund, Moscow, 2001; O. Reznikova, "Per-spektivy pritoka priamykh inostrannykh investitsii v ekonomiku gosudarstv Tsetnral'noi Azii i Kavkaza," Tsentral'naia Azia i Kavkaz. Nasushchye problemy 2003, TOO "East Point," Almaty, 2003; S. Zhukov, O. Reznikova, "Tsentral'naia Azia i Iuzhny Kavkaz v mirovoi ekonomike," in: Meniaiushchyisia mir i Rossia, The Institute of World Economy and In-
THE CAUCASUS & GLOBALIZATION
we think that in 2011-2030 Turkmenistan will demonstrate the highest average annual GDP growth rates at a level of 6%. It will be followed by Kazakhstan and Azerbaijan with 4% each. The average annual growth rates of Kyrgyzstan and Tajikistan, on the other hand, will be no higher than 3%. On the whole, our estimates, with the exception of Azerbaijan, are close to the estimates of the International Energy Agency (IEA). We believe that the IEA underestimates the economic growth potential of this country, which is not limited to the oil and gas sector. Azerbaijan's agrarian sector, for example, has good growth potential.
We also believe that economic growth in Kazakhstan, Turkmenistan, and Azerbaijan will be less energy-intensive than the IEA predicts, mainly because this growth will rely not on an increase in domestic demand, but largely on export demand. At the same time, we do not think that Uzbekistan will be able to lower the GDP energy-output ratio to the extent the International Energy Agency predicts.
Due to the large absolute dimensions of the economy, Kazakhstan will account for 44% of the entire increase in consumption of the six countries being examined, Uzbekistan 37%, and Turkmenistan 9%. Azerbaijan, Kyrgyzstan, and Tajikistan will account for 5%, 1.7%, and 2.3% of the increase in consumption (calculated according to the data of Table 6), respectively.
An extremely important question is whether the states being analyzed are capable of producing the amount of energy resources necessary for maintaining the predicted economic growth rates. Whereas there is no doubt that Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan can cope with this task, the same cannot be said of Kyrgyzstan or Tajikistan.
The "Failed" Unstable States of Kyrgyzstan and Tajikistan
The low economic development rates in Kyrgyzstan and Tajikistan are caused among other things by the fact that they do not have their own hydrocarbon resources. It is mainly for this reason that both republics joined the ranks of the least developed countries of the world after the collapse of the Soviet Union.
It comes as no surprise that both countries are relating their energy future to the development of hydropower, which dominates in their energy balances (see Table 3 above). For example, in Tajikistan, the electricity production potential based on hydropower resources is estimated at 264 Terawatt/h a year, of which about only 6% are used.4 For the past two decades, Tajikistan and Kyrgyzstan have been constantly putting forward mass construction plans for large hydropower facilities in order to meet their domestic demand and export of electricity to neighboring countries. Information on the largest hydropower projects the two Central Asian republics would like to implement is summarized in Table 7. Kyrgyzstan is counting on building new hydropower stations with a total capacity of 5,667 megawatts, which will require $7.6 billion. For Tajikistan, the respective indices amount to 5,344 megawatts and $9.5 billion.5
ternational Relations, Moscow, 2004; S. Zhukov, O. Reznikova, "Ekonomicheskie vzaimosviazi na postsovetskom pros-transtve," Voprosy ekonomiki, No. 8, 2007; O. Reznikova, "Mirovoi opyt regulirovaniia trudovoi migratsii: uroki dlia Rossii," in: Migratsionnye protsessy v razvivaiushchikhsia stranakh Azii i Afriki: osnovye problemy, The Institute of World Economy and International Relations, Moscow, 2008; S. Zhukov, O. Reznikova, Tsentral'naia Aziia i Kitai: eko-nomicheskoe vzaimodeistvie v usloviiakh globalizatsii, The Institute of World Economy and International Relations, Moscow, 2009.
4 See: Survey of Energy Resources, World Energy Council, 2007, p. 310.
5 Calculated according to: Energy Demand/Supply Balance and Infrastructure Constrains Diagnostic Study, Asian Development Bank, October 2010, pp. 31-32.
Table 7
New Large Projects Designated in the Hydropower Industry of Kyrgyzstan and Tajikistan
Project Capacity, MW Electricity Production, G Wh/year Estimated Project Cost, $m I nvesto r Put into Operation
Tajikistan
Sangtuda-1 670 2,700 670 Russia 2009
Sangtuda-2 220 1,000 220 Iran ?
Rongun 3,600 13,000 2,200 ?
Nurabad-1 350 650 PRC ?
Kyrgyzstan
Kambarata-1 1,900 2,000 Russia ?
Kambarata-2 400 400 Russia partially implemented
Kokemeren-1 360 ?
Kokemeren-2 912 ?
S o u r c e s: Electricity in Central Asia. Market and Investment Opportunity Report, World Energy Council, July 2007; business periodicals of Kyrgyzstan and Tajikistan; world business periodicals.
Despite their popularity,6 these plans are not economically feasible. In addition to their obvious non-commercial nature, their implementation is also complicated by two factors.
■ First, neither Kyrgyzstan, nor Tajikistan have their own financial resources or enough qualified personnel to implement them. New hydropower stations can only be built using external resources. Both republics belong to the group of so-called failed states. Despite the two decades of independent development, stable state formations have not emerged, nor have prototypes of the national economy been created. Economic and political life in Kyrgyzstan and Tajikistan is largely based on servicing statistically unregistered Chinese exports to Russia and Kazakhstan, remittances of work migrants from the most successful post-Soviet republics, and integration into the global networks of drug trade and transportation. In our view, the large-scale projects planned in the Central Asian hydropower industry can only be implemented by external donors guided not by economic, but by various political interests. So if they cannot attract external resources into the hydropower projects, Kyrgyzstan and Tajikistan can expect another bout of socioeconomic degradation.
■ Second, Kyrgyzstan and Tajikistan are situated on the upper reaches of mountain rivers that supply the entire Central Asian region with water resources. The countries lower down the rivers, Kazakhstan and particularly Uzbekistan, use the water of the cross-border rivers for
6 See, for example: Tajikistan. In-Depth Review of the Investment Climate and Market Structure in the Energy Sector, Energy Charter Secretariat, Brussels, 2010.
