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A Frosty New Year in the Caspian Region

The beginning of the year 2001 has seen a re-inauguration of economic and political warfare over the production, distribution and consumption of natural gas in the greater Caspian region. On the first day of the year, Turkmenistan stopped exporting gas to Russia because of a failure to agree with the energy-transport company Itera on prices for the year to come. On the very same day, for the second time in a month, Russia cut off gas supplies to Georgia, in abrogation of existing contracts.

1. Turkmenistan and Russia at It Again

The shut-off of Turkmenistan's gas occurs in the context of the interminable negotiations with Russia that have followed upon the agreement in principle, struck between Presidents Niyazov and Putin last spring, to increase dramatically the volume of natural gas imported by Russia from Turkmenistan. That agreement called for the export of 10 billion cubic meters (bcm) to Russia during the year 2000, a target that was met and probably overfulfilled. (Turkmenistan's gas-export statistics are not the most transparent and sometimes seem to report planned targets as attained, regardless of actual deliveries.) This agreement called for that quantity to increase by 10 bcm every year until reaching the level of 50 bcm in the year 2004, a level to be sustained for the remainder of the decade.

This agreement was a chess-move by Niyazov in his then-failing negotiations with Western firms over the Trans-Caspian Gas Pipeline (TCGP), which would have joined up with gas from Azerbaijan's Shah-Deniz field, crossing Georgia into Turkey. As I explained in a series of columns last year, Niyazov imposed financial preconditions that Bechtel and GE Capital (who then composed the PSG consortium and have since been joined by Royal Dutch Shell) could not accept and also refused to discuss seriously with President Aliev of Azerbaijan the allocation of the TCGP's throughput volume between the two countries. In these circumstances, Bechtel and GE Capital did not seek to renew their mandate for negotiation and close to their consortium's office in Ashgabat leading Royal Dutch Shell, which has long-term interests throughout Turkmenistan, to represent them in any reprise of negotiations with the government of the country.

Later last year, as negotiations with the Russian side continued to be fruitless, Niyazov announced that he would renege on this agreement in principle with Russia, observing it only until 2002 or 2003 and requiring that volumes for any subsequent years be discussed again. This reversal occurred in autumn last year, at about the time Niyazov was having second thoughts concerning his implacability in the TCGP negotiations several months before. He began approaching Turkey (the ultimate consumer of TCGP gas) to seek to discuss the matter again. Turkey's new President Sezer played the mediator between Niyazov and Azerbaijan's President Aliev, and later in the year 2000 it was very quietly announced that Azerbaijan and Turkmenistan had reached agreement on the allocation of throughput volumes in the TCGP pipeline after it came on shore in Azerbaijan before passing through Georgia into Turkey. By then, however, the engineering studies for constructing a pipeline from Azerbaijan alone, to carry gas from its offshore Shah-Deniz deposit, were under way. It became clear that the TCGP could not come online before 2005 that the earliest, and probably 2006 at the most reasonable.

In that same series of columns last year, I described the foreign-exchange crisis that still confronts Niyazov's government. On its face, the TCGP provides a long-term solution to that crisis. Russia pays for gas from Turkmenistan with only 40 percent of the balance in cash; payment for the remainder is made in goods, i.e., by barter. However, Niyazov could probably sign a TCGP agreement without losing the Russian market. That is because natural gas demand in Russia has recently increased and will likely continue to increase over the next few years, while domestic production will remain stable or even decline slightly. At the same time, Russia is negotiating with the European Union for increase natural-gas exports to Europe. Turkmenistan risks becoming a captive of Russian energy policy, because over the last ten years only one pipeline has been constructed offering an alternative export route: a low-volume pipeline across the border with Iran.

Although Russia needs this gas, Itera has not been willing to meet Niyazov's price demands. That is because if push comes to shove, it is probably Europe and not Russia that will feel the pinch, as Russia will keep the gas for domestic use if it is absolutely needed. Niyazov has decreased his price demand from $42 per thousand cubic meters to $40, but Itera began by insisting on its price for earlier deliveries of $36, which offer it has not raised above $38. And there things stand for now.

2. The Georgian Gas Crisis

Even before the New Year, during the first week of December, the customs service in Russia had ordered suspension of gas deliveries to the Gardabani power plant in Georgia, which supplies the capital Tblisi and is owned by the U.S. company AES. To get the gas flowing again, AES had to agree to pay a surcharge of 10 per cent over its delivery contract with the Gazprom subsidiary Inneftgazstroi. The Gardabani generating units were the ones again hit by Russian gas cut-offs on January 1.

Inneftegazstroi is reported to have said it halted deliveries following a "request" from the Economic Ministry of the Russian government, which said that if Inneftgazstroi did not halt deliveries, then the company would no longer receive gas supplies at all. In order to get deliveries under way again, Georgian officials had to agree to receive gas from Itera and pay an even higher price than the Inneftgazstroi contractual price plus the 10 per cent December surcharge. Only after President Shevardnadze appealed in writing to Putin and Prime Minister Kasyanov did supplies resume.

