Prospects of export routes for Kashagan oil

2002).

 When alternative courses of action and various viable options are pitted against each other, the array of forces of the competing interests, influences which interest (if any) will win. Of course, this array depends on more than just the relative power of the actors involved. It also  depends on each actor’s willingness to spend influence on  the  issue in  question (salience)  and the intensity with which it prefers  one proposed  settlement to another. Each actor has a total number of potential ‘‘votes’’ that is equal to its salience scores multiplied by  resource/capability scores (Votes ¼ saliency scores x resource scores) (de Mesquita,

2002; Babali, 2006) Calculation  and explanation of these judg- mental scores are needed for final evaluation which will be based on experts’ overall assessment (see footnote 19)  regarding the resource and salience scores for each actor and prediction will be made based on the results of applying these assessments to the original Bueno De Mesquita (BDM) model.

 As it was explained by Bueno De Mesquita, before embarking upon prediction activity and likely scenarios, one has to determine where the median vote stands on the scale of actors. To do this, one has to first look at the official positions of the actors in terms of their preferred routes. There are basically ten major actors in total in the Caspian region: Russia, United States, Companies, European Union, Turkey, Iran, Azerbaijan, Kazakhstan, China, and Turkmenistan.

 It is clear from the  above table that the median vote (bulk of the actors’ preferences) is between Turkey (7) and Russia (5) and closer to Turkey. This is more about the general position held with regard to overall Caspian energy resource export  routes. However, the prospect for any proposed route to be chosen for Kashagan exports, depends on   actors’ ability to form winning coalitions.

5.   Most likely scenario: BTC connection 

When we look at the de-facto coalitions that are already in place in  terms of  cooperation or  declared priorities for  the possible export routes  (Table 1), it becomes obvious that with the coalition of  Turkey, Azerbaijan, United States, and European Union, the BTC route will  be the winner among  the Kashagan export routes (based on votes calculated for each actor according to the formula given above and  based on judgemental scores attributed  by  the experts). The  rival  coalition would include Russia, Kazakhstan, and Turkmenistan (based on the countries’ 

Table

 
 

Russian route). However, companies will   hold the key  in the selection of  the main export route  for the Kashagan field. Therefore, companies may change the outcome of the export route selection process.

 As Turkey and the United States secured solid commitment from the Kazakh government for the Aktau–BTC option (with signing of  Intergovernmental  Agreement between Azerbaijan and Kazakhstan in June 2006), even the companies may not be able to change the outcome. Although not yet plainly seen on the horizon, with the  increased likelihood after the Baku– Tbilisi–Erzurum natural gas pipeline’s realization in 2007, possi- ble  Turkmen commitment  would  make this coalition even stronger.

 Delays in Kashagan also make this option more viable every passing day. Kazakh Energy Minister Sauat Mynbayev in May

2008 announced that the consortium members are looking to further delay the start of  production from Kashagan deposit to  2013  (Xinhua  Financial News,    2008).  Delays in  the  field benefits Kazakhstan in both ways. Kazakh government find the opportunity to  pressure  consortium and increase their share and also price of oil increases. Delays also makes Kazakh reserves more   valuable. By  2013,  subsea gas  pipeline can   be  built between Azerbaijan and Turkmenistan, so Kazakhstan is con- sidering its own subsea oil pipeline to join   BTC. Although the timing and plans have not been finalized, Kazakhstan wants to have a new, $1.5 billion, 750 km (466-mile) pipeline, to be built along its western coast on the Caspian, that would feed into BTC (see footnote 20).

 Iran is the number one choice of companies (because of pure economic reasons—shortest route, already in place export facil- ities, etc.), based on cost effectiveness, but is out of the picture for the foreseeable future for obvious political reason.

In fact BTC and the development projects of Kashagan field are very much complementary in nature. Experts say Kashagan oil can  fill the pipeline when the Azerbaijani fields begin to show declines in output early in the next  decade (Cohen, 2002). Total   available capacity on   the  BTC pipeline is  slated to increase through technical means  (chemical agents, additional pumping capacity) to approximately 1.5 million bpd or some 75 million tons annually. That can provide a westbound outlet (as opposed to  a  Russian  one) for  part of  the  production  from

Kashagan.