THE CAUCASUS & GLOBALIZATION
irrigational farming. The accumulation of large amounts of water in artificial reservoirs for electricity generation is creating problems for the agrarian countries. The contradictions regarding use of regional hydropower resources have become particularly acute in the relations between Tajikistan and Uzbekistan.
In Soviet times, the development of the hydropower industry and irrigational farming was part and parcel of a unified system. In the republics of Central Asia and the south of Kazakhstan, a unified integration energy-water complex was created that was managed from a single center in Uzbekistan. The system made it possible to balance out the seasonal fluctuations in demand for electricity and irrigation water requirements with the fluctuations in water resources in the mountain rivers. In the winter, Kyrgyzstan and Tajikistan accumulated water in their reservoirs and received electricity and energy resources (coal and natural gas) from Kazakhstan, Turkmenistan, and Uzbekistan. In the summer, Kyrgyzstan and Tajikistan sent water to Uzbekistan and Kazakhstan for irrigational farming. Kyrgyzstan and Tajikistan also supplied their neighbors with hydropower they produced over and above their domestic needs.7 At present, there is no single political and economic center in Central Asia, while the interests of the independent states, including in the energy industry, are frequently of a mutually exclusive nature.
Summing up, it can be claimed that without investments, Kyrgyzstan and Tajikistan will most likely encounter uncontrollable degradation of the energy capacities inherited from the Soviet past in the next two decades. The scenario of modest economic growth and gradual increase in domestic demand for energy resources, the basic parameters of which are summarized in Table 6, can be realized only if significant investments are made in the Kyrgyz and Tajik energy sectors.
The prospects for development in Azerbaijan, Kazakhstan, and Turkmenistan with their rich endowments of oil and natural gas look much more promising. Let us begin with oil.
Oil Production and Export Forecast until 2030
Any significant increase in the production and export of oil among the Caspian countries can only be expected in Kazakhstan and Azerbaijan.
Kazakhstan
In 2010, Kazakhstan produced 79.5 million tonnes of oil, 90% of which was exported. The plans for increasing oil production are related to export, whereby the stakes are placed on three large fields—Tengiz (including Korolevskoe), Karachaganak, and Kashagan (see Table 8).
According to the IEA forecast, by 2030 oil production in Kazakhstan will almost double compared to today's level and reach 195 million tonnes, whereby Kashagan will provide most of the increase (see Table 9). This is the largest hydrocarbon field discovered in the last thirty years and the largest offshore field in the world.
We believe that the scenario of production growth presented by the International Energy Agency is extremely optimistic. This conclusion is justified by the far-from-easy development history of the Kashagan field.8
7 Functioning of the unified Soviet hydropower system in Central Asia and Kazakhstan is examined in detail in: S. Zhukov, O. Reznikova, Tsentral'naia Azia v sotsialno-ekonomicheskikh strukturakh... pp. 247-249, 257-263.
8 A large number of articles in the Kazakhstan business periodicals examine the history of the development of the Kashagan project. In addition to everything else, this chapter relies on a series of articles by U. Kozhantaeva in Delovaia nedelia (Almaty) and E. Butyrina in Panorama (Almaty).
Table 8
Kazakhstan's Three Major Oil Fields: Recoverable Hydrocarbon Reserves
Forecast Reserves
Tengiz and Korolevskoe Oil and condensate: 750-1,125 million tonnes
Kashagan Oil and condensate: 1,475 million tonnes of oil Gas: more than 880 billion cu m
Karachaganak Oil and condensate: more than 1.2 billion tonnes Gas: more than 1.3 trillion cu m
S o u r c e s: Data of KazMunaiGaz and business periodicals of Kazakhstan.
Table 9
Oil Production Forecasts for Kazakhstan until 2030, million tonnes
2005 Actual 2009 Actual 2015 2020 2030
Ministry of Oil and Gas
Total 61.5 76.5 95 — —
TengizChevroil 13.6 22.5 30* — —
Karachaganak Petroleum Operating B.V. 10.3 11.9 15* — —
Kashagan — — 10* — —
KazMunaiGaz 9.4 8.9 7* — —
SNPSAktobemunaigaz 5.8 6.0 5* — —
Mangistaumunaigaz 5.7 5.7 5* — —
Rest 16.7 21.5 23* — —
| International Energy Agency** |
Total 61.5 76.5 100 140 195
TengizChevroil 13.6 22.5 27 28 43
Karachaganak Petroleum Operating B.V. 10.3 11.9 15 17 12
Kashagan — — 15 55-60 75
Rest 37.6 42.1 43 35-40 65
Authors
Total 61.5 76.5 85 100 130
Table 9 (continued)
2005 Actual 2009 Actual 2015 2020 2030
TengizChevroil 13.6 22.5 30 30 43
Karachaganak Petroleum Operating B.V. 10.3 11.9 15 17 12
Kashagan — — — 10 30
Rest 37.6 42.1 40 43 45
*The data broken down into companies are authors' estimates based on the official forecast of total production. ** IEA indices in million barrels a day have been recalculated as million tonnes a year.
S o u r c e s: Strategic Plan of the Ministry of Oil and Gas of the Republic of Kazakhstan for 2011-2015, Ministry of Oil and Gas of the Republic of Kazakhstan; World Energy Outlook 2010, International Energy Agency; and authors' estimates.
The original production sharing agreement for Kashagan was signed in 1997 for 37 years. There were plans for the field to begin producing oil as early as 2005. In 2004, putting the field into operation was postponed until 2008 with the consent of the Kazakhstan government, which received a late charge of $150 million. The program of February 2004 presumed that by 2008 production would reach 3.7 million tonnes, while peak production in 2016 would amount to 60 million tonnes. The total spending on putting the field into operation was raised to $29 billion, $10 billion of which would be spent on the first development phase.
In 2005, launching of the field into operation was again postponed until 2010, while the intermediate programs for 2005-2006 raised the outlays for developing Kashagan first to $50 and then to $57 billion. The 2007 program raised the field's development cost to $136 billion. In August 2007, the Kazakhstan government announced a three-month moratorium on the project. At the end of 2008, a new program was adopted for developing Kashagan, the first phase of which was estimated at $31 billion.
The program essentially changed the field development plans. Responsibility for the project was passed from one company—Italy's ENI—to three companies at once: Royal Dutch Shell became responsible for all offshore works, Total concentrated on gas refinery, and ENI dealt with building offshore infrastructure.
