Central Asia historically has been a region where major powers fought for control of the overland trade routes between China, Europe and Russia. These so-called silk routes extended over 4,000 miles and proved to be a vital path for inter-regional trade for more than 3,000 years.
The Soviet Union changed the region’s political dynamic, especially around energy, when it brought the five “stans” and the Caucasus within its sphere. Under Soviet rule, the energy trade developed in a north-south pattern, with all pipelines moving north into Russia and avoiding the traditional east-west paths of the Silk Road.
Since the demise of the Soviet Union in 1991, many cracks developed in Russia’s energy hegemony over Central Asia and the Caucasus. Diversification of oil routes occurred first, starting in the mid-1990s and continuing to the present. Diversification of gas routes occurred much later and is only now resulting in multiple gas export routes.
Today, the players in the region are numerous: Russia, which is attempting to maintain its political and economic hegemony over the region; China, which is entering into long-term relationships to sustain economic growth and energy security; the European Union, which is developing new sources of gas to meet future demand and to enhance its energy security; the United States, which is seeking to augment its influence to counterbalance Russia and China; and the nation’s that make up the region are attempting to forge a delicate balance among these competing interests.
The international effort to break the Russian monopoly on transport routes is at the forefront of the new energy politics in the region. In this heightened political atmosphere, the oil and gas pipelines crisscrossing the area have become, in effect, the modern version of the Silk Road.
OIL PIPELINES
In the post Soviet era many cracks developed in the Russian oil pipeline monopoly. The United States, with European backing, supported this diversity with its multiple pipeline strategy. Today, route diversity and competition undermine Russia’s former monopoly.
The first crack developed in Azerbaijan in the 1990s with pipeline and rail routes starting in Baku, Azerbaijan and transiting Georgia carrying oil to the Black Sea ports of Supsa and Batumi. The second crack, the Caspian Pipeline Consortium (CPC) pipeline, opened in October 2001 carrying oil from Kazakhstan’s Tengiz oil field to the Black Sea via Russia. CPC was the first and remains the only oil pipeline within Russia not controlled by state-owned Transneft, Russia’s oil pipeline monopoly. The third crack, the Baku-Tblisi-Ceyhan (BTC) pipeline open in July 2006, from Baku to Ceyhan, Turkey, a deepwater port on the Mediterranean.
The next crack was the completion of the Kazakhstan to China oil pipeline in July 2006, now extended across Kazakhstan to Atyrau to link up with its western oil fields. Finally, Kazakhstan developed a trans-Caspian barge system shipping oil from the port of Aktau via barge to the BTC pipeline.
GAS PIPELINES
In Soviet times, all gas pipelines went north and connected with the Russian gas system. The emergence of Gazprom in the 1990s as Russia’s state controlled gas monopoly continued Russia’s domination of Central Asian gas transportation. The Central Asia Center Pipeline (CAC) connected Kazakhstan, Turkmenistan, and Uzbekistan for distribution of gas within the region and export to Russia. Gazprom contracted with the three countries to buy all the available capacity in the CAC system maintaining Russia’s dominance.
Alternatives are dissipating Russia’s gas monopoly. Azerbaijan’s Shah Deniz Caspian gas field development led to the South Caucasus Pipeline (SCP) that carries gas from Baku through Tbilisi, Georgia to Erzurum, Turkey (or BTE pipeline), connecting to the Turkish gas pipeline network. SCP began gas exports in 2007, marking the change of Azerbaijan from a net importer of Russian gas to a net exporter of its own gas.
In June 2009, Azerbaijan’s President Aliyev signed an agreement with Russia’s President Medvedev for Azerbaijan gas exports to Russia. An implementing agreement was signed in October 2009 running from 2010 to 2014 for the sale of 500 million cubic meters per year.
Russia thought it staged a coup by buying Azeri gas precluding Azerbaijan’s commitment to Nabucco. Closer analysis revealed that Azerbaijan did better since it sold its surplus gas for a limited period of time at world prices, but retained the ability to commit gas in the future to Nabucco since Nabucco is not expected to begin operations until 2015, a year after the Russian contract expires. Azerbaijan continues to seek gas export alternatives and is working with Bulgaria for pipeline and tanker movements of compressed natural gas for additional gas exports.
Turkmenistan is opening another wedge in Russia’s dominant gas position. Gazprom turned to Turkmenistan when its own Russian production leveled off and found that it was cheaper to buy Turkmen gas than to develop its own Yamal gas fields. Under President Niyazov, Turkmenistan sold its gas to Russia or Ukraine, while making overtures to the west about a trans-Caspian pipeline. This situation continued until the death of Niyazov in December 2006.
