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 Toughens Position in the Oil and Gas Sector

Excerpt from Caspian Investor by Svetlana Milyaeva

First quarter results have not caused any optimism among Kazakh authorities.The global financial crisis has hit Kazakhstan, lowering rates of economic growth and reducing incomes by 3 percent. According to President Nursultan Nazarbayev, “there is a hole in the budget,” that is necessary to fix. Moreover,the continuing rise in oil products prices on the domestic market resulting fromthe lack of such products has caused the next rise in inflation. Astana has received another postponement in Kashagan development from the foreign partners of the consortium, the third delay in the initiation of production. The response has not been long in coming. The Kazakh government has startedtalking about rigid sanctions for the failure in production terms at Kashagan,has introduced export duties on oil and a ban on oil products export, has promised to toughen requirements to subsoil users regarding transparency of purchasing procedures, and has suggested a change in import custom duties forforeign producers in the oil and gas sector.

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Determining the Russian Offshore External Borders

Excerpt from Russian Petroleum Investor by Vladimir Baidashin

The question of fixing the Russian continental shelf external border arose after the Russian institute VNIIOkeanologiya using the icebreaker Russia conducted geological-geophysical research in 2007. The research zone encompassed the adjoining of the underwater Lomonosov Ridge with Laptev and East Siberian Sea shelves, substantiating the external border of the Russian continental shelf. During the work, arctic explorers in a bathyscaphe lowered to the ocean bottom near the North Pole, took ground samples and put there a Russian flag.

In September 2007, the Ministry of Natural Resources (MNR) reported that, “Preliminary analysis of data obtained for a model of the earth’s crust allows confirmation that the structure of the Lomonosov ridge corresponds to world analogues of a continental crust and therefore is a part of the adjoining continental shelf of the Russian Federation.”

For 2008-2009, plans call for preparation of geological substantiation for the Russian application defining its continental shelf external border and carrying out of negotiations with Denmark, Canada and the US on delimitation of the continental shelf in Arctic regions. Then, in 2011, Russia plans to send the United Nations (UN) an expanded application for establishing an external border in the Arctic regions in connection with acknowledgement of the continental nature of the Lomonosov Ridge and Mendeleyev’s Elevation with their belonging to the extensions of Eastern Siberia. The Ministry of Foreign Affairs remarks that, from the legal point of view, Russia from the very beginning operated within the limits of the Convention on the Law of the Sea.

By estimations of experts, the increase in the area of the Russian continental shelf in Arctic regions outside a 200-mile zone can total 1.2 million square kilometers. Estimates of hydrocarbon resources in the territory are approximately 4.9 billion tons of conditional fuel.

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The Russian Ruble at the Iranian Oil Exchange

Exerpt from Russian Petroleum Investor

Earlier this year, a special oil exchange opened on the Iranian island of Kish in the Persian Gulf to trade oil, oil products and natural gas. In the opinion of experts, the Iranian experience in creating the exchange is especially interesting to Russia because, first, it begins exchange trade in oil and oil products; secondly, it is possible that in the near future there will be a new Iranian- Russian gas exchange.

Iran is the second country in the region on oil production after Saudi Arabia, extracting nearly 22 million tons of oil a year. However, because of rigid state regulation, it cannot take an appropriate place in the global market, despite a convenient geographical location. According to the Minister of Oil Gholam- Hossein Nozari, the purpose of creating an oil exchange is transformation of Iran from an oil-producing country to an important player in the global market of oil and oil products. “Our purpose is to make oil and oil products trade more transparent, to strengthen competition and to attract solid investors, to become a part of the global market not only in the sphere of oil extraction but also in the sphere of oil trade,” Nozari declared.

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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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The Complexities of Realizing the Shtokman Project

Excerpt from Russian Petroleum Investor

Both Total (France) and StatoilHydro (Norway) have no guarantee that they can put Shtokman reserves on their books, although Gazprom assures them there will be no problem. The participating companies intend to enter into discussions about the accepted role of each company in development of the first phase of Shtokman, specifying the realization of the project as well as the model of project finance. In addition, the discussions will consider the reserves balance at the deposit, the license for which belongs to Gazprom 100 percent owned affiliate Sevmorneftegaz. Is it possible for the foreign companies to put on their books reserves that are, in fact, virtual amounts? Gazprom remains the real owner of the reserves. In addition, Total and StatoilHydro will be compelled to discuss this issue not only with Gazprom, but also with the US Securities and Exchange Commission (SEC).

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Gazprom Agrees to Buy Central Asian Gas at European Prices

Excerpt from Caspian Investor by Kent F. Moors, Ph.D., Contributing Editor

Gazprom announced an historic decision on March 11. The Russian natural gas giant has agreed to purchase Central Asian gas at “European prices” beginning in 2009. If the decision holds
up, it stands to place considerable control of Central Asian gas throughput to Europe in Russian hands, as well as create a significant problem for the Western-supported Trans-Caspian Gas Pipeline designed to bypass Russia. One thing appears certain, however. This agreement once implemented will fundamentally change the regional gas export dynamics.

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