Kazakhstan: Energy Cooperation with Russia - Oil, Gas and Beyond (Russian Foreign Energy Policy)

KAZAKHSTAN: ENERGY COOPERATION WITH RUSSIA—OIL, GAS AND BEYOND

Ariel Cohen, PhD

Publisher’s note Every possible effort has been made to ensure that the information contained in this publication is accurate at the time of going to press and neither the publishers nor any of the authors, editors, contributors or sponsors can accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editors, authors, the publisher or any of the contributors or sponsors. Users and readers of this publication may copy or download portions of the material herein for personal use, and may include portions of this material in internal reports and/or reports to customers, and on an occasional and infrequent basis individual articles from the material, provided that such articles (or portions of articles) are attributed to this publication by name, the individual contributor of the portion used and GMB Publishing Ltd. Users and readers of this publication shall not reproduce, distribute, display, sell, publish, broadcast, repurpose, or circulate the material to any third party, or create new collective works for resale or for redistribution to servers or lists, or reuse any copyrighted component of this work in other works, without the prior written permission of GMB Publishing Ltd. GMB Publishing Ltd. 120 Pentonville Road London N1 9JN United Kingdom www.globalmarketbriefings.com This edition first published 2006 by GMB Publishing Ltd. © Ariel Cohen Hardcopy ISBN 1-905050-41-0

E-report ISBN 1-905050-81-X

British Library Cataloguing in Publication Data A CIP record for this book is available from the British Library

Kazakhstan

Contents About the Author

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1. Russia and Kazakhstan in an energy-starved world

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The geoeconomics of post-empire: from nomadic steppe to worldclass energy exporter
Russia–Kazakhstan: pipeline politics
The Shanghai Cooperation Organization and other foreign-dominated organizations
Caspian Sea demarcation

2. Oil and gas export challenges





7

Current export routes The Chinese factor Other challenges Environmental factors

3. Major oil projects

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Tengiz field
Caspian Pipeline Consortium (CPC)

4. Marine exploration






The Kurmangazy project The Khvalynskoye and Tsentralnaya projects Atash project The Tyub–Karagan project The Imashevskoye field

5. Gas projects





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23

Transit of Russian and Central Asian gas through Kazakhstan Development of a gas pipeline infrastructure ‘Central Asia – Centre’ Purchasing and marketing Kazakhstan’s natural gas The outlook for Kazakhstan’s gas

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Establishment of the gas alliance
Future issues of cooperation and competition
The Kazakh gas supply to China

6. Electricity

31


Creation of a Kazakh–Russian company based on Stantsiya Ekibazstuzkoy GRES-2

7. Coal industry cooperation

33


The Kazakhstan–Russia Coal Connection

iv

8. Uranium mining and nuclear fuel cooperation

35

9. Conclusions

39

Notes and references

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About the series: Russian foreign energy policy reports

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About the Author Ariel Cohen, PhD, is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at The Heritage Foundation. A member of the Council on Foreign Relations, Cohen has testified numerous times before the US Congress and appeared on CNN, BBC, ABC and in many other electronic and print media around the world. Cohen is a sought-after consultant for energy and other industries. He is the author of Russian Imperialism: Development and Crisis (Praeger, 1998) and editor and co-author of Eurasia in Balance (Ashgate, 2005), as well as over 400 articles. Cohen earned his MA and PhD in Law and Diplomacy from the Fletcher School of Law and Diplomacy (Tufts/Harvard). The author would like to thank Karim Massimov, Assistant to the President of Kazakhstan, and Tatyana Klimova, for their kind assistance in the preparation of this report.

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1. Russia and Kazakhstan in an energy-starved world

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ith oil prices reaching new heights, non-Gulf oil and gas is more important than ever. The Caspian is the third largest oil basin in the world after the Gulf and Russia and, at this point, suffers less terrorism, political instability and religious strife than has been occurring in the Gulf since Ayatollah Khomeini overthrew the Shah in 1979. However, Kazakhstan and other countries in former Soviet Central Asia and Azerbaijan are increasingly coming under geopolitical pressure from their giant neighbours – Russia and China – which may jeopardize the unrestricted flow of oil to Western markets in the foreseeable future. Russia demonstrated high growth rates for oil production from 1997 to 2003, when the state cracked down on YUKOS and took other measures to renationalize the production of oil and gas, and the pipelines. As a result, Russian oil production rates are flattening. This leaves Kazakhstan as the largest producer in the Caspian and the one most open to Western investment, certainly more open than Russia. Western investment fueled most of Kazakhstan’s energy development during the 1990s, including the giant Tengiz, Kashagan and Karachaganak fields. This report will track the development of Kazakhstan’s energy resources through the prism of relations with its former imperial master – Russia. It

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will review the oil, gas, electricity and nuclear sectors and offer a discussion of future developments.