One thing that is going on here is a fight between Itera and Inneftegazstroi even though both have close relations with Gazprom. Itera is also the company involved in negotiations with Turkmenistan, so it is fairly certain that Itera is seeking to keep its effective monopoly on regional gas pipelines. (It already runs most gas distribution in Armenia, Kazakhstan and Ukraine.) Also it is likely that the Russian company UES, now headed by Anatolyi Chubais, is seeking to eliminate AES as a competitor in the Georgian electricity market.

All that notwithstanding, there is evidence of collusion among Itera, Gazprom, UES, and the Russian government. On January 10 the Financial Times cited a letter from Chubais to deputy prime minister Khristenko. In this letter, Chubais criticized AES's participation in the Georgian market and, according to the Financial Times, affirmed the existence of an understanding between UES and Itera. Key here is that assertion by Chubais that UES's attempt to grab the whole of the Georgian electricity market was foiled when Inneftegazstroi decided to supply AES after Itera cut off supplies "based on the advice of [Russia's National] Security Council."

This is extremely provocative in the present situation. Tensions are already high from Moscow's continuing pressure on Tbilisi to allow Russian troops to make incursions across their common border to the region of the Pankisi Gorge on the Georgian side, which is ethnic Chechen and where Russia alleges Chechen fighters have taken refuge. Yet in the present situation, Georgia's President Eduard Shevardnadze cannot allow the appearance of his country's sovereignty being violated by giving some permission to Russian troops.

More than that, Russia's visa regime newly imposed on Georgia will hurt remittances from ethnic Georgians working in Russia, who are estimated to provide between one-eighth and one-fourth of the national revenue. Further still, the new visa regime specifically exempts residents of the secessionist Abkhazia and Tskhinvali (South Ossetia) regions. It is reported that among the conditions that Russia sought to impose on Georgia, for not imposing the new visa regime, was that Tbilisi renounce its plans to participate in the Baku-Tbilisi-Ceyhan (BTC) main export pipeline for Azerbaijani petroleum from the Caspian offshore to Turkey's Mediterranean coast. But none of the pipeline projects circumventing Russia–neither BTC nor the Shah-Deniz gas pipeline nor the TCGP–can happen without Georgia's participation.

3. Conclusion

The South Caucasus is the only part of post-Soviet space where the contours of the post-Cold War system are not yet clear. Central Asia, another crucible of energy-pipeline and ethnic ferment, is locked into a medium-term future of uncertainty but it is at least certain who the major outside players are (Russia, China, Pakistan, Iran, Afghanistan, and perhaps still the U.S. if the new Bush administration correctly perceives the region's strategic connection with the Caucasus). The Baltics, despite their geographic location, are accurately said to be becoming part of Western Europe, or at least Northern Europe (which is culturally and half-strategically West European).

Belarus, Ukraine and Moldova are confirmed in their status as orphans of European security, occupying a netherworld between "Deutschland" and "Russland." The plight of Ukraine is partly its own fault, because of insufficient reforms, but also it vacillates, almost necessarily, between pro-Western and pro-Russian cycles in foreign policy. As I pointed up in columns late last year, it too is caught up in the pipeline routing controversies. But the status of these countries in a sort of security limbo is at least established in a relatively stable way.

The South Caucasus is the exception. Even who the outside players are, is not yet well decided. Clearly these include Russia and Turkey. Iran has sought with less than full success to increase its profile and signficance, not only through its embroilment with Azerbaijan due to the ethnic Azeri population in the northwest of the country, but also through the project of a gas pipeline to Armenia (which it has declared it would then seek to extend through Georgia, under the Black Sea and through Ukraine to European markets). The United States is clearly in the picture. But Europe is strangely absent.

Indeed, Europe has done nothing to show itself unwilling to sacrifice Georgia to a Russian sphere of domination. Europe seems willing to let Russia's effective monopoly over energy distribution remain, so long as Europe itself is well supplied. Thus Europe has not only opposed the BTC but also failed to support the TCGP. Europe will take Turkmenistan's gas via Russia, sold by Russia for 100 per cent hard currency, if that is what it takes for Europe to get natural gas. Or it will take Iran's gas via Georgia or via Turkey; but without appearing to care what this means for the countries in the region or the people living there.

Contrasting with the tension in Georgian-Russian relations is the recent, most collegial, almost chummy visit by Putin to Azerbaijan's President Heydar Aliev in Baku. This visit has been the subject of widely varying interpretations and evaluations, and commentators have not even agreed on the significance of the two sides' agreement concerning their bilateral division of Caspian undersea resources. I will address the importance of this visit for Caspian energy development in a subsequent column.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2001/01/a_frosty_new_year_in_the_caspi.html
First published in FSU Oil & Gas Monitor, No. 116 (24 January 2001): 4–5.

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This page contains a single entry from the blog posted on January 24, 2001 8:34 PM.

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