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Competitive proposal to allow diversification gas transportation in Central Asia is Turkmenistan-Kazakhstan-China Pipeline. See map 2.7. In 2007, Kazakhstan and China reached an agreement on the construction and operation of the Kazakhstan-China gas pipeline network. The first pipeline (running through Southern Kazakhstan) will be the Kazakh section of the Turkmenistan–China gas pipeline. Turkmenistan will be the major supplier for the 7000 km pipeline. Kazakhstan, which hosts 1300 km of the pipeline, plans to extend its part in the future, connecting it to its own gas fields near the Caspian. Construction works of Kazakhstan section started on July 2008.
Uzbekistan also started construction of its part this month while Turkmenistan launched its segment in 2007 78
The gas pipeline from Turkmenistan to China, which runs via Uzbekistan and Kazakhstan, was officially launched on 2009. Cost of construction – US$6.7 billion79 Ownership – each section is owned by a company in which CNPC and the local partner hold 50% of shares.
Sources: HydrocarbonsTechnology.com
Map 2.7 Turkmenistan-Kazakhstan-China pipeline
78 Upstream the international oil and gas newspaper http://www.upstreamonline.com/live/article158831.ece, access July 15 2011.
79 Centre for Eastern Studies ―The Turkmenistan-China gas pipeline considerably strengthens China's position in Central Asia‖ http://www.osw.waw.pl/en/publikacje/eastweek/2009-12-16/turkmenistan-china-gas-pipeline-considerably-strengthens-chinas-posit, access July 15 2011.
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The launch of the pipeline is of great economic significance for the region because it offers the Central Asian states access to an alternative gas buyer to Russia, and because they can use this new position in negotiations with Gazprom to maximize their gas export revenues. The main consequence of this process is that Russia has lost some influence in the region while China has strengthened its position. The new gas pipeline is the result of the Central Asian states' policy of gaining more independence, and China's economic expansion in the region aimed at securing supplies of energy resources and building up its political influence, among other goals.
The new gas pipeline is around 2000 km long and will connect to a 5000 km-long internal Chinese gas pipeline (now under construction) at the Chinese-Kazakh border. Its target capacity, which it is planned to reach in 2012, is 40 bcm. This means that the pipeline will enable the Central Asian states to transmit a substantial portion of their gas exports to China (Central Asian gas exports totaled around 65 bcm in 2008).
The pipeline's capacity may be increased to above 40 bcm. No information on the price of gas is available. The price discussed in January 2008 was around US$195 per 1000 cubic meters80.
Another planned project is Trans-Caspian Pipeline. See map 2.8. Proposed Trans-Caspian Pipeline would bypass both Russia and Iran to carry Turkmen gas across the Caspian Sea to Azerbaijan. This proposed pipeline could connect to the South Caucasus pipeline flowing gas to Turkey and then to the planned Nabucco pipeline to southeastern Europe (From Turkey to Austria). This project has several serious problems. None of which so far been resolved. European consortium led by Austrian OMV doesn‘t have enough financial recourse for starting build the pipeline.
The implementation is always postponed to future. Next serious problem is the sources of supply.
80 Centre for Eastern Studies ―The Turkmenistan-China gas pipeline considerably strengthens China's position in Central Asia― http://www.osw.waw.pl/en/publikacje/eastweek/2009-12-16/turkmenistan-china-gas-pipeline-considerably-strengthens-chinas-posit, access July 15 2011.
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Sources: STRATFOR
Map 2.8 Possible Nabucco and Trans-Caspian Pipelin
Possible supplier – Turkmenistan has under big Russian pressure to reject European offer. Kazakhstan‘s attitude to the trans-Caspian project will depend on U.S.
and European political support to Kazakhstan and Turkmenistan in the face of Russian pressure as well as on clearly attractive Western commercial offers to Kazakhstan and Turkmenistan. Until now that plans have not been put into operation.