Along with restructuring of the field development programs, Kazakhstan managed to increase its share in the international consortium for Kashagan from zero to 16.81% (see Table 10).
The internal Kazakhstan debate on launching Kashagan essentially boiled down to discussing questions such as what amount of investments would be needed to develop the field and how justified were the investment plans of foreign developers of the field. But the main questions should have been: what are the economic, financial, and environmental risks of developing Kashagan? And do the oil companies have development technology that meets the field's difficult specifications? The thing is that such specific field characteristics as high oil temperatures of 100-120oC, extreme pressure in the seams, high content of sulphur and other chemically active substances, including mercaptans, and significant fluctuation in summer and winter temperatures in the field zone make it extremely difficult to develop. What is more, the field is in an offshore zone, which raises the risks even more.
Table 10
Percentage of Shareholders in the International Consortium for Developing Kashagan, %
1997 2005 2009
Agip-ENI 18.52 18.52 16.81
British Gas 8.332 — —
ExxonMobil 18.52 18.52 16.81
Royal Dutch Shell 18.52 18.52 16.81
Total 18.52 18.52 16.81
ConocoPhillips 9.26 9.26 8.40
Inpex 8.33 8.33 7.56*
KazMunaiGaz — 8.33 16.81**
* Announced its intention to sell its share in the project. ** Kazakhstan paid $1.78 billion to raise its share.
S o u r c e s: business periodicals of Kazakhstan.
A separate question is raised by the transfer from a consortium with one executive operator to essentially a triple structure of consortium management. Who will ensure coordination of the work of such major companies used to working independently as Royal Dutch Shell, Total, and ENI and how, and won't the transfer to a triple management structure essentially divide Kashagan into three independent projects? Who will ultimately be responsible for possible failure of the new program if it happens? And there are many more such questions.
In May 2011, Kazakhstan announced a halt to the second phase of work on Kashagan. The reason for this next holdup is the inability of the consortium participants to precisely determine the production volume at the second development phase or the amounts of necessary investments.9
Serious contradictions between Kazakhstan, on the one hand, and the foreign shareholders, on the other, also exist under the Karachaganak project, which by 2015 should reach a production level of 15 million tonnes. The Kazakhstan government is striving to raise control over the outlays of the foreign companies when implementing the third phase of the project and is ready to freeze it if a consensus is not reached with the investors. In 2010, the production of hydrocarbons at Karachaganak dropped by 4% compared to the previous year, that is, to 133.7 million barrels.10
The prospects for raising production at the Tengiz and Korolevskoe fields are more definite. At the end of 2010, a decision was made to double the throughput capacity of the Caspian Pipeline Consortium (CPC) from 28.2 to 67 million tonnes a year, of which the quota for Kazakh oil would amount to 52.5 million tonnes. The CPC will make it possible to transport Kazakh oil to the European markets through a Russian port close to Novorossiysk on the Black Sea.11
Keeping in mind the noted difficulties, even a production level of 130 million tonnes in 2030 (see Table 9) may prove too optimistic. It is possible that actual oil production in the country will be
9 See: "Kazakhstan Freezes Second Phase at Kashagan," International Oil Daily, 26 May, 2011.
10 See: "Kazakhstan Set to Freeze Major Gas Project, Minister Says," Reuters, 18 May, 2011.
11 See: "CPC Expansion Gives Producers New Options," Petroleum Intelligence Weekly, Vol. L, No. 1, 10 January, 2011; Ministry of Oil and Gas of the Republic of Kazakhstan. Results of the strategic development of the oil and gas industry for 2010 and plans for 2011.
no higher than 110 million tonnes. In any case, foreign investors will have a decisive influence on the rate of increase in oil production in Kazakhstan. In the 1990s, Kazakhstan proved to be the most valuable find for the leading international oil and gas concerns. The stunning speed with which the Soviet Union and Soviet economy collapsed and the economic chaos that accompanied it made it possible for them to enter agreements with the republic on unprecedented advantageous conditions for themselves. It is foreign companies that essentially control the development of Kazakhstan's largest fields. In turn, investment decisions of the American and European companies producing Kazakh oil will be determined by the global demand for oil.
Azerbaijan and Turkmenistan
It is easier to assess the prospects for increased oil production in Azerbaijan. In 2010, 51 million tonnes of oil were produced there, the Azerbaijan International Operating Company AIOC accounting for 85% of this total (graph 3). And although in the past few years production lags a little behind the original schedule, it is almost certain that by 2020 Azerbaijan will be producing around 60 million tons of oil. Then as the reserves of the Azeri-Gunashli-Chirag group of fields developed by AIOC become exhausted, oil production will begin to drop and by 2030 will be no higher than 45-50 million tonnes.
Graph 3
Azerbaijan: Oil Production Dynamics in 1997-2010, million tonnes
Total - - - - AIOC - AIOC forecast for 2002
S o u r c e s: Compiled and calculated according to the data of the Azerbaijan State Statistics Board; business periodicals of Azerbaijan.
In Turkmenistan, oil production amounts to approximately 10 million tonnes, almost half of which is exported. No significant increase in oil production is expected in this country in the period being forecast.
Oil Export
An evaluation of the potential amounts of oil export from the Central Asian countries and Azerbaijan is presented in Table 11. We think that in the most favorable circumstances, the total oil
export of Azerbaijan, Kazakhstan, and Turkmenistan will amount to 160 million tonnes in 2030, which is more than 30% lower than the estimates of the International Energy Agency.
Table 11
Estimates of Oil Export from Kazakhstan, Turkmenistan, and Azerbaijan until 2030, million tonnes
2009 Actual 2015 2020 2030
| Kazakhstan |
Ministry of Oil and Gas 68 84 — —
International Energy Agency* 68 84 123 178
Authors 68 75 85 115
| Azerbaijan |
International Energy Agency* 48 61 59 48
Authors 48 50 50 40
| Turkmenistan |
International Energy Agency* 4.5 7.5 7 5.5
Authors 4.5 5 5 5
| All Three Countries |
International Energy Agency* 120.5 152.5 189 231.5
Authors 120.5 130 140 160
* Net export.
