The selection several weeks ago of Italy's ENI as operator of the Offshore Kazakhstan International Operating Company (OKIOC), which is exploring the vast Kashagan deposit offshore from Kazakhstan, came as a surprise to most observers. Eni was a dark horse in OKIOC and not one of the front-runners to become operator.
1. "I'm OKIOC, you're OKIOC!"
Not only the choice of Eni but also the suddenness of the announcement were surprising. Various theories have been advanced to explain these developments. In one view, Eni's nomination is just an interim choice, made under the pressure of Astana's insistence that OKIOC identify an operator. According to this view, a further shake-out is foreseeable as smaller stakeholders leave the consortium and sell out to the principal partners, and France's TotalFinaElf will in the end become operator after that process is over. Another theory holds that Eni was selected as operator by the other principal partners in order to pre-empt TotalFinaElf and to prevent Kashagan's oil from reaching market via Iran, a route that the French company is reputed to favour. However, the role of operator is very tightly circumscribed by the joint operating agreement.
The operator acts on behalf of all partners, so all decisions are still made by the votes of all parties, regardless of whichever company is operator. This theory also overlooks the fact that several of the remaining partners are likely to intervene, as they are permitted to do, to pre-empt TotalFinaElf's purchase of the BP-Amoco and Statoil stakes in OKIOC and to acquire pro-rata shares for themselves. (This theory also overlooks the fact that TotalFinaElf is considering joining the Baku-Tbilisi-Ceyhan, or BTC, pipeline group itself. Besides its stake in OKIOC, it also has a 35 % stake in the LenkorandEniz oil field in Azerbaijan's sector of the Caspian.)
According to yet another theory, because of Eni's experience with difficult underwater gas pipelines, Eni's selection reflects the high proportion of gas as opposed to oil from the Kashagan field and therefore militates against OKIOC oil going across the Caspian for loading into the BTC. Indeed, all sorts of the geopolitical constructions have been placed upon these events. For example, the US company ExxonMobil is reputed to have strong preference for a route out through Iran. The company's president met with Kazakhstan's President Nursultan Nazarbaev soon after the senior US diplomat Elizabeth Jones visited Astana and obtained Nazarbaev's declaration that Kazakhstan favours plans to turn the Baku-Ceyhan pipeline into the Aqtau-Baku-Ceyhan pipeline.
The bottom line is that Kashagan is a technically and environmentally complex development that will continue for the long term. If the Caspian Pipeline Consortium (CPC) line from Tengiz to Novorossiisk fills up with Kazakhstani oil —and if the Iran-Libyan Sanctions Act (ILSA), which prohibits US companies from major investments and pipeline deals with Iran, is renewed later this year —then at least part of the crude extracted from Kashagan may be forced into the BTC. The president of Chevron, Richard Matzke, has suggested there may be room for Kashagan crude in the CPC, but then again Chevron is planning to acquire at least 10% and perhaps 20% of the consortium that will be building the BTC.
2. OKIOC and the Central Asian gas balance
The conditions placed by the Kazakhstan government upon the OKIOC consortium and its newly-chosen operator Eni include the mandate that the gas must not be burned off but itself also be commercially developed. This mandate dovetails with an overall effort by Astana to prepare for the expansion of activities in the gas sector. Kazakhstani officials have said they expect local gas output to rise significantly in the near future. Nurgali Ashimov, the president of Kaztransgaz, estimated in early March that his country's production would more than quintuple from its current rate of 9 bn cm in 2000 to 50 bcm in 2005. Ashimov is currently investigating the possible use of the Russian pipeline system to sell this gas to Europe.
He is also seeking to upgrade Kazakhstan's gas pipeline network to accommodate the greater volumes that are projected to go from Turkmenistan to Russia. Clearly, Kaztransgaz would seek to utilize that extra throughput capacity itself once natural gas deposits in Kazakhstan came on line. However, Kazakhstan may encounter the same problems as have been experienced by Turkmenistan as a customer seeking to pipe natural gas through the Russian system -- mainly extremely hard bargaining by Russia because of the absence of other export routes. The significance here is that if Kazakhstan does indeed find major gas reserves at Kashagan (without regard to the huge proven reserves at the Karachaganak deposit), then the prospects for Turkmenistani gas exports looks still bleaker in the absence of the Trans-Caspian Gas Pipeline (TCGP). This project has been in limbo since the first half of last year.
Turkey, meanwhile, has declared anew its confidence that the TCGP will finally be given the go-ahead by Turkmenistan's President Saparmurad Niyazov and indicated its willingness to receive the gas. This declaration was made in the wake of Azerbaijani President Heidar Aliev's signature of an agreement with Turkish President Ahmet Necdet Sezer during his mid-March visit to Ankara, according to which Turkey will purchase 2 bn cm of natural gas per year beginning in 2004, with the figure rising to 6.6 bn cm in 2006. This timing is rather more distant than the Azerbaijanis had hoped, but the Shah-Deniz field (gas from which will be sent to Turkey) is a technically difficult field to develop. It is the expense involved in solving those difficulties that is probably responsible for the reported hard bargaining between the two sides over the price of the gas earlier this year.
Meanwhile, the director general of the Turkish pipeline concern Botas reports that imports of Iranian gas will begin in August of 2001. According to Botas, only 300 km of the pipeline from Iran remain to be constructed.
3. More Troubles for Iran's Caspian diplomacy
Iran, for its part, has continued to suffer delays in its efforts to become a significant transit country for Caspian basin oil. It was reported that the country has postponed its plans with Kazakhstan to engage in oil swaps, whereby Kazakhstan's oil would be refined and consumed in northern Iran and compensatory quantities would be exported from the Persian Gulf.
