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In this section, we publish the weekly analysis of the major events taking place in the Caucasus and beyond. The Caucasus Update is written by our Senior Editor Alexander Jackson. Click here to subscribe.

Kazakhstan's oil options, CU Issue 8, November 3, 2008

This week it was confirmed that shipments of oil from Kazakhstan’s Tengiz field have entered the Baku-Tbilisi-Ceyhan pipeline (see Caucasus Update, Issue 6). Meanwhile Kazakhstan and a consortium of international oil companies have signed a long-awaited agreement on the exploitation of the huge Kashagan oil field. Although the field will not begin pumping oil until 2012, and will not reach maximum output until 2021, the Kashagan deal and the BTC announcement illustrate Astana’s increasingly assertive oil politics.

Much of this assertiveness is simply necessity: in the current economic climate, the country has no option but to ramp up development of its export infrastructure and sell its oil to every potential customer. “Kazakhstan needs every new pipeline and pipeline expansion that is currently being talked about”, says Julian Lee, senior energy analyst at the Centre for Global Energy Studies in London. The budgets for 2009-2011 are based on oil prices of $60 per barrel: increasing signs of strain in the global economy could push it below this. So every avenue must be explored, which has led to increasing cooperation with Azerbaijan, Iran, and China.

Around 10,000 tonnes of oil per day are now being shipped from Tengiz through the BTC. This follows an agreement signed in June 2006, far predating the August war in Georgia, but the introduction of Kazakh oil is nevertheless a confidence boost for supporters of the east-west energy corridor, which had been viewed as increasingly risky after the conflict. Still, the fact that the news was anonymously leaked to Reuters, rather than publicly announced by any of the companies involved, suggests that the issue is still sensitive. The news cements the developing cross-Caspian energy link, which will bypass Russian and Iranian territory and deliver hydrocarbons directly to the West. Although fears are often raised about the implications of breaking free from Moscow’s oil monopoly, the risk should not be overstated. For one thing, Kazakhstan already has far more oil than its export capacity can handle. Russia will therefore not lose out from Kazakh exports to Azerbaijan in any real sense, although it may be piqued by the symbolism of the venture.

Equally symbolic is Kazakhstan’s enthusiasm for closer energy links with Iran. From an economic point of view, this makes sense: shipping oil south, and then through the Persian Gulf to world markets, is the cheapest route. But it is also the most geopolitically fraught. International sanctions against Tehran over its nuclear program, and the constant possibility of a US/Israeli strike on the country, makes Iran a risky partner. This has not stopped Astana from seeking to boost the volume of its oil swap agreement, a process which the US has grudgingly accepted in the past but is unlikely to do so in the future. The oil swap increase is only one element of a broader strategy of cooperation, ultimately comprising a north-south energy and transport corridor - including pipelines - along the eastern shore of the Caspian from Russia, via Kazakhstan and Turkmenistan to Iran. Although this could become extremely significant, it is unlikely to make a great deal of progress. As Mr Lee notes, Iran announces a lot of plans, very few of which ever get built. Discussions about a Kazakh refinery in northern Iran have been going on for years, to no end. Continuing Western sanctions will make it extremely difficult to find funding, especially since neither Moscow nor Beijing - the alternative investors - has much of an interest in seeing Iran become a hub for Caspian energy.

China is far more interested in its direct link to Kazakh oil. In 2006 a pipeline between the two countries began operation, pumping 5 million tonnes per year, a figure which will ultimately reach 20 million tonnes. A gas pipeline from Turkmenistan to China, through Kazakhstan and Uzbekistan, is also being constructed: Chinese Premier Wen Jiabao signed an agreement with the Kazakh authorities on the matter during his visit on October 31. It is likely that the Chinese dimension will become increasingly attractive for Kazakhstan in years to come. The route is a lot less politically contentious than an Iranian or Azeri link, for one thing. Whilst the mooted trans-Caspian gas pipeline to Europe is political dynamite, adamantly opposed by Russia and Iran, there is very little opposition to a gas network connecting Central Asia with China. Economically, the route is also very appealing. Despite a recent cut in Chinese GDP growth projections, the country’s economy is still growing extremely fast. Whilst European demand for gas and oil slumps, China’s is unlikely to follow suit, at least not to the same extent.

All of this suggests that Kazakhstan is increasingly going to become the focus of world attention. In 2010 the country holds the rotating chairmanship of the Organisation for Security and Co-operation in Europe (OSCE). Although human-rights groups have expressed dismay that the country should be granted the position, Western governments will use the opportunity to deepen their ties with Astana. It remains to be seen whether Kazakhstan will be able to translate its sudden popularity into a meaningful strategic advantage, such as regional hegemony in Central Asia. As always in Eurasia, this will depend on what Moscow is prepared to concede. As energy prices tumble and the Russian economy stagnates, it is unlikely to be nonchalant about so much Kazakh oil going elsewhere, especially with the help of Western oil majors. Kazakhstan, like Azerbaijan, is going to have to tread a careful line.

"Kazakhstan's oil options, CU Issue 8, November 3, 2008" | 1 comment | Search Discussion
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by Danial Pratt on Fri Nov 07, 2008 9:12 am
Everything you have written is spot on. I really look forward to reading your decisive analysis. Thankfully I dont miss any reviews now I have subscribed to the newsleter! Keep up the good work


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