S o u r c e s: Strategic Plan of the Ministry of Oil and Gas of the Republic of Kazakhstan for 2011-2015, Ministry of Oil and Gas of the Republic of Kazakhstan; World Energy Outlook 2010, International Energy Agency; and authors' estimates.
The plans for increasing natural gas production are related primarily to the export markets.
Gas Production and Export Forecast until 2030
The statistics for the production, consumption, and export of natural gas in the post-Soviet republics are not sufficiently transparent and rather confused. Azerbaijan and Kazakhstan mainly produce associated gas with unstable properties. Most of it is pumped back into the seam, and the rest is subjected to additional refining before it goes to the final consumer. For this and other reasons, there are great differences between the data on the total recovery and production of commercial gas.
In our opinion, the forecasts of the IEA greatly overestimate the potential of gas export and production in the Central Asian republics and Azerbaijan (see Table 12). This reassessment is related to the following factors:
■ first, the forecasts for Kazakhstan are evidently based on the statistics for total recovery and not on the data regarding the production of commercial gas;
■ second, associated gas accounts for most of the gas produced in Kazakhstan.
Since development of the Kashagan and Karachaganak fields will, as we presume, be carried out at a slower rate than the time schedules announced, the production of associated gas will grow at
Table 12
Forecasts of Natural Gas Production by the Central Asian Countries and Azerbaijan, billion cu m until 2030
2009 Actual 2015 2020 2030
II National Statistics ||
Turkmenistan 41
Uzbekistan 66
Azerbaijan 17
Kazakhstan 9 15
Total 133
| International Energy Agency |
Turkmenistan 41 85 104 119
Uzbekistan 66 72 70 70
Azerbaijan 17 20 36 49
Kazakhstan* 36 47 49 61
Total 160 224 259 299
Authors
Turkmenistan 41 60 85 100
Uzbekistan 66 70 70 60
Azerbaijan 17 20 20 25
Kazakhstan 9 15 20 30
Total 133 165 195 215
| * Evidently the International Energy Agency relies on total recovery statistics. |
S o u r c e s: Strategic Plan of the Ministry of Oil and Gas of the Republic of Kazakhstan for 2011-2015, Ministry of Oil and Gas of the Republic of Kazakhstan; World Energy Outlook 2010, International Energy Agency; and authors' estimates.
a slower rate. This consideration is fair for Azerbaijan where gas production by the international consortium lags behind schedule; and third, keeping in mind the experience of the 1990s-2000s, gas production in Turkmenistan will not grow as quickly as planned.
Gas production in Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan will amount to a total of 195 billion cu m in 2020 and 215 billion cu m in 2030, which is 64 and 84 billion cu m less than the IEA forecast, respectively. This difference is explained by the differences in evaluating the dynamics of external and internal demand for Central Asian and Azeri gas.
Table 13
Forecasts of Natural Gas Export by the Central Asian Countries and Azerbaijan, billion cu m until 2030
2009 Actual 2015 2020 2030
|| National Statistics ||
Turkmenistan 17
Uzbekistan 15
Azerbaijan 8
Kazakhstan 7 10
Total 47
| International Energy Agency* |
Turkmenistan 17 56 73 85
Uzbekistan 15 8 3 -1
Azerbaijan 8 9 23 35
Kazakhstan 4 7 4 4
Total 44 80 103 123
Authors
Turkmenistan 17 30 50 60
Uzbekistan 15 15 15 15
Azerbaijan 8 9 20 30
Kazakhstan 7 10 10 10
Total 47 64 95 115
* Net export (export minus import).
S o u r c e s: Strategic Plan of the Ministry of Oil and Gas of the Republic of Kazakhstan
for 2011-2015, Ministry of Oil and Gas of the Republic of Kazakhstan; World
Energy Outlook 2010, International Energy Agency; and authors' estimates.
We think that Central Asia and Azerbaijan will be able to export 95 billion c m in 2020 and 115 billion cu m in 2030 (see Table 13). In so doing, Turkmenistan will account for more than half of the export.
Becoming an important center of oil and gas production will raise the importance of the Caspian countries in the world energy industry. Most of the hydrocarbons produced in Central Asia go to the markets of the APR countries, primarily China. Kazakhstan and Turkmenistan are also playing an important role in the globalization strategy of Chinese energy companies.
China
in the Oil and Gas Sector of Kazakhstan and Turkmenistan
There is objective complementarity in the energy sphere between China, on the one hand, and the Central Asian countries, on the other. China has a common land border with Kazakhstan. Major Central Asian gas exporter Turkmenistan has access to the Xinjiang-Uighur Autonomous Region (XUAR) through Uzbekistan and Kazakhstan.
The XUAR in turn is a major and, what is particularly important, growing center of China's oil and gas production. In 2010, around 35 million tonnes of crude oil were produced there, which amounted to 14% of China's total production (see Fig. 2). In terms of natural gas, corresponding indices amounted to 30 billion cu m and 32% (see Fig. 3). It is convenient and beneficial for China to import Central Asian hydrocarbons through the XUAR with its developed oil refining and pipeline infrastructure.
Figure 2
The XUAR in China's Total Oil Production, million tonnes and %
40 35 30 25 20 15 10 5 0
1970 1985 1988 1991 1994 1997 2000 2003 2006 2010
] million tonnes % of total Chinese production
S o u r c e s: Statistical Yearbook of China, National Bureau of Statistics of China for different years and Chinese business periodicals.
i-i r i-i r n T 1-1 PI
LLLL. M M M M 1M |l 1 M M J_U . ILL. J_U_L
Special mention should be made of cooperation between China and Kazakhstan in the oil industry and between China and Turkmenistan in the gas sector.
Figure 3
The XUAR in China's Total Natural Gas Production, bcmand %
I I bcm % of total Chinese production
S o u r c e s: Statistical Yearbook of China, National Bureau of Statistics of China for different years and Chinese business periodicals.
China and Kazakhstan Oil
In recent years, the PRC has been increasing its oil imports from neighboring post-Soviet republics, particularly Kazakhstan, at an accelerated rate. In 2010, this Central Asian republic accounted for 4.2% of China's total oil imports compared to 1% in 2000 (see Table 14).
