The Caspian Pipeline Deal and Russia’s Energy Strategy in Central Asia

Vladimir Putin’s week-long visit to Central Asia in the second week of May 2007 was aimed at courting Kazakhstan and Turkmenistan as part of Russia’s future energy strategy in the region. Behind the visit lay the Kremlin’s desire to create a natural gas cartel in the region and maintain its monopoly over gas supplies to Europe. Moreover, despite its vast resources of oil and gas, Russia may actually face domestic shortages, at least of gas, because much of its own resources are in remote areas and need heavy investments to be made productive. This makes Central Asian energy sources important to Moscow.

Both Kazakhstan and Turkmenistan are rich in natural resources and are increasingly exposed to Chinese and Western influence. After the sudden death of President Saparmurat Niyazov, Moscow was keen to ensure that Turkmenistan’s foreign policy was oriented towards it. More importantly, it wished to further strengthen its dominance over the country’s gas supplies. Russia has had a near monopoly on Turkmen Gas and, consequently, any success for the United States and Europe in that country’s energy sector would automatically mean a weakening of Moscow’s hold. Here, it should be noted that the new Turkmen President, Berdymukhamedov, met executives of Chevron in the first week of June 2007 and invited them to participate in oil extraction efforts beneath the Caspian Sea. In addition, Berdymukhamedov has also stated that plans for a Trans-Caspian Pipeline (TCP) – a Western project – have not been completely dropped. Like his Turkmen counterpart, the Kazakh president has also said that he does not rule out consideration of the TCP option and will transport oil and gas through a route that is more profitable.

Today, the competition over Central Asian energy resources is by no means limited to the West and Russia. China is emerging as an important player in this game and it is pursuing an aggressive energy policy in Uzbekistan, Turkmenistan and Kazakhstan. It has already built an oil pipeline from Kazakhstan and signed an energy deal with Turkmenistan to supply gas by 2009. More importantly, it does not need Russia to access Central Asian energy resources.

The desire to strengthen its dominance, coupled with Western and Chinese attempts to make inroads into the Central Asian energy scene, is pushing the Russian leadership into pursuing a vigorous energy strategy in the region. One aspect of this strategy was Russia’s signing of a landmark deal with Turkmenistan and Kazakhstan on May 12, 2007. Under this deal, the three countries agreed to build a natural gas pipeline along the Caspian Sea Coast to carry gas from Turkmenistan to Europe via Kazakhstan and Russia and to upgrade the Prikaspiiski natural gas pipeline. In addition, the three states, along with Uzbekistan, agreed to modernise Central Asia’s energy infrastructure. A treaty to build the new pipeline is scheduled to be signed in September 2007, while actual construction is slated to begin in mid-2008.

Putin was reported to have said that the pipeline would carry 20 billion cubic metres (bcm) of gas annually by 2012, while the Russian Energy Minister stated that it would eventually carry 30 bcm a year. Moreover, once it is fully upgraded, the proposed pipeline is expected to carry roughly 90 bcm of gas annually. Though the cost of the pipeline has not been announced, ITAR-TASS News Agency has cited a 2003 estimate of about US $1 billion. It has been agreed that both Kazakhstan and Turkmenistan will finance the construction of their respective portions of the pipeline without Russian assistance.

In the West, the deal is being viewed by most energy experts as a great advance by Russia in the race for acquiring access to Central Asian gas and a serious blow to the US and European Union proposed energy projects in the Caspian Basin. The EU has grand plans to diversify its sources of energy, a significant percentage of which comes from Russia today. It completed the construction of the South Caucasus Pipeline (SCP) in May 2006, which follows the Baku-Tbilisi-Ceyhan route, crossing Azerbaijan (442 km) and Georgia (248 km) and terminates at Erzurum in the east of Turkey. Once the Shah Deniz field reaches its production level, the pipeline would become a crucial source of energy for Europe.

Concerned about their over reliance on Russia, the European Union in particular has also been trying to develop an alternative route of energy flow from Central Asia to Europe that would bypass Russia. Having constructed the SCP, the EU has been hoping that the TCP – a pipeline called Nabucco – would eventually be linked up with it. The TCP is supposed to carry Central Asian gas via the Caucasus and Turkey to Europe. However, the latest deal between Russia, Kazakhstan and Turkmenistan seems to have rendered this pipeline a less viable option and a more difficult proposition.

American experts view the deal as a Russian step towards creating a natural gas cartel, which would also simultaneously help Moscow in realising its other geopolitical goals –wrecking western pipeline plans and increasing Central Asian dependence on Russia. Reacting to the trilateral deal, the US Energy Secretary Samuel Bodman said on May 14, 2007 that “this is not good for Europe” and “Europe needs to diversify its energy sources.” For eventually when the deal comes through, Russia will control the bulk of Central Asian energy exports and especially that of Turkmenistan. This is a clear victory for Moscow and would enable it to maintain its dominance over the European gas market. At the same time, the deal is a serious blow to European and American energy interests and plans to build an alternate pipeline that bypasses Russia. More importantly, there are growing Western concerns about Moscow using its energy clout for political purposes, which it demonstrated in 2006 and again in 2007 by briefly halting gas supplies to some of its neighbours, which in turn reduced the flow of gas to EU countries. Such concerns are unlikely to abate despite assurances given by Putin that the deal meant “more supplies of energy resources to Europe and the world’s markets,” which the Kazakh president sought to reinforce by characterising the deal as “a pure pragmatic commercial project.”

Another consequence of the trilateral pact is that China’s agreement with Turkmenistan for the annual supply of 30 bcm of gas starting in 2009 seems to be in danger. This is in addition to the projection that China’s dependence on Russia for gas could grow in the future. Russian leverage thus seems all set to increase vis-a-vis both the West and China.

Russia also tends to benefit financially from the deal. It currently pays $100 per 1,000 cubic metres of gas to Turkmenistan, which is subsequently resold to Europe at $250 per 1,000 cubic metres. Moscow stands to almost double its imports from Central Asian gas from roughly 50 bcm to about 90 bcm. It is important to note here that Russia has succeeded in roping in Central Asian states into its energy strategy because it has charged lower than world market prices for their use of Russian pipelines to export gas and oil. At the same time, unlike the West, which has sought to link its investments in the energy sector to the promotion of democracy, Russia does not demand any political reforms in these states. Moreover, past linkages make it easier for Moscow to consolidate its position in the region.

One aspect that is worth noting here is Turkmenistan’s conviction that it has enough gas for projects with Iran, China, Afghanistan and India, apart from the commitment it has entered into with Russia through this latest deal. In contrast, energy experts contend that Ashgabat would find it difficult to simultaneously supply gas for European projects, China and the Turkmenistan-Afghanistan-Pakistan-India pipeline. If Turkmenistan has to meet Chinese and South Asian demand while maintaining its Ukrainian and Russian deliveries, it will have to double its production. It is not clear whether the country can increase production, nor is it even clear how much gas reserves it actually has.

One thing that is however clear is that Russia has managed to strengthen its hold over energy transit routes to Europe and is likely to remain the main source of energy supplies to the continent in the foreseeable future.