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Chapter 3 CAS Dependency on Old Russian Pipeline
Russia‘s economy is heavily dependent on oil and natural gas exports. Russia exports huge amount of natural gas. See graph 3.1 According to IMF and World Bank estimates, the oil and gas sector generated more than 60 percent of Russia‘s export revenues (64% in 2007)81. Exports of natural gas to Europe gives the most important benefits in Russia, because domestic prices are very low, do not even cover the cost of extraction. Exports 26 % raw material to the EU brings Russia (Gazprom) 60 % of revenues82. Russia's proven reserves of natural gas are higher than those of any other state, being 27 % of the global total, while Central Asia is a further 5%83.
Graph 3.1.Gas Consumption and Production in Russia (bcm)
Kremlin policy makers still show a tendency towards the state‘s influence in the energy sector84. Taxes on oil and gas exports and extraction are high. Russia‘s state-influenced oil and gas companies are obtaining controlling stakes in previously
81 Energy Information Administration http://www.eia.doe.gov/cabs/Russia/Background.html, access July 15 2011.
82 Polityka, Krotki kurs gazownictwa ,http://www.polityka.pl/krotki-kurs-gazownictwa/Lead33,1091,279283,18/ access July 15 2011.
83Michael Wesley ―Energy security in Asia,‖ New York : Routledge, 2007 p.134.
84GlobalSecurity.org , http://www.globalsecurity.org/military/world/russia/energy.htm, access July 15 2011.
Sources Statistical Review of World Energy 2010, British Petroleum
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foreign-led projects. State-owned export facilities have grown fast, while private projects have progressed more slowly or have been obstructed by state-owned companies or by few government agencies. Private sector is being terrorized and forced to cooperate with Kremlin.85 Foreign investors cannot enjoy clear rules and free market. Their activities are controlled by the Russian government. 86
The collapse of the former Soviet Union triggered unprecedented changes that galvanized and refashioned Central Asia. The countries that evolved from the dissolution of the Soviet Union, as well as countries that had to reform entirely because of their dependence of the Soviet Union (Moscow). The Russian strategic objectives in Central Asia have few similarities with those from the Soviet era.
Russian aspirations for national prestige, present benefits and considerations about the future strategic prospects require the maintenance of Russia‘s more or less controlling influence over the southern belt of the Commonwealth of Independence States.
From 1991 Russia has been strengthening its control over the gas and oil pipelines. The Kremlin has been said to use its control of the pipelines "as a lever to control the regional states‖87. Economics and politics moved to main point of the agenda in terms of trade and transit of post-Soviet gas. The former Soviets states in Central Asia were compelled to create formal commercial relationships with Russia which did not exist during Soviet era. For the Russian Federation, two distinct markets have become important. Southern, cheaper sellers from the ―near abroad‖ came from CIS countries or former republics. The other market was dominated by the attractive buyers from Europe.
Russia's continuous effort to subordinate Central Asia to its policies is the most strongly perceived aspect of this rivalry. However, Central Asian states are not helpless against foreign machinations. On the contrary, they are enhancing their ability
85Khodorkovsky & Lebedev Communications Center, http://www.khodorkovskycenter.com/ , access July 15 2011.
86 Robert Amsterdam, Perspectives on Global Politics and Business
http://www.robertamsterdam.com/2008/03/bp_pulls_employees_from_russia.htm, access July 15 2011.
87 Elizabeth Van Wie Davis, Azizian Rouben, Islam, oil, and geopolitics: Central Asia after September 11, Lanham, Md. : Rowman & Littlefield Publishers, Inc., USA 2007, p.207.
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to deal freely with Russia's rivals. The creation of commercial relationships between CAS and Russia has been a painful process. Transit of natural gas is a key issue because all pipelines taking Central Asian gas to Europe pass through Russia.