Table 14
Post-Soviet Oil Exporters: Share in the Total Crude Oil Imports of the PRC, %
1995 2000 2005 2006 2007 2009 2010
Former U.S.S.R. 0.2 3.1 11.1 12.8 12.6 11.0 10.6
Russia 0.2 2.1 10.1 11.0 8.9 7.5 6.4
Kazakhstan 0.0 1.0 1.0 1.8 3.7 3.5 4.2
S o u r c e s: Calculated on the basis of U.N. COMTRADE data and customs statistics of the PRC.
Kazakhstan is also placing greater importance on oil export to the Chinese market. In 2007, oil export from Kazakhstan to China came close to 6 million tonnes, which amounted to approximately 10% of all of Kazakhstan's oil export. That year, the PRC became the fourth largest oil market for Kazakhstan after Switzerland, Italy, and France. After a direct oil pipeline from Kazakhstan to China was put into operation, the latter became the second largest export market for Kazakh oil (see Table 15).
Table 15
Kazakhstan: Main Export Markets for Oil, million tonnes
2001 2008 2010
Bermuda Islands 8.0 Switzerland 23.7 Italy 15.9
Russia 5.3 Italy 11.4 China 9.7
Italy 4.4 France 9.3 France 7.3
Ukraine 3.7 China 6.4 The Netherlands 7.0
Virginia Isles (British) 3.0 The Netherlands 5.1 Austria 4.9
UAE 2.1 Israel 4.6 Canada 3.6
Germany 1.4 Russia 4.0 Rumania 2.4
Great Britain 1.4 Rumania 2.0 Israel 2.2
Poland 1.1 Spain 1.9 Poland 1.8
China 0.6 Turkey 1.8 Greece 1.7
S o u r c e: Compiled according to : customs statistics of Kazakhstan.
The economic and geographic complementarity of the two countries in the oil sphere was reflected in the fact that in 2005 an oil pipeline was built from Kazakhstan to China with a throughput capacity of 10 million tonnes a year. This was the first Kazakh oil pipeline that did not pass through the territory of third countries and join local oil fields with foreign consumers directly. The Kazakhstan-China Pipeline Company is the pipeline owner and delivery operator, of which the Chinese National Petroleum Company (CNPC) and National Oil and Gas Company of Kazakhstan KazMunaiGaz became shareholders on parity conditions.12 In 2009, the PRC and Kazakhstan finished building the Kenkiak-Kumkol oil pipeline, which made it possible to increase the total capacity of the oil pipeline to China. In the future, the total capacity of the oil pipeline to China could be raised to 50 million tonnes a year.
The oil pipeline has already become the main export channel for Kazakh oil to the PRC. In 2010, more than 10 million tonnes of oil were exported via it, approximately 8 million tonnes of which comprised oil produced in Kazakhstan (see Table 16).
Cooperation between Chinese and Kazakh oil companies is even more important. In tough competition with other foreign investors, Chinese companies have established control over several oil fields in Kazakhstan. In terms of current oil production volume, Chinese companies are right behind the American companies that control the Tengiz field.
In 2009, qualitative shifts have occurred in oil cooperation between Kazakhstan and the PRC.
■ First, under a transaction called "financial resources in exchange for oil," China has reserved credit resources for Kazakhstan totaling $5-10 billion (see Table 17).
■ Second, the China Investment Corporation bought approximately 11% of KazMunaiGaz Exploration and Production (KMG EP), which is a production subdivision of the state oil company KazMunaiGaz.
12 See: A. Kosherbaeva, Struktura i effektivnost ekonomicheskogo sotrudnichestva Kazakhstana i KNR, KazMunaiGaz Consulting, Astana, 2006.
Table 16
Oil Export from Kazakhstan via the Main Routes, million tonnes
2005 2006 2007 2008 2009 2010*
CPC all oil 30.5 31.1 32.6 32.2 34.6 34.9
inc.
Kazakh oil — 24.4 25.6 25.8 27.5 28.4
Russian oil — 6.7 7.0 6.4 7.1 6.5
Uzen-Atyrau-Samara 15.0 15.6 16.0 16.8 17.5 15.5
Port of Aktau 8.9 9.9 8.9 7.6 9.3 —
Atasu-Alashankou — 2.2 4.8 6.1 7.7 10.1
inc.
Kazakh oil — — 4.8 5.1 6.2 —
Russian oil — — — 1.0 1.5 —
Other, including rail 0.2 5.0 5.6 5.4 7.6 —
Total Kazakh oil 54.6 57.1 60.8 60.7 68.1 71.2
* Estimates.
S o u r c e s: Data of the KazTransOil Company; business periodicals of Kazakhstan.
Table 17
China:
Largest "Financial Resources in Exchange for Energy Resources" Contracts with Central Asian Countries
Time Agreement was Reached Amount of Loan, $bn Contracted Oil Deliveries
Kazakhstan April 2009 5-10 —
Turkmenistan April 2009 4.1 Development of gas fields, building of export gas pipeline
Turkmenistan May 2011 4 Development of gas fields, building of export gas pipeline
S o u r c e: World and Central Asian business periodicals.
Enhancing cooperation with the PRC will make it possible for Kazakhstan to increase oil exports to the Chinese market. Other Asian countries are also showing an interest in investing in Kazakhstan's oil sector. In April 2011, India made a breakthrough into Kazakhstan's oil producing sec-
THE CAUCASUS & GLOBALIZATION
tor. India's oil and gas corporation, ONGC, signed an agreement with KazMunaiGaz on joint exploration of the Satpayev block in the shallow part of the Caspian shelf, the reserves of which are estimated at 256 million tonnes of oil equivalent.13 Nevertheless, given even the most favorable development of events, production will not begin before 2020.
In the foreseeable future, China will remain Kazakhstan's main energy partner in the APR, since this partnership is based on shared interests and opportunities. Kazakhstan sees China as a large and geographically close oil sales market. It is particularly important that against the background of stagnation, as well as the probable drop in demand for oil on the European markets, demand for oil in China will only grow in the next decades. In so doing, in contrast to all the other export routes, oil can be delivered directly from Kazakhstan to the PRC without involving transit countries.
This does not mean that the European vector is becoming less important for the export of Kazakh oil. American and European companies, which will continue exporting to the European markets, will ensure the lion's share of current and future oil production in Kazakhstan. This is particularly true since both the country's current oil export infrastructure, as well as that being created, is most developed in the European vector. However, it is possible that in the near future American and European oil and gas companies will be delivering oil to China from Kazakhstan.
