Azerbaijan: Avoiding the Crisis and Increasingly Optimistic

Excerpt from Caspian Investor by Ilya Kedrov

During the first quarter, Azerbaijani authorities recognized development in both the domestic economy and the oil and gas sector. Successes included a 63 percent increase in domestic investment, growth in natural gas production, the rapid commissioning of two new offshore rigs at the “Oily Rocks” deposit, restoration of oil production at Azeri-Chyrag-Guneshli, the republic’s largest upstream project, and the commissioning of the Bakhar-Govsany-Surakhany gas pipeline, among other positive developments. Despite exploring several directions for gas export, however, Baku’s strategic plan still sees the basic direction as moving to Europe.

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Gazprom Neft Targets Kazakhstan and Turkmenistan

Excerpt from Caspian Investor by Elena Kirillova

Gazprom Neft expects to increase its resource base in Russia, while also beginning development of foreign projects. According to the company’s deputy general director for exploration and production Boris Zilbermints, Gazprom Neft has already offered to several leading world oil and gas holdings – Chevron(US), Eni (Italy) and Royal Dutch/Shell (Netherlands/UK) – a number of its Russian assets in exchange for participation in their projects abroad.
Zilbermints noted that Kazakhstan and Turkmenistan are a priority of the company. Now Gazprom Neft delivers oil products to Kazakhstan in bulk, but in the future is planning to reach the end user. Independently, the company does not want to build gas stations. “We shall consider possible purchases,” he said. Zilbermints noted that in close proximity to Kazakhstan is the Omsk refinery from which Gazprom Neft could deliver oil products. He did not specify investment requirements for the project.

Currently in Central Asia Gazprom Neft has its own network of gas stations only in Kyrgyzstan. Having refocused on the purchase of gas stations, the company could be counting on acquiring a share in Mangistaumunaigaz, which owns a large network of Kazakh gas stations. KazMunayGaz (KMG), the Kazakh state oil and gas company, is purchasing 51 percent of Mangistaumunaigaz shares; Gazprom Neft has applied for the remaining 49 percent. The company is not going to limit cooperation to KMG. Zilbermints added that Gazprom Neft is ready for joint development of deposits in both Kazakh and Russian territory.

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Georgian Conflict Obliges Export Route Reality Check

Excerpt from Caspian Investor by Dr. Kent Moors, Contributing Editor

Within days of military action commencing, all oil pipelines and seaport terminal export facilities closed in Georgia. The separatist regions of South Ossetia and Abkhazia remain resolved to leave Georgia guaranteeing ongoing domestic unrest. That means threats of pipeline and port closures will continue, substantially increasing the risk equation in moving hydrocarbons out of the Caspian basin. The vulnerability of the Baku-Tbilisi-Ceyhan (BTC), Baku-Supsa and Baku-Tbilisi-Erzurum pipelines, as well as the ports of Batumi, Poti and Kulevi, will certainly prompt a serious reappraisal of export security.

A number of observers now suggest that the events assure a reorientation of oil flow directions, or at least a more balanced risk exposure.

This is exactly what Washington does not want to hear. The ongoing “pipeline war,” in which the US and the European Union pursue pipeline projects by-passing Russia while Moscow responds with new export projects of its own, has been briefly interrupted by hostilities of a more heated variety. Yet, the longer-term implications are more sobering for the West.

BTC had been the one major accomplishment of Washington and Brussels, a primary export venue from the rapidly developing Caspian basin beyond the touch of Moscow. Apparently, that is not the case any longer. The argument that Moscow’s intent all along was to put pressure on the BTC through this military exercise has nothing substantive behind it. In the end, however, that makes little difference. The military rationale for the incursion is not the issue here. Events have accomplished Moscow’s “energy full court press,” as one observer put it to us.