Hence, Gazprom's complete control of those supplies. In the past, all Russian export to Europe was transited through Ukraine, and around 15 %88 also passed through Moldova. With the opening of the Yamal pipeline Belarus came increasingly important country. Central Asia gas deposit could restrict Russian ability to compete in world markets with rapidly increased rates of demand for fossil fuels. According to Steven Bank, ―Given the centrality of oil and gas to Russia‘s economy that would be a catastrophe‖89 Central Asia‘s natural gas situation is specific because of the location and size of natural gas deposits, the current need for pipelines, and the much larger ownership role of Russia.90 See map 3.1
Sources: Gazprom
Map 3.1 Russian gas pipelines in Central Asia
88 Jonathan P. Stern, ―The future Russian gas and Gazprom‖, U.K. 2005, p.66
89 Stephen Bank, ‖Russo-Chinese energy relations: politics in command‖ U.K. 2006, p. 23
90Dina Spechler and Spechler Martin, Central Asia. Trade, energy, and security in the Central Asian arena, Seattle: National Bureau of Asia Research, 2006, p. 218.
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economically more advantageous than in the north of Russia where the overwhelming majority of Russian oil and gas fields are concentrated. Russia is striving to drag as large a part as possible of the hydrocarbon resources of Central Asia into its own fuel-energy balances in order to support internal consumption, without simultaneously lowering the volumes of its own hydrocarbon exports to external markets, first and foremost to Europe.913.1 Turkmenistan
During the Soviet era Turkmenistan provided significant quantities of gas to Russia and other republics. After the break-up of Soviet Union, Turkmenistan demanded payment for its gas from all former republics, including Russia, in hard currency at world prices. A series of disputes ensued over payment and non-delivery of gas between Turkmenistan and the former Soviet republics.92
Turkmenistan is Central Asia‘s biggest player with proven reserves of 3 trillion cubic meters, and production of 54.6 billion cubic meters (bcm), of which 38.6 bcm were exported in 2004, mostly to Russia through Soviet-era pipelines crossing Kazakhstan93. In Turkmenistan, Russia cut off Turkmen gas exports to Europe and tried to cut itself in on any future pipeline construction. Russia also apparently bought Turkmenistan's gas supply at low prices and resold it to Turkey at a 300 percent markup94.
91 Dr Vladimir Paramonov and Dr Aleksey Strokov The Defense Academy is the United Kingdom
"Structural interdependence of Russia & Central Asia in the oil and gas sectors",2008, p.
6 ,http://www.da.mod.uk/colleges/arag/document-listings/ca/07(16)VPEnglish.pdf access July 15 2010
92 Ibid.
93Dina Spechler and Spechler Martin, Central Asia. Trade, energy, and security in the Central Asian arena, Seattle: National Bureau of Asia Research, 2006, p 218.
94 Stephen Blank, The Strategic Studies Institute is the U.S. Army "Energy, Economics, and Security in Central Asia: Russia and Its Rivals", USA 1995 p.19 http://www.strategicstudiesinstitute.army.mil/pdffiles/pub119.pdf, access July 15 2011.
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of Companies are working in Turkmenistan. Project and investment activity of Russia and Russian companies in the oil and gas sectors of Turkmenistan is still extremely low. It encompasses only the gas transportation area and the volume of Russian investments at the end of 2007 was just in the region of 25 million U. S. dollars96. These investments were directed towards the supply from Russia of technical equipment for the gas sector of Turkmenistan, the renovation and modernization of gas pipelines, compression and distribution stations, etc. 97On the other hand, considering the significant hydrocarbon and, above all, the gas reserves of Turkmenistan, one can with great certainty assume that in the near future the investment activity of Russian companies will increase dramatically. Up to and including 2012, Gazprom alone plans to invest not less than 2 billion dollars in the gas sector of Turkmenistan. Furthermore, it is most likely that other Russian or joint companies can be expected to appear in Turkmenistan, in the first instance Lukoil and TNK–BP.
