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Gas and oil developments in the Caspian region, CU Issue 6, October 20, 2008

This week saw a flurry of new developments in the Caspian oil and gas game which, having been shaken up by the Georgian war, is now back in full force. These developments are not in themselves revolutionary, but, taken in sum and added to the uncertainty caused by the financial crisis and the Georgian war, they could indicate a shift in regional gas and oil dynamics.

Firstly, it was revealed that the South Yolotan-Osman gas field in Turkmenistan contained between 4 and 14 trillion cubic metres of gas; the best estimate, 6 trillion, would make it the fourth largest field in the world. As the Wall Street journal noted, the upper estimate is triple the EU’s annual gas consumption. The analysis was undertaken by a British firm, Gaffney Cline & Associates, who had been hired by the new ‘reformist’ government of President Gurbanguly Berdimuhammedov. Although questions persist about the precise size of the field (both Gaffney Cline and the Turkmen government are tight-lipped), it is probably vast.

Equally significant is the fact that Gaffney Cline was the first foreign firm hired to explore Turkmenistan’s gas fields, and the positive news that the Turkmen government has received may encourage it to commission more. Although President Berdimuhammedov will have to do a great deal more to undo his predecessor Saparmurat Niyazov’s legacy of isolationism and Soviet-style control, it is perhaps not too far-fetched to see Turkmenistan becoming a ‘gas Azerbaijan’, flooded with international companies seeking a favorable deal.

If Ashgabat is the new Baku, then a trans-Caspian pipeline (TCP) from Turkmenistan passing through Azerbaijan and Georgia towards the West could become Turkmenistan’s BTC pipeline, a link to the West and a bone of contention with Russia and Iran. The project has been discussed for several years, but the Caspian’s unclear legal status has stalled any development. Moscow and Tehran, both concerned about the West gaining access to Central Asian hydrocarbons through routes other than their own, have warned the other Caspian littoral states against the project. This is where the similarities end – the BTC could afford to loop around Armenia since it was not, in any military sense, a significant threat to the project or the states involved. Russia and Iran most certainly are potential threats to a TCP.

Despite the attempts of the Kremlin and Gazprom, the Russian state gas company, the TCP is still on the table. In early October, Turkish Prime Minister Recep Tayyip Erdogan visited Ashgabat to discuss cooperation on, amongst other things, energy. Azerbaijan and Turkey began discussing a gas transit agreement on October 17th, emphasizing Ankara’s hopes of becoming an energy hub. As John C. K. Daly at the Jamestown Foundation noted at the time, Turkey requires Turkmen gas to fulfil its obligations in the mooted Nabucco pipeline to south-east Europe, so the stakes are high. Apart from a route through Iran and up into Azerbaijan – a route which would be sternly opposed in Washington - a TCP is the only feasible option. On October 11th Boyden Gray, US special envoy for Eurasian energy, told reporters in Rome that within six months a deal would be struck whereby Central Asian gas would reach Europe through Turkey without transiting Russia.

He did not clarify his comments, but it adds to the sense that the race is on to tap Central Asia’s gas fields – the Gaffney Cline estimate will only have added fuel to the fire. But whether Turkey can nudge Azerbaijan and Turkmenistan to sign up to a TCP will depend upon political will from Europe and America, but also in the countries themselves. For now, it seems that neither is willing to antagonize Moscow by sending vast gas supplies to the West right under its nose. This is economic as much as it is political – Moscow is willing to offer favourable deals, including rebuilding of infrastructure, in exchange for a large slice of the gas market. In May 2007 it struck a deal with Kazakhstan and Turkmenistan to build a new pipeline capable of plugging huge quantities of their gas into Russia’s pipeline network – the West will have to go a long way to sweeten the TCP as a competitor.

In the oil markets, Azerbaijan is willing to continue circumventing Moscow’s grip with the help of Kazakhstan. This week BP announced that Kazakh tankers would begin delivering oil to the BTC pipeline in late October, following a deal that was struck in June 2006. The quantity is unknown, but may be an additional 20,000-60,000 barrels per day, according to Reuters. This will not make a dramatic change to the BTC’s output, but it is symbolically important: Central Asian hydrocarbons have been plugged into a Western export route on a regular basis (a subsea pipeline between Aktau in Kazakhstan and Baku has so far made no progress). Astana is also allegedly expressing interest in strengthening its relationship with Tehran through oil swaps – currently, Kazakhstan ships around 70,000 bpd to Iran. This could increase if Kazakhstan decides that sending much of its oil westward is risky business, in light of the Georgian war. Iran may seem like the safer bet, despite consternation in Washington.

These moves take place against political and economic uncertainty. The two biggest shocks to the international system of the last three months - the Georgian war and the meltdown of the world economy – have had profound implications for the Caspian region. The first has shaken the geopolitical order between the West and Russia across the former Soviet Union; the latter has caused oil and gas prices to slump on the back of declining demand and production. On October 16th, oil hit a 15-month low of $67 a barrel. Prices are expected to rise next week when OPEC, the oil cartel, meets on October 24th to discuss a potential production cut in order to raise prices, but not dramatically.

This background will have damaging effects in the long run for Caspian states who rely heavily on hydrocarbon revenues. Azerbaijan’s budgetary plan is based on oil at $70 per barrel, so a price slump would derail spending and slow the economy. At a wider level, geopolitical and economic uncertainty has made new energy infrastructure plans appear even more highly complex and risky than before; the threat of military conflict is decreasing the appetite of foreign investors for uncertain projects, even as the financial viability of such projects looks in doubt as the world heads towards a recession. The danger in such a volatile situation is that one player will be determined to seize control of the export routes or prevent alternatives from being built, and so give themselves a degree of leverage over price – a useful thing when an economy is built almost entirely on oil and gas. What better way to scare away foreign investors, and intimidate one’s neighbours, than a show of force?

"Gas and oil developments in the Caspian region, CU Issue 6, October 20, 2008" | 2 comments | Search Discussion
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by Sean Alexander on Wed Oct 22, 2008 7:31 am
I'm curious to see how this shift in focus on gas reserves in the Caspian region is going to affect traditional US policy towards Iran. If the US plans to stay in the region long-term, I don't see how it couldn't become more concilliatory towards Tehran, if only for the sake of promoting regional stability.

by Alex Jackson on Wed Oct 22, 2008 7:33 am
I'm inclined to agree. I think we'll know at least part of the answer on November 4...


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