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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
The comments are owned by the poster. We aren't responsible for their content.

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


PREVIOUS ISSUES

  Caspian Compromise Backfires for Russia and Iran, CU Issue 83, November 24, 2010
  Turkey in a Tight Spot on Missile Defense, CU Issue 82, November 11, 2010
  The OSCE and Kyrgyzstan’s Election, CU Issue 81, October 30, 2010
  Unblocking the US-Azerbaijan Relationship, CU Issue 80, October 07, 2010
  Nabucco Pipeline: Quo Vadis?, CU Issue 79, September 30, 2010
  Russia tightens its grip in the South Caucasus, CU Issue 78, August 23, 2010
  Armenian Politics: Rigidity Versus Flexibility, CU Issue 77, August 10, 2010
  Russia and Georgia: Ready To Talk?, CU Issue 76, July 21, 2010
  Can the US walk and chew gum at the same time?, CU Issue 75, July 9, 2010
  The Kyrgyzstan Crisis – A Qualified Success for Turkish Diplomacy?, CU Issue 74, June 24, 2010
  Brussels downgrades the Caucasus, CU Issue 73, June 07, 2010
  NATO’s New Strategic Concept and the Caspian Region, CU Issue 72, June 01, 2010
  Joe Biden and European Security, CU Issue 71, May 13, 2010
  Behind the US-Azerbaijan row, CU Issue 70, May 6, 2010
  Turkey and Iran: The risks of failure, CU Issue 69, April 30, 2010
  Kazakhstan, the OSCE, and the crisis in Kyrgyzstan, CU Issue 68, April 19, 2010
  The Implications of the Moscow Bombings, CU Issue 67, April 12, 2010
  Iran Manoeuvres for a role in Karabakh, CU Issue 66, April 5, 2010
  The EU and Abkhazia: Between a rock and a hard place, CU Issue 65, March 16, 2010
  Fallout from the US ‘Genocide’ vote, CU Issue 64, March 9, 2010
  Ukraine's elections and future of GUAM, CU Issue 63, February 10, 2010
  Less Democracy, More Security: Kazakhstan and the OSCE, CU Issue 62, January 18, 2010
  Tackling the North Caucasus Insurgency: Development or Rhetoric?, CU Issue 61, January 11, 2010
  The Caspian Region in 2010, CU Issue 60, January 4, 2010
  The Caspian Region in 2010, CU Issue 59, December 31, 2009
  The Turkmenistan-China Pipeline Changes the Energy Balance, CU Issue 58, December 21, 2009
  Russia’s European Security Treaty, CU Issue 57, December 7, 2009
  The ‘Kidnapping War’ in Georgia and its Implications, CU Issue 56, December 3, 2009
  Azerbaijan Shifts its Energy Priorities, CU Issue 55, November 23, 2009
  The South Caucasian States and Afghanistan, CU Issue 54, November 11, 2009
  Is Turkey turning East?, CU Issue 53, November 2, 2009
  What is Russia’s Gameplan for Iran?, CU Issue 52, October 26, 2009
  Turkey, Armenia and Azerbaijan: Where Next?, CU Issue 51, October 19, 2009
  The Armenians of Georgia: A New Flashpoint in the Caucasus?, CU Issue 50, October 12, 2009
  Turkey’s EU Membership: Will The ‘Armenian Opening’ Help?, CU Issue 49, October 5, 2009
  The Missile Defence Shift: Implications for the Caucasus, CU Issue 48, September 22, 2009
  Rising Tensions in the Black Sea , CU Issue 47, September 14, 2009
  Armenia, Turkey, and Azerbaijan: The Clock Is Ticking, CU Issue 46, September 7, 2009
  The Battle of the Bases in Central Asia, CU Issue 45, August 31, 2009
  Russia, Israel, and the S-300s, CU Issue 44, August 24, 2009
  The motivations behind Turkey's 'Kurdish Initiative', CU Issue 43, August 17, 2009
  The Implications of the Turkmenistan-Azerbaijan Dispute, CU Issue 42, August 10, 2009
  What has changed since the August war?, CU Issue 41, August 3, 2009
  The Internal Dynamics of Armenia’s Karabakh Policy, CU Issue 40, July 20, 2009
  Gazprom’s Baku Triumph, CU Issue 39, July 06, 2009
  Ingushetia: The New Chechnya?, CU Issue 38, June 29, 2009
  Georgias Economy - A Matter for Diplomats, CU Issue 37, June 22, 2009
  ‘Progress’ In The Nagorno-Karabakh Peace Process, CU Issue 36, June 08, 2009
  Iran's Azerbaijanis and the presidential election, CU Issue 35, June 01, 2009
  Nabucco and South Stream - The Race Heats Up, CU Issue 34, May 25, 2009
  China and Central Asia, CU Issue 33, May 19, 2009
  Russia, Georgia, and NATO - A Bad Week, CU Issue 32, May 11, 2009
  The Obama Administration’s Emerging Caucasus Policy, CU Issue 31, April 27, 2009
  Integration and Division in the Caspian Sea, CU Issue 30, April 20, 2009
  The Turkish-Armenian Rapprochement - Implications for the South Caucasus, CU Issue 29, April 13, 2009
  Turkey's local elections and Armenian issue, CU Issue 28, April 6, 2009
  Is There Life Left In The Nabucco Project?, CU Issue 27, March 30, 2009
  Problems and Prospects for Russian Military Reform, CU Issue 26, March 23, 2009
  Russia and Georgia: Not back to war, CU Issue 25, March 16, 2009
  Armenia: Heading towards crisis?, CU Issue 24, March 9, 2009
  Drug trafficking in the Caucasus, CU Issue 23, February 23, 2009
  Russian-led military block: A real counterweight to NATO?, CU Issue 22, February 16, 2009
  Are the International Missions in Georgia still relevant?, CU Issue 21, February 9, 2009
  Israel and Azerbaijan: Baku’s Balancing Act, CU Issue 20, February 2, 2009
  The North Caucasus in 2009: A Bleak Forecast, CU Issue 19, January 26, 2009
  The Military Balance in Nagorno-Karabakh, CU Issue 18, January 19, 2009
  Russia, Iran, and Barack Obama in 2009, Part II, CU Issue 17, January 12, 2009
  Looking forward to 2009 in the Caucasus and beyond, Part I, CU Issue 16, January 5, 2009
  The opportunities and the risks of NATO’s new supply routes, CU Issue 15, December 22, 2008
  The Black Sea Ambitions of Armenia, CU Issue 14, December 15, 2008
  Another Small Step for Nabucco, CU Issue 13, December 8, 2008
  Will Saakashvili survive politically?, CU Issue 12, December 1, 2008
  The latest fashion: conflict mediation, CU Issue 11, November 24, 2008
  The Baku Energy Summit, CU Issue 10, November 17, 2008
  Obama and the Caucasus, CU Issue 9, November 10, 2008
  Kazakhstan's oil options, CU Issue 8, November 3, 2008
  Is the Minsk Group being sidelined?, CU Issue 7, October 27, 2008
  Gas and oil developments in the Caspian region, CU Issue 6, October 20, 2008
  Where next for the Georgian peace process?, CU Issue 5, October 8, 2008
  Unrest in the North Caucasus, CU Issue 4, September 29, 2008
  Saakashvili's future, CU Issue 3, September 22, 2008
  Iran after the Georgian War, CU Issue 2, September 15, 2008
  Football diplomacy, CU Issue 1, September 8, 2008
       
 
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