Turkmenistan‘s ability to exploit and export its natural gas is constrained by its geography and export options, primarily the routes and the capacity of those systems.
There exist two export routes for Turkmen gas: northwards to Russia and to Iran to the south. Of these two routes, the overwhelming majority of export infrastructure is focused towards Russia, a legacy of the Soviet Union‘s integrated pipeline network.
The export of natural gas generates up to 8598 percent of Turkmenistan‘s annual revenue. Turkmen gas is also essential for Russia. Exports from Turkmenistan provide energy to major portions of southern Russia, thus allowing Moscow to meet its income generating export demands in Eastern Europe. In addition, as the yields decrease in Russia‘s main gas fields and production sags due to a combination of aging
95 Jonathan P. Stern, ―The future Russian gas and Gazprom‖, U.K. 2005, p.72
96 Ibid.
97 Dr Vladimir Paramonov and Dr Aleksey Strokov The Defense Academy is the United Kingdom
"Structural interdependence of Russia & Central Asia in the oil and gas sectors",2008, p.
6 ,http://www.da.mod.uk/colleges/arag/document-listings/ca/07(16)VPEnglish.pdf access July 2010
98 Central Asia-Caucasus Institute Analyst, http://www.cacianalyst.org/?q=node/4378/print, access July 2011
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infrastructure and a lack of upstream investment, Turkmen gas allows Gazprom to meet mounting European energy demands.
Russia is the source of nearly half99 of Europe‘s total gas imports (varying by country), and according to the Economist - European demand is set to double in the next 30100 years. Gazprom‘s ability to meet those demands is a result of continued access to Turkmen gas. With gas the prime income earner, both the new Turkmen government and Russia are extremely dependent on the continued flow of gas exports.
For the Berdymukhammedov administration, access to export revenues will allow the patronage systems put in place by Niyazov to continue, thereby maintaining the status quo among the various competing interests at work in the country
In the immediate short term, we can expect there to be no changes in Turkmenistan‘s policy of gas exports. Rather, while the situation remains fluid in Ashgabat, and until presidential elections are held in early February, the interim Berdymukhammedov government will draw closer to Russia. This is simply the result of the fact that Moscow is best positioned to both influence and provide much needed stability to the new government. Moreover, Russia is the only viable export route for Turkmen gas, a fact well-known in both Moscow and Ashgabat.
One of Berdymukhammedov‘s first statements was that oil and gas exports would continue uninterrupted throughout Turkmenistan‘s transition, and thus far this appears to have occurred. Early indications suggest that the acting president and his backers in the security services of the ancient régime will likely win the February elections, thereby formalizing the transfer of power, and perpetuating the Niyazovist system. As a result, it is likely that a pro-Moscow gas export policy evolves in the short term, continuing to enrich the Turkmen nomenclature and advance Gazprom‘s profits and acquisitions.
99Heritage Foundation, http://www.heritage.org/research/reports/2007/11/europes-strategic-dependence-on-russian-energy , access July 15 2011.
100 Central Asia-Caucasus Institute Analyst, http://www.cacianalyst.org/?q=node/4378/print, access July 15 2011.
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Main priority for Russia is relationship with Turkmenistan is still continuing. In 2003 Russia obtained the option to buy all Turkmen gas for next 25 years. However prices were to be negotiated each year, which inevitably led to much hard bargaining.
―Moscow refused to give up when gas deliveries were stopped in the winter of 2004-2005, and showed considerable flexibility when seeking to secret Turkmenistan‘s support in the gas conflict with Ukraine in 2006‖ 101 . When new president Berdymukhammedov understood that Western proposals to cooperate are unreal, he decided to sign deal with Gazprom (this same agreement was signet also by Uzbekistan and Kazakhstan) in 2009 which granted an increase gas import from 50 to 90 bcm 102 and allowed to modernize The Khiva – Aleksandrov Gay pipeline and west and south of the country. Gas exports from Kazakhstan to Russia use the Central Asia-Center pipeline, which also carries gas from both Turkmenistan and Uzbekistan.