China and Turkmen Gas
Whereas in Kazakhstan, Chinese companies are targeted toward oil, in Turkmenistan their interests are tied to natural gas.
A breakthrough in gas cooperation between the two countries occurred in April 2006 when the PRC and Turkmenistan signed a strategic comprehensive agreement on partnership in the gas sector. According to the agreement, a main export gas pipeline with a throughput capacity of 30 billion cu m a year was to be built from Turkmenistan to China. Gas was to be delivered for 30 years.14 The gas fields on the right-hand bank of the Amu Darya River with total reserves of up to 1,700 billion cu m, the development right to which Chinese companies had acquired, were pegged as the resource base for filling the gas pipeline. Keeping in mind that the two countries do not have a common border, the PRC built coupling gas pipelines through the territory of Uzbekistan and Kazakhstan, thus joining the Kazakh, Uzbek, and Turkmen sections into one.
Like Kazakhstan, at the beginning of 2009 Turkmenistan, at the peak of the global financial and economic crisis, received large funds from China for investing in the "financial resources in exchange for raw hydrocarbons" project (see Table 17) to implement natural gas production and gas pipeline construction projects. In May 2011, Turkmenistan entered a second transaction of the same type with the PRC. The more than $4 billion received for 10 years with a three-year grace period will go toward developing the Iuzhny Yolotan-Osman field and building a new branch of the export gas pipeline to China. In exchange, Turkmenistan has pledged to deliver additional gas to the Chinese market for ten years.15
In 2010, Turkmenistan exported a total of 4 billion cu m of natural gas to China. However, by 2015, with the necessary purchasing power, gas deliveries to the Chinese market could increase to 40 billion cu m. In the spring of 2011, the PRC reached a preliminary agreement with Turkmenistan
13 See: "Satpayev Deal Ends Long Indian Wait for Kazakh Upstream Entry," International Oil Daily, 19 April,
2011.
14 See: "Turkmensky gaz poidet na vostok," available at [http://www.turkmenistan.ru/?page_id=5&lang_id= ru&elem_id =event &sort=date_desc], 4 April, 2006.
15 See: Petroleum Intelligence Weekly, Vol. L, No. 18, 9 May, 2011.
THE CAUCASUS & GLOBALIZATION
on the import of an additional 20 billion cu m of gas beginning in 2015. If this agreement is executed, the total volume of Turkmen gas contracted by China will reach 60 billion cu m.16
Not only Turkmen, but also Uzbek and Kazakh gas may be exported via the gas pipeline.
Prospects for Exporting Central Asian Gas to China
Chinese companies are participating in several prospective gas projects in Uzbekistan. In June 2006, the Chinese National Oil and Gas Exploration and Development Cooperation (CNODC) entered an agreement with Uzbekneftegaz on carrying out exploration and survey work at five investment blocks in the Ust-Yurt district, the Bukhara and Khivin regions, as well as in the Ferghana Valley. Over five years, CNODC will invest $208 million in the project and if hydrocarbons are discovered, the Chinese and Uzbek companies will establish a joint venture on a parity basis for exploiting the fields.17 In August 2006, the CNPC, within the international consortium which also includes Uzbekistan's Uzbekneftegaz, Russia's LUKoil, Malaysia's Petronas, and South Korea's National Petroleum Corporation, signed a production sharing agreement for carrying out exploration and survey work in the Uzbek sector of the Aral Sea. According to some estimates, the potential reserves in the contract zone may amount to 1 trillion cu m.18
In June 2010, the CNPC agreed to buy up to 10 billion cu m of gas a year in Uzbekistan.19 In April 2011, Uzbekistan signed an agreement with the PRC on building the third branch of the main Turkmenistan-China gas pipeline. The gas pipeline with a throughput capacity of up to 25 billion cu m a year will be put into operation by 2014. The China Development Bank and the CNPC will finance the project costing $2.2 billion.20
Foreign investor companies are relating the prospects for their gas projects in Uzbekistan to the Chinese market. LUKoil is planning to raise the production of natural gas at the Uzbek fields in the Kandym-Khauzak-Shady-Kungrad zone, the reserves of which are estimated at 100 billion cu m, to 18 billion cu m by 2015.21 In the future, gas exports to China will also be carried out by Malaysia's Petronas, which has several small gas projects in Uzbekistan in its portfolio.22
Kazakh gas will also be pumped into the Central Asia-China export gas pipeline. In February 2011, Kazakhstan and the PRC signed an agreement on joint development of the Urikhtau gas condensate field, the potential reserves of free gas of which are estimated at 40 billion cu m.23 The KazMunaiGaz and CNPC joint venture will develop the field on a parity basis. Gas will be delivered to the southern regions of Kazakhstan, which are currently supplied with Uzbek gas, for which the CNPC will launch the Beineu-Bozoi-Shymkent gas pipeline in 2015.24 In the future, Kazakh gas will be exported to China.
16 See: "China Firms Up More Natural Gas Supplies from Turkmenistan," International Oil Daily, 4 March, 2011.
17 See: "Kitaiskaia CNODC uchredila v Uzbekistane docherniuiu kompaniiu," available at [http://business.uzreport. com/ main.cgi?lan=r&pg=130], 26 December, 2006.
18 See: "Gaz so dna Aralskogo moria," available at [http://neftegaz.ru/lenta/show/58245/], 19 September, 2005.
19 See: "Uzbeks Eye Reserve Boost," International Oil Daily, 18 May, 2011.
20 See: "Uzbekistan, China Ink Pipe Deal," International Oil Daily, 26 April, 2011.
21 See: "Lukoil Outlines Ambitious Uzbekistan Plans," International Oil Daily, 20 May, 2011.
22 See: "Petronas to Build Uzbek Plant," International Oil Daily, 25 May, 2011.
23 See: E. Butyrina, "KazMunaiGaz and CNPC budut sovmestno razrabatyvat mestorozhdenie Urikhtau," Panorama (Almaty), No. 11, 25 March, 2011.
24 See: "China Eyes Kazakh Gas Field," International Gas Report, Platts, Issue 668, 28 February, 2011.
Keeping in mind the information available in mid-2011, we believe that by 2020 Central Asian gas export to the PRC will amount to 40-50 billion cu m, whereby Turkmenistan will account for most of it (see Table 18). By 2030, export could rise to 55-75 billion cu m, whereby Turkmen gas will retain its dominating position.