 In  addition, most of the companies who maintain majority stakes in the Kashagan consortium of Agip KCO also hold majority share in BTC’s parent operating consortium AIOC. Four members of the BTC Co. group also have stakes in Kashagan

6.   Some concerns about the likely scenario and issues that can affect development efforts 

6.1.  Russia–Georgia war and viability of trans-caucasus transit corridor for Kazakhstan 

 Although Kazakhstan has officially announced plans to arrange delivery of its oil to the BTC oil pipeline via Azerbaijan and on to Georgia’s Black Sea port of Batumi, traders expressed fears after the Georgia–Russia conflict about the efficiency of the trans- Caucasus routes and about possible future pressures from Russia.

 Kairgeldy Kabyldin, CEO of Kazakhstan’s state-owned KazMu- naiGaz, speaking with journalists about the strategy of developing oil export routes said on October 9, 2008 ‘‘KazMunaiGaz is a business structure, so we do not make political assessments of these kinds of  events. I would  not say  today that risks  of [transporting oil via]  the  trans-Caucasian corridor via the BTC pipeline have increased due to the Russian–Georgian conflict. We will not change our plans for using this corridor. On the contrary, the transit of Kazakh oil in this direction would lend an element of stability in the region. This is because you know that any country signing international transit agreements guarantees the stability of oil supplies and the freedom of transit. The rest is an issue for politiciansy Let us here separate the issue of the conflict from the issue of the transit and transport of oil along the Baku–Batumi corridor and the BTC pipeline. We are planning to use   the BTC pipeline, which currently carries 37–40 million tonnes of oil/year and whose annual throughput capacity is 50 million tonnes of oily and Kazakhstan still has plans to build refinery in Ceyhan, Turkey’’ (Watkins, 2008). He said his country is also eyeing the Baku–Supsa pipeline, which can transport 10 million tonnes/year of oil and which has already been idle for 2 years.

 On a confirming note, effective from November  1, Chevron’s subsidiary TengizChevroil has significantly augmented oil ship- ments from Kazakhstan, via Azerbaijan and Georgia, to interna- tional markets. This  development  adds to  the  evidence that Kazakh business confidence is   returning to  the Azerbaijan– Georgia transit corridor, in the aftermath of the Russia–Georgia war.

 As a result of the conflict in Georgia however, Azerbaijan and Turkmenistan  are   now   considering  exporting more   of  their hydrocarbons via Russia even if that gives Moscow leverage over them while some Western countries that want to punish Russia are  discussing allowing exports via Iran,²¹  and still  others are pushing to resolve the Nagorno–Karabakh issue in order to allow the export of oil and gas via Armenia.

 As of now, neither the countries of the region nor any of the major outside powers have   reached  any final decision, but the mere discussion of these possibilities changes not only the geo- economics of the region but also the geopolitics of the world. This situation creates the real possibility that old  allies may find themselves at odds, while old enemies may start cooperating with each other, possibilities that none of them could have imagined prior to the Georgian crisis.

 Such   unimagined development occurred between Turkey and Armenia. Turkey’s President Abdullah Gu¨ l, upon the invitation of Armenian President Serzh Sargsyan visited Armenia on September

6 to watch the 2010 World Cup qualifier soccer match between their national teams, which provided a unique opportunity to explore establishment of diplomatic ties (does not exist between the two countries since the Armenian independence in 1991) and cooperation opportunities.

 Some analysts have argued that this rapprochement will create a sea  change in the usually hostile relations between the two countries and will make Armenia a new potentially interesting transit partner for regional energy and infrastructure projects to increase viability of  Trans-Caucasus  corridor. Some other ex- pressed cautious optimism for the prospects. The sudden thawing in relations may not be as sudden as it may seem. 
 

