Caspian pipeline seems to have defeated Nabucco

19:50 | 25/ 12/ 2007

MOSCOW. (Igor Tomberg for RIA Novosti) – The last few months of 2007
were good for Russia, which has been fighting this year to affirm its
leadership in the hydrocarbons market.

On December 20, Russia agreed with Kazakhstan and Turkmenistan to build
the Caspian gas pipeline across Russia. The agreement was signed
following the Kremlin talks between President Vladimir Putin and
Kazakhstan’s leader, Nursultan Nazarbayev.

During the Moscow visit by the Greek prime minister some time before
that, Russia and Greece signed an agreement to set up a company to
draft technical plans for the Burgas-Alexandroupolis oil pipeline.

The Caspian pipeline agreement provides for modernizing the old Central
Asia-Center pipeline, running from Begdash in Turkmenistan to Beineu in
Kazakhstan, with an annual projected capacity of 10 billion cubic
meters of gas in 2009-2010.

During the second stage in 2010-2017, the partners will prolong the
pipeline to Aleksandrov Gai on the Russian-Kazakh border, with a
capacity of 20 billion cubic meters, which will increase the total
capacity of the pipeline to 30 billion.

Russian Industry and Energy Minister Viktor Khristenko said that the
Caspian pipeline would be built by 2010, with each side making
investments independently of others.

"The basic provision is that each partner shall build the part of the
pipeline assigned to it. Turkmenistan will build 300 km (186 miles) of
the pipeline and Kazakhstan, 1,500 km (932 miles). Russia’s part will
be the shortest, only a few dozen kilometers, but it should include a
junction," Khristenko said.

The estimated cost of the project is about $1 billion. The agreement
will be effective until 2028, but will automatically be prolonged for
12 months unless one of the parties notifies the others of its decision
to withdraw.

Although the new pipeline has been planned to have a capacity of 30
billion cubic meters a year, it will transport only 20 billion a year.
Also, the agreement does not include guarantees of obligatory gas
supplies to the pipeline. Turkmenistan and Kazakhstan have pledged to
provide up to 10 billion cubic meters of gas each.

Experts say there are political and economic reasons for the decision.
Turkmenistan may want to diversify its gas transportation routes, or at
least maintain the ability to continue talks on the Western-backed
trans-Caspian pipeline bypassing Russia.

So far, Uzbekistan limited the transport of Turkmen gas to be able to
export more of its own gas through the Central Asia-Center pipeline.

This is probably why Turkmenistan’s President Gurbanguly
Berdymukhammedov said ahead of the December 20 signing ceremony that
his country would initiate a UN resolution to ensure the safety of
international energy routes. He also called the Uzbek leader, Islam
Karimov, to discuss the uninterrupted transit of hydrocarbons.

This can only be interpreted as Ashgabat’s signal to Moscow that the
progress of the Caspian pipeline project depends on guarantees that the
expanded Central Asia-Center pipeline will carry the additional volumes
of Turkmen, not Uzbek, gas. If Moscow makes the decision in favor of
Uzbekistan, the relevant UN resolution would encourage the construction
of the trans-Caspian pipeline.

Ashgabat knows that the expansion of the Central Asia-Center pipeline
is the most probable way to increase the export of Turkmen gas to
Russia. On the other hand, the Turkmen authorities also want to have a
westward pipeline that would not depend on Uzbekistan, which means that
it may eventually join the trans-Caspian project.

A more practical reason is that Turkmenistan and Kazakhstan cannot
produce enough gas for the new pipeline. The companies expected to
supply gas for it – Gazprom, KasMunaiGaz and TurkmenGaz – have not yet
signed additional agreements on adjusting their gas production to the
development of the Caspian pipeline.

"We expect the pipeline to be commissioned no later than the end of
2010," Khristenko said. In other words, this is one more project with
unrealistic deadlines.