Table 18
Forecast of Central Asian Gas Export to the PRC until 2030, billion cu m
2010 Actual 2020 Forecast 2030 Forecast
Turkmenistan 4 30-40 40-60
Kazakhstan — 3 5
Uzbekistan — 5 10
Total 4 38-48 55-75
S o u r c e: Authors' estimates.
European Vector of Gas Export from the Caspian Countries
Azerbaijan in the European Gas Market
At the end of 2011, Azerbaijan proved to be the only new post-Soviet gas exporter able to carry out deliveries to the European market, albeit in modest amounts and only via Turkey.
Development of the Shah Deniz field made it possible for Azerbaijan to become a gas exporter. The participants in the consortium founded in June 1996 are: British Petroleum (project operator— 25.5%), Statoil (25.5%), the State Oil Company of the Azerbaijan Republic (SOCAR) (10%), LUKoil (10%), Iran's NICO (10%), France's TotalFinaElf (10%), and Turkey's TPAO (9%). The field's reserves were initially estimated at 625 billion cu m of gas and 100 million tonnes of condensate, but later Azerbaijan stated that the proven reserves of Shah Deniz reach 1.2 trillion cu m of gas and 240 million tonnes of condensate.25 Export from Shah Deniz is carried out along the Baku (Azer-baijan)-Tbilisi (Georgia)-Erzurum (Turkey) gas pipeline 1,050 km in length. The throughput capacity of the gas pipeline is only 8 billion cu m a year.
In March 2001, Azerbaijan and Turkey signed an intergovernmental agreement, according to which Turkey pledges to buy almost 90 billion cu m of gas over a span of 15 years. The international consortium has entered initial contracts on gas purchase: Turkey—6.3 billion cu m of gas a year; Azerbaijan—1.5; and Georgia—0.8 billion cu m. Later Azerbaijan increased its contracted amounts of gas by 3 billion cu m. The intergovernmental contract set forth the price of exported Azeri gas: $63 per 1,000 cu m for Georgia and $120 for Turkey.26
Azerbaijan is still a modest gas exporter. In 2010, its total gas exports amounted to around 7 billion cu m, 4.9 billion cu m of which were delivered via the Baku-Tbilisi-Erzurum gas pipeline (see Table 19).
25 See: A. Grivach, "Udvoenie 'Shakh-Deniza'," Vremia novostei, 28 September, 2007.
26 See: T. Tagiev, "Eksportnye dilemmy Azerbaidzhana," Neftegazovaia vertikal, No. 3, 2009.
Table 19
Azerbaijan: Production and Export of Natural Gas, billion cu m
2007 2008 2009 2010
Production 23.6 26.2
inc. commercial gas 16.3 16.7
Total export, billion cu m 1.8 5.3 7.7 7.0
inc. the Baku-Tbilisi-Erzurum gas pipeline 4.7 5.2 4.9
S o u r c e: Business periodicals of Azerbaijan.
There are serious contradictions between Azerbaijan and Turkey regarding the price of exported gas. Azerbaijan has repeatedly made and continues to make attempts to re-examine the price terms of buy-sell contracts that are disadvantageous to it, but to this day these attempts have proven fruitless since Turkey and Georgia do not agree to revise the contracts.27
Western transnational corporations in cooperation with the government are implementing a strategy to turn Baku into an oil and gas transit hub for Central Asian hydrocarbons.
Prospects for Gas Export from Turkmenistan to Europe
In the longer run, if European investors join the act, increasing amounts of Turkmen gas might also begin arriving in the European markets. Europe has long been regarding Turkmenistan as one of the main suppliers of natural gas for the pan-European Nabucco gas pipeline being planned. But these plans have essentially not been put into practice. The projects have been blocked until very recently from the European side by the absence of real gas purchasers willing to also assume significant investment and political risks. Turkmenistan, on the other hand, well-seasoned in the gas conflicts and wars of the 1990s, is strictly abiding by the simple principle that Turkmen gas is sold on the country's border, while all risks associated with its delivery to the end consumer are born by the external participants concerned. This principle essentially works in gas relations between Turkmenistan and Russia. Cooperation in the gas sector with China is developing on the basis of the same principle.
In the spring of2008, Turkmenistan stated that, beginning in 2009, it was reserving 10 billion cu m of gas a year for export to the European markets.28 This is hindered by the position of the other Caspian countries, which for environmental considerations are against building the Turkmenistan-Azerbaijan gas pipeline along the bottom of the Caspian Sea.
In December 2010, the American company INS CERA, under contract from the World Bank, European Commission, and European Investment Bank, prepared a project for establishing the Caspian Development Corporation (CDC). This is an institutional and commercial corporation especially
27 For more on the problems of Azeri gas import in the context of Turkey's interests, see: G.M. Winrow, Problems and Prospects for the "Fourth Corridor": The Position and Role of Turkey in Gas Transit to Europe, Oxford Institute for Energy Studies, Oxford, NG30, June 2009.
28 See: A. Grivach, "Po pervomu zvonku," Vremia novostei, 21 April, 2008.
THE CAUCASUS & GLOBALIZATION
created for carrying out purchases and ensuring the transportation of large amounts of natural gas from Turkmenistan to the European and possibly other markets.29 It is presumed that the CDC will sign a long-term 20-year contract with Turkmenistan on the purchase of gas and ensure its delivery to the European markets via the main gas pipeline through Azerbaijan. There are plans to begin purchases in 2014 and bring their volume up to 10 billion cu m by 2017, to 20 billion cu m by 2019, and to 30 billion cu m by 2020.30 In so doing, the CDC will buy Turkmen gas at the average price in the European markets excluding its transportation costs (the netback principle) and the corporation's investment outlays.31
Building a gas pipeline that joins Turkmenistan and Azerbaijan along the bottom of the Caspian Sea will be an important aspect of the CDC's activity. As was mentioned above, this construction would be stalled by several Caspian states, so at the beginning of 2011 the EU energy commission stated that the Turkmenistan-Azerbaijan gas pipeline project would be implemented under the auspices of the European Union. The Energy Commission did not exclude that the CDC would be the only investor and owner of the gas pipeline, which would free Turkmenistan and Azerbaijan of all political and investment risks.32
The purchase price for Turkmen gas is the weakest link in construction of the CDC. The positions of the sides on this matter are not entirely clear. Keeping in mind the high volatility of oil prices, to which the main bulk of natural gas imported by Europe is pegged, it is advantageous for Turkmenistan to enter long-term export contracts under the "take or pay" principle, in the same way as is done in Gazprom's export contracts. But for the European Commission a contract based on the "take or pay" principle would mean rejection of the strategy toward complete liberalization of the European gas sector.