6.2.    Problems with BTC connection and CPC rivalry 

 In  parallel with the prediction made above,  most Turkish media and political establishment circles also expected that when the BTC started to pump oil in July 2006, Kazakh oil will begin flowing in the pipeline, as well; if not right away, soon afterwards. After all, the BTC’s capacity of 1 million barrels/day (50 million tons/year) was designed largely on the premise that Kazakh oil would be part of the flow stream.

 Despite all   the hype about Kazakh oil,  Kazakhstan’s full participation in the BTC still remains little uncertain because of the fact that Azeri side still reluctant to give Parliament’s approval to the IGA signed in June 2006 on the ground that if the Kazakh oil with lower quality is permitted to the BTC route will eventually hurt the superior quality Azeri  oil’s high revenues. Even  the Kazakh oil has been barged across the Caspian in the volume of

80,000 barrels/d to be pumped into the BTC as of November 1,

2008,²²  to what extent the volumes will incrementally allowed to be increased by Azeri officials is not clear yet.

 Kashagan early production (‘‘early   oil’’) is expected to start between late  2011  and 2013,  and the consortium must soon decide on a suitable export route for this oil. A temporary solution for early oil is needed, leaving the decision for a more permanent solution, involving pipeline(s), for  a later  date. One way and apparently the best way to transport early oil is to use tankers and barges from Aktau to Baku. To facilitate this alternative, the United States has already financed projects aimed at upgrading port facilities at Aktau and Dubendi, the latter a tiny  port on  the Apsheron peninsula in Azerbaijan.

  The   Aktau–Baku surface transport   solution for  early oil, however, faces  competition from the CPC, which Kazakhstan is also considering. The CPC’s capacity is at present 6,00,000 b/d, and

will  eventually  be  expanded to  1.34  million b/d by 2015.  As production from Karachaganak’s gas-condensate field increases and other Kazakh fields go on-stream, need for an excess capacity may appear to be urgent than expected. If this materializes, the CPC’s capacity expansion could be expedited to accommodate early  oil (probably as  much as 2,00,000 b/d) from Kashagan. If excess capacity continues, the CPC could readily receive early oil from  Kashagan. In either case,    the CPC  would pose serious competition to the Aktau–Baku surface transport alternative. If the CPC  alternative were implemented  (‘‘Russian  solution’’), Turkey would  be  the obvious loser,  both strategically and economically. To a lesser extent, Azerbaijan and Georgia would be on the losing side, as well.

 A compromise solution, splitting Kashagan’s early oil between BTC and the CPC, is not out of the question. That could mean that BTC would receive some 1,00,000 b/d initial contributions from Kazakh sources.

 Beyond early oil, the transport of Kashagan crude, depending on (recoverable) reserves possibly as high as 10–12 billion barrels of oil, will require construction of one or more pipelines. A trans- Caspian sub-sea pipeline connecting Kashagan  to  BTC, while favored by  the United States,  currently  stands little chance, because the oil companies does not fully support the idea. Russia is against such a pipeline; purportedly on ecological grounds. Not surprisingly, Iran is opposed, as well.

 Regardless of  which pipeline route(s) is (are) selected, huge financial stakes, colored by geopolitical considerations, will  be involved in the export of Kashagan oil. The financial stakes will be further magnified by virtue of the fact that Kashagan also holds significant gas reserves linked to oil production. The export game will be interesting to watch—certainly no less interesting than the one witnessed with Azeri oil and BTC.

6.3.    Environmental issues at stake

 The world’s attention is attracted to the Caspian by regional rivalries over  the highly competitive  issues of  oil  extraction, transportation  and profit  sharing, and occasionally by  ethnic tensions. However, there is another, equally important, danger about which politicians and oil-interests generally remain silent, namely the destruction of the Caspian Sea’s unique ecosystem. This is due to a lack of respect for overall regional development and the former Soviet Union’s long-term violation of generally accepted environmental norms. The present rush of Western oil companies and a lack of control over oil exploration operations in most of the Caspian littoral states only exacerbate  the situation. Soviet degradation of the environment  in the Caspian region created massive economic distortions and mammoth environ- mental problems, which are posing great challenges and difficult choices both for governments and the companies. The question is whether states will use their resources to rectify current problems or  invest  in  the future. The  Caspian governments,  including Kazakhstan optimistically hope that they can do both: a balanced ecosystem and lots of oil, which sounds too optimistic.

