Posted by meb at July 18th, 2007

For years Putin has been determined to win the battle over Caspian oil and gas. During the Russian Security Council discussion on the Caspian (April 21, 2000) Putin made the following statement:
“We must understand that the interest of our partners in other countries — Turkey, Great Britain and the United States — toward the Caspian Sea is not accidental. This is because we are not active. We must not turn the Caspian Sea into yet another area of confrontation. We just have to understand that nothing will fall into our lap out of the blue, like manna from heaven. This is a matter of competition and we must be competitive.”14 Today Russia is the most active player in Caspian.

Putin’s strategy for Caspian oil and gas involves the following goals: encircle Europe by pipelines from the northwest, the southeast and the middle (for instance, the Nord Stream bypasses Belarus and Poland, the South Stream bypasses Ukraine and Turkey); buy most of the gas as cheap as possible from the eastern Caspian states and either use it in Russia or sell it to Europe at a nice profit; use the routes Russia has control over or construct new ones bypassing “troublemakers” and competitors; kill the Nabucco gas pipeline project from Turkey to Austria unless Russia participates; bring Kazakh oil to Western outlets through the routes Russia has control over; discourage competing projects but ensure that Russia is a reliable supplier; convince countries that oil and gas exports with guaranteed volumes and low prices are more attractive than selling uncertain amounts at high prices by bypassing Russia; and promote other means to make Russia’s ties with the Caspian states stronger.15

Putin’s three important moves in the past two months have given him much leverage to realize his strategy.

May 12, 2007: At the trilateral Central Asian summit between Russia, Kazakhstan and Turkmenistan, the leaders announced their agreement to: refurbish and expand the gas capacity of the Soviet-era pipelines that run from the Asian region to Western markets via Russia; increase gas exports volumes from the region via Russian pipelines; deepen further Russian participation in developing Turkmen gas reserves; and commit to long-term Kazakh oil exports through Russia. A formal agreement is expected to be signed on Sept.1, 2007.

However there are two major uncertainties surrounding the formalization of that agreement.

The first of these issues concerns Turkmenistan, as the bulk of Turkmen gas is already under contract to Russia until 2028. Exports (up to 30 billion cubic meters [bcm] annually) to China are expected to start in 2009 and some gas (about 6 bcm) goes to Iran. In addition, Turkmen President Gurbanguly Berdymukhammedov still supports the Trans-Caspian and Trans-Afghan pipeline projects. Now Turkmen gas is supposed to feed the Nabucco project via Iran, according to an announcement on July 13. Can Turkmenistan fulfill all these commitments? It is very unlikely. Were these issues discussed in the Turkmen president’s meetings with US Adm. William Fallon on June 21 and with US Deputy Assistant Secretary of State Evan Feigenbaum on June 26? Will he discuss these issues during his trip to China?

The second problem concerns Kazakhstan. Kazakh President Nursultan Nazarbayev told reporters that his country “was absolutely committed to funneling the bulk of our hydrocarbons, if not all, via Russia’s territory,” hence strengthening Putin’s signal to the world that the region is becoming increasingly under the Russian sphere of influence. He is known to be a chameleon policy follower which causes a lack of trust. So, is he serious or is it a part of his multi-vector policy which maintains a balance among the main powers involved?

June 4, 2007: The Moscow Times reported that Gazprom will study the proposal made by the Greek president to build a gas pipeline alongside the Burgas-Alexandroupolis oil pipeline. The line is planned to be connected at the Bulgarian port of Burgas with a link from the Blue Stream. An LNG facility in the Aegean port of Alexandroupolis will ship the gas further by tank.

June 23, 2007: Eni and Gazprom signed a memorandum of understanding to cooperate on the South Stream gas pipeline. The pipeline would start from Russia’s Black Sea at Beregovaya (the same point the Eni-Gazprom Blue Stream line begins), cross the Black Sea and reach Bulgaria. From there two options are on the table — the southwestern option would continue through Greece and the Adriatic seabed to the port of Otranto in southern Italy, while the northwestern option would run from Bulgaria through Romania, Hungary, Slovenia and Austria to northern Italy. Gazprom is reported to have signed memorandums of understanding (MoUs) with Hungary and Serbia to participate. Bulgaria and Greece are already ready to participate and construction would begin as early as 2008, to be completed within three years.

Putin could not have better timing for making these arrangements as the US has been busy with Iraq and Turkey preoccupied with the upcoming election.