Tbilisi now faces the real damage, some probably irreversible. Georgia’s image as a secure energy route is shattered. Throughout BTC construction, considerable attention emerged over pipeline safety concerns in Turkey or Azerbaijan. There was hardly a mention of the Georgian segment in discussions on the subject. Over the past decade, Europe in deliberations over each new possible pipeline route has relied upon Georgia as a preferable connection to the Caspian. All of that assurance is now gone. An immediate withdrawal of Russian tanks from Georgia does not make the South Ossetian and Abkhazian situations more secure. Oil and gas companies now must factor in a new level of uncertainty. From the standpoint of export flows, whether the threat comes from regional militias, separatists or national armies makes little difference. Georgia is now unstable and that increases the risk of transporting hydrocarbons across it.

The wider implications are only beginning to appear. As one commentator put it on August 12, “The biggest casualty of the showdown has been the West's naive belief that Georgia provides a secure alternative energy corridor that avoids either Russia or charter ‘axis of evil’ member Iran.” Over the last decade, Western companies have pumped $5 billion into developing the Batumi, Poti and Kulevi Black Sea ports, along with the Baku-Supsa oil pipeline and the BTE. However, the real crown jewel of Western investment success has been the 1,760-kilometer, 1 million barrel a day BTC pipeline. All are now clear targets in a new security environment.

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Kazakhstan Introduces Major Changes in Subsoil Use Legislation

Kazakhstan Introduces Major Changes in Subsoil Use Legislation

Excerpt from Caspian Investor by Inna Gaiduk

Kazakh authorities have not limited themselves only to a victory in restructuring Kashagan ownership. At the beginning of February, Prime Minister Karim Masimov suggested to terminate contracts in which subsoil development companies have not executed obligations, with the deposits returning to the state. Experts have regarded this action as an attempt to return most of large production companies’ shares to state ownership, clearly reflecting the recent Russian approach. First, the Ministry of Finance suggested imposing taxation on mineral extraction, already applied for years in Russia. Then the Ministry of Energy and Mineral Resources lobbied for tax amendments introducing oil export customs duties by January 1, 2009, another analogy to the Russian legislation.

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Russia Moves to Control Caspian Gas Pipeline Directions to Europe

Excerpt from Caspian Investor by Elena Kirillova and Inna Gaiduk

Russia is intensifying efforts to connect key Caspian regional players to its new natural gas pipeline projects. These serve to render so-called "anti-Russian" pipelines less likely. Such pipelines include Nabucco (the Trans-Caspian gas main from Turkmenistan to Europe) and the South-Caucasian gas main (the Baku-Tbilisi-Erzerum pipeline, extending from Azerbaijan to Turkey and then on to Southern Europe). On November 22, the head of Gazprom Alexei Miller and the CEO of Italian Eni Paolo Scaroni signed an addendum to the June 23 Memorandum of Mutual Understanding concerning the construction of the South Stream gas pipeline across the Black Sea floor. Recently, the Russian government approved the Near-Caspian gas pipeline.

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Agreement on Near-Caspian Pipeline Reached

Excerpt from Caspian Investor

Recently in Moscow, the governments of Russia, Kazakhstan and Turkmenistan signed an agreement to construct the Near-Caspian (also called the Pre-Caspian) gas pipeline. The signing took place in the Kremlin following talks between Russian President Vladimir Putin and Kazakh President Nursultan Nazarbayev. Turkmen President Gurbanguly Berdymukhammedov was apprised by telephone during these discussions. The pipeline should be brought into operation no later than the end of 2010, according to Victor Khristenko, Russian Minister of Industry and Energy.

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Caspian Sea Status Remains Uncertain

Five years after meeting in Turkmenistan, the leaders of the five near-Caspian states—Azerbaijan, Kazakhstan, Russia, Turkmenistan and Iran—gathered during the second summit in Tehran to continue discussions on the legal status of Caspian Sea.

In the summit’s Final Declaration, the parties only mention unobjectionable positions on the future status of the Caspian Sea. The positions on which the heads of state disagreed are not included and become subjects for their future discussions. The countries are on record as stating that the Caspian Sea is a region exclusively under their jurisdiction and that they are committed to work for its prosperity and peace. “We spoke very frankly, in detail and in an interested fashion. We did not reach agreement all the time on everything, but it is very clear that we desire to find a consensual arrangement,” Russian President Vladimir Putin said at the joint press conference following the summit.

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