 For  years, ecologists have given warning that the development of Kazakhstan’s oil deposits in the Caspian threatens the sea’s flora and fauna. The Caspian basin is also a  seasonal habitat for birds migrating from Europe and Asia, such as the flamingo and the rare white-tailed  eagle. It  is  also   home  to  about 4,00,000   seals and—crucial to caviar—production–more than 90% of the world’s sturgeon live in the Caspian. Over a period of four weeks in May

2000,  about 4000  seals were found dead on  the  shores of

Kazakhstan.²³    Their deaths might be connected to oil drilling at the massive Kashagan field. Local environmentalists blame an international oil  consortium that drilled its  first well  in  the shallow waters of Kashagan. Another possible culprit is hydrogen sulfide gas, a by-product at the nearby Tengiz oilfield, which is released into the air. The waters of the Ural and Volga rivers that flow  into the Caspian, which are  polluted with heavy metals, could also be to  blame.

 This large-scale environmental and ecological damage under- lines the need for international cooperation and some kind of an authority to enforce compliance with appropriate environmental norms in the Caspian Basin. However, as the negotiations on legal issues surrounding the Caspian Sea are intermingled with  the resolution of environmental concerns, the ongoing dispute over access to resources presents a major obstacle to the effective management of such problems, particularly at the regional level.

 Both Iran and Russia oppose the construction of trans-Caspian pipelines and they objected to oil and gas development projects in the Caspian on environmental grounds. The accusations that both Iran  and  Russia are  using environmental issues to block  other countries’ exploitation of  the  Caspian,  however, complicate matters. In particular, the fact that Russia is still by far the largest polluter  of  the Caspian Sea  and that its  favored regime  for environmental protection, which is the joint control of the sea, would also  yield Russia a  greater proportion of  oil  reserves, undermines its sincerity. While Russia does  not mention any environmental problems that might be caused by the Nord Stream gas pipeline project between Russia and Germany under the Baltic Sea, assertive environmental concerns expressed in the Caspian Sea further diminishes its credibility on this ground.

 International efforts, on the other hand, are being spearheaded by  the United Nations Environment  Program (UNEP),  with assistance from the United Nations Development Program (UNDP) and the World Bank. Together these institutions have launched a Caspian initiative to coordinate the preservation of the Caspian’s ecosystems at both a technical and legal level. However, given the reluctance to commit substantial funds to solve these and similar environmental problems on the side of Caspian governments and international oil companies, these initiatives are far from creating tangible solutions. Continued economic development, improved regional cooperation, and the implementation of modern technol- ogy  will  be  required  in  order to  improve the state of   the environment in and around the Caspian Sea in coming years. 

6.4.   Re-nationalization and corruption issues 

 The  most important problems that may hinder oil develop- ment in Kazakhstan are linked to corruption and the government’s eagerness to re-negotiate the existing production sharing agree- ments in order to secure more concessions from the companies. Last  years saga between Kazakh  Government and AGIP-KCO partners over increasing the KazMunaiGaz shares are testimony of this new trend.

 The   corruption issue in  Kazakhstan—which in  most part applies to the investment and development of the giant Tengiz oil field—delayed the development of the bigger Kashagan field for at least 3 years, which is expected to drive exports over the next 10  years. It is not certain fully  yet, how the corruption scandals may hamper future foreign investment (Krastev, 2002).

In  November  2002,  the US-led TengizChevrOil  consortium shelved a  $3  billion expansion  project  after arguments with KazMunaiGaz about funding and tax revenues from the deal. The dispute deepened on 4 December 2002 as a Kazakh court upheld a fine  of 11 billion tenge ($71 million) against TengizChevrOil for open storage of hydrogen sulfur extracted from its   export oil. Company officials have argued that the government knew from the start about the sulfur and storage plans.²⁴ Kazakhstan, in early January 2003 mended its rift with the investors and reached an agreement without changing the original contract. On the other hand new tax code was enacted and implemented since January