Concluding remarks

General Sun Tzu, the ancient Chinese strategist of the fourth century B.C., taught his men to “know your enemy” before going into battle. If “you know your enemy and know yourself,” he wrote in his book “The Art of War” that “you need not fear the result of a hundred battles.” But, he warned, “if you know yourself but not the enemy, for every victory gained you will also suffer a defeat.” He also added: “If you know neither the enemy nor yourself, you will succumb in every battle.” Vladimir Putin certainly knows himself, his subject, his competitors and his country. Most importantly, he works for the interests of his country. He may have made some mistakes in other areas, but this will not prevent him winning the energy battle over Caspian until at least March 2008.

China also hunts in Caspian

For years Beijing has called on its major energy companies to engage in a “go-out” strategy for securing energy resources and investments in them. Consequently Chinese firms have traveled around the world searching for oil and gas fields, securing exploration rights and purchasing multiyear contracted supplies, mainly in Africa.

In the past few years, however, China has concentrated on a region closer to home which the Russians consider near abroad — Central Asia and the Caspian. China has stepped up its involvement in the region by signing a series of bilateral energy sector deals and with successful investments in several energy projects and assets, mostly in Kazakhstan. This development indicates that Chinese and Russian companies will be competing with each other for the remaining reserves and assets.11 Ultimately, they could decrease the competition and instead work together as partners on several projects.

In this regard one major cooperative project may be an oil pipeline to China. Lukoil wishes to direct as much high-quality Kumkol oil as possible through the CPC line to Western markets, leaving a Kazakh-China oil pipeline dependent on Russian crude.12 Russia may make use of a Kazakh-China oil pipeline for its oil exports to China until its own pipeline to China is implemented.

The combined weight of China and Russia in Kazakhstan and Turkmenistan should not be underestimated. Russia and China’s overall effect may marginalize the US and EU attempts to bring about political and economic reforms in region’s countries13, as well as undermine energy transit corridors backed or not backed by them.

Another area of cooperation may be the Iran-Pakistan-India gas pipeline, which the US strongly opposes. Two recent developments are worth noting. First, Gazprom expressed the possibility of extending the pipeline into China, which implies a convergence of interests among all regional actors and the delegation of Russian Prime Minister Mikhail Fradkov’s recent visit to Pakistan included officials from Gazprom.

Footnotes and references:

1- Putin has restored many Soviet symbols: the red star as the military emblem, the red banner as its military flag and declaration of the birthday of Felix Edmunovich Dzerzhinsky, founder of Soviet secret service Cheka, the forerunner of the KGB, as Security Organization Day.

2- Putin’s thoughts and enthusiasm for reasserting the role of a strong Russia was shaped in his Ph.D. thesis around the idea of natural resources and national champion companies. Whether he was the actual author is another issue.

3- According to a news analysis in The Washington Post, up to 78 percent of 1,016 leading political and business leaders in Russia have served previously in organizations affiliated with KGB or FSB.

4- Martha Brill Olcott, The Energy Dimension in Russian Global Strategy, The James Baker III Institute for Public Policy, Rice University, October 2004.

5- Allowing the government to pay back salaries and pensions.

6- When the government could not pay back loans, it auctioned off the right to manage shares.

7- However, in mid-July Gazprom announced it would develop the field with France’s Total.

8- For example, Gazprom signed long-term contracts and asset swaps with Germany’s Ruhrgas, France’s Gaz de France, Italy’s Eni and Enel, and Austria’s OMV. Note that Germany’s Ruhrgas has a stake of more than 10 percent in Gazprom today and has a representative on the board of directors.

9- Most of the recent increase in production most probably comes from already long-worked fields with old wells, from new wells in those deposits, the rehabilitation of existing oil fields and the reopening of closed wells.

10- Signed in March 2007 by Greece, Bulgaria and Russia, scheduled to be completed in 2011.

11- Andrew Neff. “Russian-Chinese competition may marginalize US, European influence.” Oil & Gas Journal, March 13, 2006. pp. 39-42.

12- Kimberly Marten. “Disrupting the Balance: Russian Efforts to Control Kazakhstan’s Oil.” PONARS Policy Memo No.428. December 2006.

13- A. Neff. “China competing with Russia for Central Asian investments.” Oil & Gas Journal, March 6, 2006. pp. 41-46.

14- For example, the Eurasia Canal project of Kazakh President Nazarbayev for connecting the Caspian and Black seas. Sergei Ivanov, Russian Deputy Prime Minister, already endorsed the idea on June 15.

source: Dr. Sohbet Karbuz – Today’s Zaman

Dr. Sohbet Karbuz, a former official of the International Energy Agency and a former academic, currently works for an energy industry association in France. The opinions expressed are the author’s alone. He can be contacted at sohbetkarbuz@yahoo.com