The most likely suppliers of gas on the part of Turkmenistan are
Malaysian Petronas, British Burren Energy and Dragon Oil headquartered
in Dubai. Taken together, they can provide 5-6 billion cubic meters of
gas in 2010 for the Central Asia-Center pipeline, 8-9 billion in 2011,
and 2-3 billion cubic meters more than the pipeline’s capacity
beginning in 2012. This surplus gas is not a sufficient reason for
building a new Caspian pipeline, especially since the three companies
are expected to reduce production by 2017.

A new gas pipeline with a capacity of 30 billion cubic meters can be
built only if Turkmenistan and Kazakhstan develop new gas fields in the
Caspian region. Talks on the involvement of Russian companies, mainly
LUKoil and Gazprom, in gas exploration and production there are
underway, but it is still unrealistic to expect industrial gas
production there to start in 2010.

The joint development of the large Kurmangazy deposit in Kazakhstan
under a relevant agreement can begin only after 2010.

Moscow has strengthened its stance as a major gas supplier to Europe,
and therefore the Caspian project is interesting to it only as part of
a global strategy. It must ensure that gas from Central Asia passes
across Russia, and not through the alternative trans-Caspian pipeline
from Turkmenistan to Azerbaijan, which can be linked to the Nabucco
pipeline running through Turkey, Bulgaria, Romania, Hungary and
Austria.

Without that gas, Nabucco will be a stillborn child, as Andre Mernier,
Secretary General of the EU’s Energy Charter Secretariat, has said.

On the other hand, Russia has won this battle in the "gas pipeline war"
with Europe only by making concessions to Kazakhstan and Turkmenistan.
Turkmenistan has agreed to join the Caspian pipeline project only if
Russia raises the purchase price for Turkmen gas from $100 in 2007 to
$130 in the first half of 2008 and $150 in July-December.

Uzbekistan made public its increased price ambitions soon after Gazprom
signed the deal. However, it has been denied the price increase because
it is playing only a tiny part in the Caspian project so far.

Kazakhstan currently sells its gas at a higher price than Turkmenistan,
$165 per 1,000 cubic meters, but the purchase price and transit tariffs
for Kazakh gas might be increased.

It was said during the Kremlin meeting on December 20 that the tariff
for the transit of Turkmen and Uzbek gas across Kazakhstan should be
raised from $1.1 to $1.5-$1.85 per 1,000 cubic meters per 100 km (62
miles), and the purchase price for Kazakh gas should be increased to
$190 in 2008.

It is not clear whether the Kazakh delegation got what it wanted, but a
price increase is almost inevitable because Russia needs the Caspian
pipeline. Besides, it earns enough from Gazprom’s gas deliveries to
Europe and therefore can afford to pay more for the non-critical
amounts of Kazakh gas.

So far, Astana wants Moscow to pay more for oil transit. Kazakhstan has
agreed with Russia that it would supply oil for the
Burgas-Alexandroupolis pipeline. Nazarbayev also suggested that the
quota for the export of Kazakh oil through the Atyrau-Samara oil
pipeline should be increased from 10 million to 20 million metric tons
annually. Kazakhstan proposed expanding the capacity of the Caspian
Pipeline Consortium (CPC) to 67 million metric tons of oil, saying that
it would supply the required additional 17 million tons. The proposal
was accepted.

However, the signing of the agreement on the Caspian project and its
implementation do not mean that the "big Eurasian oil and gas war" is
over. A sharp rise in hydrocarbon prices is drawing the world’s
attention to the oil and gas reserves of the Central Asian states. The
regional countries will definitely use this chance to play on
contradictions among potential consumers.

Moscow has made the concession to its Central Asian partners also
because the Caspian pipeline project will strengthen economic
interaction between Russia and regional countries. At the same time,
the agreement to expand the capacity of the CPC was not a concession,
but a way to intertwine the interests of Russia and Kazakhstan.
Alternative fuel routes will again be used as a bargaining chip, but
they are becoming less of a threat to Russia’s transportation
interests.

Dr. Igor Tomberg, economist, senior research associate at the Energy
Research Center of the Russian Academy of Sciences’ Institute of World
Economy and International Relations.

The opinions expressed in this article are the author’s and do not
necessarily represent those of RIA Novosti.