The re-eruption of the conflict between Ukraine and Russia over payments for gas deliveries illustrates that developments in Eurasian energy geo-economics do not take vacations, even over the New Year holidays. The Ukrainian-Russian dispute, for example, takes place in circumstances (economic, financial, political, military, even cultural) that are different from those surrounding their last tiff three years ago. Its significance and its dynamics differ accordingly.
Despite themes that appear to recur, there is no "grand design" in Eurasian energy exploration, development and production that is implemented in any step-by-step fashion. There are, instead, multiple and competing partial designs that intersect and interact interdependently in ways both foreseeable and unforeseeable. The agreement last month to double the volume of the pipeline owned by the Caspian Pipeline Consortium (CPC), running from the Tengiz oil field in northwest Kazakhstan across southern Russia to the Black Sea port of Novorossiisk, is a case in point.
At its foundation in early 1995, the CPC originally comprised Russian, Kazakhstani and Omani companies, formed nearly behind the back of Chevron's venture TengizChevrOil, which operates the Tengiz field. In reply, Chevron cut investment, but it was the inability of the CPC to raise capital on the world markets combined with the autocratic management style of its Dutch chief that made progress impossible.
Later in the 1990s, the CPC's ownership and management structures were radically transformed, such that by 2009 its shareholders included the Russian Federation represented by two companies with 31%, Kazakhstan represented by KazMunaiGaz with 19%, a dedicated Chevron pipeline company with 15%, a LUKoil-Atlantic Richfield joint venture with 12.5%, a Mobil pipeline company and a Rosneft-Shell joint venture each with 7.5%, and a few smaller stakeholders with 2% each or less.
Its current capacity is 670,000 barrels per day (bbl/d), although this has recently been occasionally augmented through the use of additives to increase flow. The doubling of this capacity was foreseen in the original construction agreement, and planning and construction should have started not long after the pipeline opened in late 2001. However, Kazakhstan and its president, Nursultan Nazarbaev, for years implored Russia and its president and now Prime Minister Vladimir Putin to make good on this promise, without effect.
Coincidence or not, it was only when the Kazakhstan-Caspian Transportation System (KCTS), which provides for taking Tengiz oil by overland pipeline to the port of Atyrau for transit across the Caspian Sea to Azerbaijan where it has a number of routes for reaching the world market, not least the Baku-Tbilisi-Ceyhan (BTC) pipeline to the Turkish Mediterranean coast. (For details of the KCTS, see Caspian pipelines ease Russia's grip.)
In the event, the CPC expansion will be implemented not by construction of a parallel pipeline but by additional pumping stations with augmented storage facilities at the Novorossiisk terminus. It is said that financing issues held back the final decision on the CPC's expansion (estimated now to cost US$1.5 billion) but also, coincidence or not, that decision seems to have awaited the conclusion of an agreement on construction of an overland pipeline from Burgos, Bulgaria, on the Black Sea, to Alexandropoulos, Greece, on the Mediterranean. (The Burgos-Alexandropoulos route is sometimes now referred to as the Bapline.)
This line provides a route for avoiding the already overcharged Turkish Straits. Russia has a majority participation in the construction consortium at 51%, with the remainder distributed among Bulgarian and Greek companies. This distribution tends to remove the Burgos-Alexandropoulos route as a potential egress for oil arriving on the eastern Black Sea coast conveyed there by non-Russian companies, such as those managing the production and export of oil from Azerbaijan and Kazakhstan.
In particular, it complicates finding an export route for Kazakhstan's oil from the offshore Kashagan deposit, unless enough new Tengiz oil goes through the CPC to Burgos-Alexandropoulos to free up the KCTS trans-Caspian route for Kashagan oil.
Still, increased amounts of Kazakhstani oil arriving on the Georgian Black Sea coast will need to find a way to world markets. Perhaps by then world prices will have recovered enough to make the reversal of Ukraine's Odessa-Brody pipeline and its extension through the the Polish Baltic Sea coast a possibility (see Ukraine clash threatens oil to Europe, Asia Times Online, August 2, 2008).
Agreement on the CPC expansion was also delayed for some time by Bulgaria's insistence on receiving higher transit fees, for which it used as leverage the question of the source of its own gas imports. On this issue, Russia elbowed Turkey out of the way when, in January 2008 during a visit by Putin to Sofia, Bulgaria enrolled as a transit country in the South Stream pipeline project (gas from Russia under the Black Sea to the eastern Balkans and thence to the rest of Europe), itself a main strategic competitor to the EU-sponsored Nabucco gas pipeline project (see Euro-Caspian energy plans inch forward, 27 November 2008).
From looking at just this corner of the European energy tableau, it can be seen that this whole "game" is a combination jigsaw puzzle, chessboard, poker game and crap shoot. Yet there is no denying the high stakes. In the Ukraine gas row this year, for example, Russia has clearly planned its moves with much greater reflection and attempted subtlety than three years ago, when Moscow television headlines showed with fanfare the taps to Ukraine being closed at midnight.
Yet even if Russia can be said to have a "grand design", the same could be said of China, Kazakhstan, Azerbaijan and other countries. For this reason, the Russian-Ukrainian gas row cannot properly be seen in a bilateral, or even trilateral (with the European Union) perspective. It is rather the interplay of all these interests, together with the multi-level bargaining, jockeying for position, and feinting, to which is added the random unexpected event and global financial surprises, that makes the whole nothing less than a roller-coaster that lays its own track ahead of it as it goes along.
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First published in Asia Times Online, 8 January 2009.