According to industry sources, the reason is the high level of sulphur compounds in the Kazakhstani crude. This has been a stumbling block for Iranian swap deals with Kazakhstan since they first were attempted in the mid-1990s. The difference is that this halt comes after Iran has invested a significant amount of money (nearly half a billion dollars, according to Iran's Foreign Minister Kamal Kharrazi) into upgrading its infrastructure to promote swaps with both Kazakhstan and TurkmEnistan.
Meanwhile, Iran has declared its opposition to holding the five-way Caspian summit with Russia, Azerbaijan, Turkmenistan and Kazakhstan in mid-April. The original postponement—it was first scheduled for early March—was made at Iran's request, but it appears now that the results of President Mohammad Khatami's visit to Moscow two weeks ago were insufficient for Tehran to feel able to proceed. Even the reaffirmation of the 1921 and 1940 treaties, long sought by Tehran and achieved this month in Moscow, does not bind the two signatories to terms governing the deployment of energy technologies that did not then exist; and there is no way for those treaties to bind the other littoral states, which also did not exist at the time.
It is an open secret that one principal reason for this is that Tehran advocates an "equal division" of the Caspian, meaning one fifth to each littoral state, whereas the "modified median-line" principle adopted by Russia in its bilateral agreements with Azerbaijan and Kazakhstan would leave Tehran with rights to only a little more than one eighth of the seabed. Contradicting its own earlier position, which it shared with Turkmenistan, Iran has now announced that it will began exploring for oil and gas in the Caspian without waiting for the sea's status to be definitively established under international law. Thus Tehran has signed a contract with GVA of Sweden and with Sadra, a domestic company, to construct a platform to begin such explorations.
4. But Iran Makes Progress in South Asia
Whatever its problems in the Caspian region, Iran is making inroads into the South Asian market with the assistance of European companies developing the South Pars field. In particular, the tripartite Iran-Pakistan-India project continues to progress. After an undersea route circumventing Pakistan to India was ruled out as too expensive, Iran has reportedly offered Pakistan $8 bn in transit fees over a 30-year period for the pipeline, which is projected to run a little more than half the distance from New York to Los Angeles. The cost of laying the pipeline would be nearly $5 bn. According to industry reports, the project is modelled on existing (mainly European) transit pipeline contracts.
No memorandum of understanding has yet been signed, and even trilateral discussions have not yet taken place. Rather, Iran has until now played the go-between. India has sought political understandings from Iran, and Pakistan has tried to ease the process by suggesting that bringing the World Bank, Asian Development Bank and other international financial institutions into the project would by itself make an agreement binding upon Pakistan. Major international energy companies, including Gazprom, British Gas and Shell, have been positioning themselves of late so as to form at least two project consortia. Also, Pakistan wishes to retain the prerogative for its own gas to enter the pipeline to India, if new reserves are found that obviate its purchase of gas from Iran en route eastwards.
These developments would seem to put the final nail in the coffin of Turkmenistan's plan, dating back to the mid-1990s, to build a natural gas export pipeline through Afghanistan into South Asia. Symbolic of Ashgabat's problems has been the exile to Beijing, as his country's ambassador to China, of Boris Shikhmuradov. Niyazov dismissed Shikhmuradov several months ago from his post as Turkmenistan's foreign minister and then appointed him as special presidential envoy on Caspian issues (and head of the national sport-and-tourism institute).
5. And Turkmenistan Is Still Boxed In
It is often difficult to judge Niyazov's motives, but in Shikhmuradov's case the former minister may simply have been right at the wrong time. In February, he had declared in Tehran that the planned Caspian summit in the port city of Turkmenbashi would fail to achieve agreement because Iran refused to compromise on certain key points of view on which it was isolated -- indeed isolated by Turkmenistan's diplomatic defection, in Tehran, from their previous common positions. In retrospect, this may have been an ill-advised public comment.
While still negotiating in Tehran, Shikhmuradov was publicly reprimanded by his boss, President Niyazov, for undue pessimism. (Recall that the Turkmenbashi summit had been Niyazov's pet project for over a year, and here his former foreign minister was predicting its failure and implicitly blaming him for this.)
What is worse, Shikhmuradov turned out to be correct in the matter. So Niyazov has now deprived himself entirely of the expertise of one of the few Turkmenistani diplomats well-known and respected in the West. It will be a bitter irony, then, that one of Shikhmuradov's principal tasks in Beijing will probably be to negotiate over the construction of the proposed pipeline from Turkmenistan across Uzbekistan and Kazakhstan into western China, a project whose gigantism recalls the most ambitious Soviet projects of the 1930s and which has not budged off the drawing-boards ever since its birth there nearly a decade ago.
Turkmenistan has begun selling gas to Russia again this year, for less than the price it wanted in the first place and well below world market levels. As noted above, however, we may anticipate that Kazakhstan (a transit state for gas from Turkmenistan) will later in the decade to begin to usurp the capacity of the transit pipeline as Karachaganak, and perhaps Kashagan, begin to come on line.
So what is the way out of the box in which Ashgabat now finds itself regarding energy exports? Turkmenistan's statistics on gas exports to Iran remain fictive and inflated. Uzbekistan has long had the markets cornered for natural gas consumption in southern Kazakhstan and Kyrgyzstan. Perhaps Shikhmuradov's remark in Tehran was just the last straw, and Niyazov was looking for an excuse to rid himself of an individual whose very presence in Ashgabat could only have been a living reproach for having refused to dismantle the roadblocks the president himself had placed on the way to a TCGP contract. These roadblocks led Western companies to leave the TCGP project in suspended animation last year, and meanwhile Niyazov is waiting for them to take the initiative in order to avoid admitting his own mistakes. And yet Ankara remains upbeat.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 125 (28 March 2001): 3–5.