Turkmen President Gurbanguly Berdymukhamedov was elected in February 2007. Later in 2007, he signed an agreement with Russia to expand the Prikaspiiski pipeline system running along the eastern shore of the Caspian. With Gazprom’s contracts for all the capacity of the CAC gas pipeline system and the expansion of the Prikaspiiski pipeline, it appeared that Russia re-asserted its hegemony over Central Asia gas.
This illusion did not last long. Turkmenistan and China signed a gas export deal in December 2006 (weeks before Niyazov’s death) for the export of gas to the east. Construction of the Turkmen section began in August 2007 and completed in November 2009. The Uzbek section began construction in June 2008, while the Kazak section began construction in July 2008. The Chinese National Petroleum Company (CNPC) is providing most of the financing for the pipeline. China and Turkmenistan expect that gas will start flowing in the Turkmen section in December 2009 and small volumes of gas will reach China in early 2010. The initial agreement was for 30 billion cubic meters per year for 30 years, now increased to an additional 10 billion cubic meters per year.
In the meantime, negotiations with Gazprom over the expansion of the Prikaspiiski pipeline continued and still have not been completed primarily due to lack of agreement over price terms. A 600 km east-west spur line also was to be built and financed by Gazprom to connect central Turkmenistan gas fields with the expansion. Rather than rely on Gazprom financing, Turkmenistan requested tenders from international companies for the pipeline’s construction. Turkmenistan now thinks that Gazprom lacks the financial capacity to complete the east-west spur.
The recession of 2008-2009 changed Gazprom’s situation. Gas demand from Europe, Gazprom’s prime export market, fell by 25-30% or more. In 2009, Gazprom’s gas prices fell as its gas contracts are oil price linked following oil prices with a six to nine month lag. With Gazprom paying “world prices” for Turkmen gas in Central Asia, Gazprom was losing significant amounts of money on every cubic meter of Turkmen gas it was selling in Europe or at home. Gazprom needed relief from its Turkmen gas contracts.
On April 9, 2009, a blast occurred on the CAC-4 section of the Turkmen-Russian pipeline stopping all Turkmen gas shipments to Russia. Whatever the cause, no gas flowed from Turkmenistan to Russia since the explosion. On April 24, 2009, at a two- day international energy conference in Ashgabat, President Berdymukhamedov declared Turkmenistan’s energy independence from Russia. Berdymukhamedov’s statements have important implications for China, EU and the US. He said, “Today we are looking for conditions to diversify energy routes and the inclusion of new countries and regions….Turkmenistan must create a new system of relations with Europe. In the current situation, the diversification of energy routes could help to stabilize the global economy.” He continued that “it is normal and absolutely justified…for any energy producer country wishing to maintain its economic and energy security to assert its national interests….Energy security has been the cornerstone of the foreign economic strategy of Turkmenistan.”
Representatives from the United States in attendance at the conference expressed interest in having Turkmen gas committed to a trans-Caspian pipeline route. European representatives also in attendance were seeking commitments to supply gas to Europe.
Turkmenistan is working with China to develop its South Yoloten gas field in eastern Turkmenistan. Some estimates have placed the reserves in this field as high as 14 trillion cubic meters, which is about twice current total Turkmen reserves. CNPC is the first foreign company to develop a major onshore field under license in Turkmenistan. China has provided a $4 billion line of credit for the development of South Yoloten. China also is financing a fertilizer plant that will export its output to China. Additional incentives have been offered as well.
The EU is seeking commitments from Turkmenistan for its proposed Nabucco pipeline, from Azerbaijan through Turkey to Europe. President Berdymukhamedov indicated recently that South Yoloten has enough gas to also supply Europe through Nabucco. On July 13, 2009, Nabucco and its partners signed transit agreements with Turkey and European countries (Bulgaria, Romania, Hungary, Austria) to permit Nabucco to carry gas across each country’s territory. The EU is now more optimistic than at any other time that Nabucco will be built.
A relatively new pipeline proposal, White Stream, a private venture, may provide an opportunity to carry Azeri gas directly to Europe, bypassing Turkey. The private companies would transport gas across Georgia (relying on a 100 mile pipeline from the South Caucasus Pipeline to Supsa), then under the Black Sea to the Romanian coast near Constanta and then using Romania’s gas transmission on to EU markets.
Since the demise of the Soviet Union in 1991, many cracks developed in Russia’s energy hegemony over Central Asia and the Caucasus. Diversification of oil routes occurred first, starting in the mid-1990s and continuing to the present. Diversification of gas routes occurred much later and is only now multiplying gas export routes. All the countries of the region rely on pipelines for their energy trade, the modern day version of the old silk routes.
Analysis by Abraham Energy Report Contributing Editor Leonard L. Coburn