Russian gas trade with Kazakhstan, even during the Soviet period, never involved large volumes. However, the exchanges between the countries were logistically useful because of the location of Kazakh gas fields far from centers of population. For the same reason as in Turkmenistan case, the collapsed of the Union quickly saw the trade reduced to negligible levels. Kazakhstan is important to world energy markets because it has big oil and natural gas reserves. The existence of Soviet era pipeline system which links Russia and Kazakhstan has meant that ―Russia has had
101 Morten Anker, Baev Pavel, Brunstad Bjorn , Overland Indra and Torjesen Stin , The Caspian Sea Region Towards 2025, The Netherlands, Asmsterdam: EburonNederland, 2010, p.79.
102Ibid. p 77.
103 Central Intelligence Agency, The World Factbook https://www.cia.gov/library/publications/the-world-factbook/geos/kz.html (estimate of January 1, 2009), access July 15 2010.
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After years of foreign investment into the country's oil and natural gas sectors, the landlocked Central Asian state has recently begun to realize its enormous production potential. Main oil Gas Company in Kazakhstan is KazMunNaiGas105, which belongs to the state. Kazakhstan could become a major world energy producer and exporter over the next decade. Main destination for Kazakhstan gas is Russia and Ukraine. At the end of 2009 to importers of Kazakhstan gas has joined China.
Kazakhstan exports most of its gas volumes to Russia through KazRosGaz which at present has a de facto monopoly on gas exports from Kazakhstan.106 KazRosGaz is a joint venture between Gazprom (50%) and KaZmuNaiGaz (50%).
Due to pipeline configurations, Kazakhstan exports much of its own gas production to Russia. At the same time, several regions depend on imported gas. Most imported gas goes to the southern network, which remains almost completely independent from imports via Uzbekistan107.
Russian companies such as Lukoil, Gazprom and Rosneft are active in Kazakhstan at the present time. At the end of 2007, total Russian investments in the oil and gas sectors of Kazakhstan amounted to an estimated 3.4 to 4.1 billion dollars. By the end of 2012, Russia plans to invest an additional sum of between 6.7 and 7.5 billion dollars. It is suggested that this will be mainly invested in geological survey projects and the opening of promising oil and gas fields as well as in the development of the pipeline system.108
104 Archie Brown, Contemporary Russian politics, Oxford: Oxford University Press, 2001 p.448.
105 КазМунайГаз http://www.kmg.kz/page.php?page_id=1009&lang=2, access July 15 2010.
106 The Oxford Institute for Energy Studies, http://www.oxfordenergy.org/pdfs/NG25.pdf access July 15 2010.
107Terterov, Marat, Kazakhstan's Dynamic Economy: A Business and Investment Review, London : GMB Publishing Ltd, 2006, 2006 p. 24
108 Dr Vladimir Paramonov and Dr Aleksey Strokov The Defense Academy is the United Kingdom
"Structural interdependence of Russia & Central Asia in the oil and gas sectors", 2008,
http://www.da.mod.uk/colleges/arag/document-listings/ca/07(16)VPEnglish.pdf access July 15 2010.
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gas processing plant in southern Russia and build new pipelines to it, enabling at least 15 Bcm109 per year of gas, mostly from Karachaganak, to be processed, with 7 bcm pump back to Kazakhstan and the rest exported through the Gazprom system.Karachaganak‘s gas production is projected by its consortium to grow to 25 bcm by 2012. Gas consumption is rising but with the expected growth in production, Kazakhstan will be an important natural gas exporter by the end of the decade.
Karachaganak‘s gas production is projected by its consortium to grow to 25 bcm by 2012. Gas consumption is rising but with the expected growth in production, Kazakhstan will be an important natural gas exporter by the end of the decade.