Launching of the Turkmenistan-Uzbekistan-Kazakhstan-PRC gas pipeline confirmed the appeal of the Asian vector in export of Caspian hydrocarbon resources and raised the likelihood of implementing other large gas pipeline projects.
Turkmenistan-Afghanistan-Pakistan-India (TAPI)
Pipeline Project
The Turkmenistan-Afghanistan-Pakistan gas pipeline construction project has been under discussion since the beginning of the 1990s. Turkmenistan agrees to sell gas on the Turkmen-Afghan border at a price no lower than in China. In December 2010, India officially joined the project. The four countries signed a framework agreement, according to which Turkmenistan will export 90 million cu m of gas a day for 30 years. In the first two years, Afghanistan will receive 5 million cu m a day, then 14 million cu m, while the rest will go in equal proportions to India and Pakistan.33
There are plans to lay a gas pipeline of 1,650 km in length and costing $7.6 billion through Afghanistan and Pakistan to Fazilka on the Pakistani-Indian border, and its construction is scheduled for 2012-2015. Turkmenistan managed to reach an agreement that gas would be sold on the border with Afghanistan and that the international consortium would assume all the risks of further transportation. In so doing, Turkmenistan is willing to offer the three buyer countries different gas prices.34 Afghanistan will have a particular advantage in terms of transit tariff.
29 See: Caspian Development Corporation, Final Implementation Report, IHS CERA, December 2010.
30 See: Ibid., p. 67.
31 See: Ibid., p. 78.
32 See: "EU Accepts Trans-Caspian Responsibilities," Petroleum & Intelligence Weekly, Vol. L, No. 12, 28 March, 2011.
33 See: "India Signs Up for Turkmenistan Gas," International Gas Report, Platts, Issue 663-664, 20 December, 2010.
34 See: "Big Afghan Backing Boosts TAPI Prospects," World Gas Intelligence, Vol. XXI, No. 51, 22 December, 2010.
THE CAUCASUS & GLOBALIZATION
Ensuring security of the gas pipeline in Afghan territory is still subject to doubt. The government of Afghanistan stated its willingness to create a special service comprising at least 5-7,000 people for protecting the gas pipeline. Influential field commander Gulbuddin Hekmatyar, who heads the armed group of the Hizb-e-Islami party operating in the province of Herat on the border with Pakistan, expressed support of the gas pipeline in a special address. The position regarding the gas pipeline in the provinces of Helmand and Kandahar, which are unofficially controlled by the Taliban, is still in doubt.35 The project is of high priority for the U.S., which is looking for resources for stabilizing the situation and promoting the economic development of Afghanistan. By 2014, the official U.S. mission in Afghanistan should be complete, but projects such as TAPI are giving grounds for continuing the presence of NATO and U.S. forces in the country. Moreover, the U.S. is pursuing a strategy of gentle encapsulation of Iran by means of economic sanctions and so is blocking advance of the Iran-India gas pipeline project as an alternative to TAPI.
If TAPI were implemented, it would essentially help to strengthen economic ties between Pakistan and India and to develop a dialog on other issues of bilateral relations between these countries. But it is possible that by participating in TAPI India is solving the tactical task of putting indirect pressure on Iran in order to prompt the latter to place its nuclear missile program under international control. India supports the U.S.'s tough position on Iran, largely because the U.S. softened its position on India's nuclear status, which opened up the international uranium market for it. However, India has not refused to participate in the Iran-Pakistan-India gas pipeline construction project, which will bypass Afghan territory.36
Russia also indirectly stated its support of the TAPI project when it talked about the possible participation of Gazprom in the project.37 The arrival of Turkmen gas in Gwadar (Pakistan) with parallel construction at the port of a natural gas liquefying plant essentially does not contradict China's interests.
The Asian Development Bank is carrying out economic coordination of TAPI. Diversification of export markets under conditions of surplus gas supply in the European market and difficulties with implementing export contracts in Russia is very attractive for Turkmenistan, particularly since the matter does not concern preference of the Asian vector over the European. Turkmenistan's natural gas reserves are so high that large projects can be implemented in both vectors.
There were initially plans to deliver the gas of the Dauletabad field via TAPI. In December 2010, Turkmenistan signed agreements with the CNPC, Petrofac International (UAE), and LG (South Korea) on the development of the giant Iuzhny Yolotan gas field with reserves from 4 to 21 trillion cu m,38 which could become a raw material base for the gas pipeline.
Conclusion
The analysis conducted makes it possible to maintain that in the next two decades, launching the energy resources of post-Soviet Central Asia and Azerbaijan into global economic circulation will be carried out at accelerated rates:
—first, the countries of the region, mainly Kazakhstan, Turkmenistan, and Azerbaijan, are richly endowed in reserves of oil, natural gas, coal, and natural uranium;
35 See: "Big Afghan Backing Boosts TAPI Prospects."
36 See: M.C. Vaijayanthi, "India Asserts Importance of TAPI," International Gas Report, Platts, Issue 660, 8 November, 2010.
37 See: J. Roberts, "Turkmenistan Favors EU over Russia," International Gas Report, Platts, Issue 660, 8 November, 2010.
38 See: "CNPC, LG Win $9.7 Billion of Turkmen Gas Contracts," available at [http://www.bloomberg.com/apps/ news?pid= newsarchive&sid=a41E4ecIpaTY], 30 December, 2009.
—second, the Caspian is the largest and growing producer of oil and gas outside the OPEC zone, which raises its significance in ensuring global energy security. Europe and the PRC view deliveries of hydrocarbon resources from Kazakhstan, Azerbaijan, and Turkmenistan as an important element in diversifying the import of energy sources;
—third, the energy resources of the Caspian countries are already largely de facto controlled by American, European, and Chinese corporations.
It stands to reason that almost all the key players acting in the Central Asian and Caspian energy sector are interested in drawing local resources into global circulation as quickly as possible.