The geoeconomics of postempire: from nomadic steppe to world-class energy exporter Kazakhstan – and the Caspian basin in general – were the de facto ‘strategic petroleum reserve of the Soviet Union’. Although discovered in the 1970s and 1980s, the large hydrocarbon deposits of the Caspian basin remained mostly undeveloped until the 1990s, with the exception of the giant Tengiz field, on which the work began in the late 1980s as a part of Mikhail Gorbachev’s policy of openness to the West.1

From empire to independence While oil deposits in Azerbaijan have been known about from time immemorial, oil was unknown in the Kazakh steppes. The Turkic-speaking Muslim Kazakhs (ethnically, linguistically and culturally related to Ghengiz Khan’s Mongols) continued to live the life of nomads well after being subjugated by the Russian Empire in the 18th and 19th centuries. There were only about 3,000 Kazakh ‘proletarians’ (industrial workers) out of a population of 3.5 million in the

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1920s, when Stalin ordered the crash construction of the Turkestan–Siberia railroad, intended to carry Uzbek cotton to Russian mills across Kazakhstan. Kazakhstan quickly became a major supplier of raw materials and semi-finished goods for the USSR, primarily in the military and nuclear sectors. Products included coal and steel in Karaganda, non-ferrous materials, and later uranium for Soviet atomic weapons. As with other nationalities in the Russian Empire and later in the Soviet Union, over the span of over two centuries the Kazakh elite underwent modernization through education and integration into Western culture, despite the distortions imposed by Soviet ideology and Russian chauvinism. In the process it also became more nationally self-aware, producing its own writers, artists, as well as its own historical narrative. This was important in that at least some of the elements of the Kazakh elite began striving for a greater autonomy within the USSR, if not for outright independence.2 The notion of autonomy implied greater control over natural resources – something the central planners and communist leaders in Moscow abhorred. With the collapse of the Soviet Union, the process of self-identification as an independent nation accelerated. The umbilical cord connecting Almaty and Moscow was partially severed; deepseated ties, however, remain to this day.

Russia’s phantom pains of empire The Russian elite never fully relinquished the notion that Kazakhstan is ‘theirs’ or at least falls within Russia’s ‘sphere of influence’ – a special relationship that Moscow believes the rest of the world must recognize. This concept is still prevalent in policy *

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circles in Moscow, especially among the military, security officials, and the Kremlin Administration.3 Many in the West, however, think that this is an obsolete, 19th century geopolitical notion. Kazakhstan’s czarist and Soviet-era development fell within a centreperiphery framework. Out of 89 Russian regions, 72 have economic links with Kazakhstan. The governors of the neighbouring Novosibirsk and Orenburg oblasts have been vocal supporters of Kazakh–Russian cooperation. Russia was the final destination of US$7 billion, or 25 per cent, of Kazakhstan’s exports in 2004. Some 75 per cent of the Caspian region’s offshore hydrocarbon resources are concentrated in Kazakhstan’s sector of the littoral shelf. The Kazakh oil and gas industry has been adapted to Russian standards since the Soviet times. Energy-rich Kazakhstan is a major consumer of Russian electricity due to distortions created by Sovietera central planning. Kazakhs, on the other hand, value their independence as a source of power, prestige, careers and wealth. Non-Kazakhs in the nomenklatura* who valued their allegiance to ‘Mother Russia’, such as the Soviet-era ‘Red Director’ and later Russian Deputy Prime Minister, Oleg Soskovets, have departed for Moscow. Others, such as Vladimir Shkolnik, the current Energy Minister, and Alexander Tereshchenko, the former Prime Minister (1991–1994) have remained in the republic. Under the leadership of Nursultan Nazarbaev, Kazakhstan’s veteran leader – who was the Soviet-era Prime Minister since 1986 and the Communist Party First Secretary – is currently the first president of an independent Kazakhstan and has lead the country since 1989 through a crash course in

a ruling Soviet elite

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nation building. This has included generating ability to attract foreign investment, and to develop and market natural resources for the global economy. Russia has apparently decided not to play some of the geopolitical trump cards she holds – at least for now – over Kazakhstan. The ethnic card is one. Moscow-based experts and politicians of a more nationalist persuasion have often complained that the ‘cultural heritage’ and the status of ethnic Russians and Russian-speaking minorities in the CIS were being neglected by the Russian government in favour of economic interests. Moscow has thus far not played the card of a large Russian-speaking community in Kazakhstan, which includes ethnic Russians, Ukrainians, Tatars and others, to destabilize the country. As Russian speakers dominate northern Kazakhstan, it would be easy to create a movement for autonomy and reunification with Mother Russia, similar to what the Nazis did in the Czech Sudetenland before 1938, or what some in Russia advocated in the Baltic States. Caution on the part of the Kazakh leadership has also helped. Nazarbaev has taken a go-slow approach to reviving the dominant role of the Kazakh language. Kazakhstan has not completed switching from the Cyrillic to the Latin alphabet to this day. With inter-religious tolerance being a widely-supported state policy, and the standard of living climbing due to high energy prices, Russian and other non-Kazakh minorities feel secure and have no immediate reasons to engage in political activities that could threaten the independence and stability of the Kazakh state. On December 4, Nazarbaev was reelected for the third presidential term of seven years with 91 percent of the vote. Western polls gave him between 71 and 85 percent – evidence of man’s overwhelming popularity.

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Russia–Kazakhstan: pipeline politics Limited development of Kazakhstan’s oil took place under the Soviets. While US-based Chevron’s financing of the Caspian Pipeline Consortium (CPC) from Tengiz to the Russian Black Sea port of Novorossiysk was a success story 13 years in the making, most Soviet investment went to Western Siberia, which is located in the territory of the Russian Federation.4 After the collapse of the USSR, Russia attempted to keep strategic control over the direction of the oil exports from the Caspian basin in general and from Kazakhstan in particular. Many in Moscow viewed maintaining a transit pipeline monopoly as a sure-fire way to prevent the energyexporting former republics from developing independence from the former imperial master. However, in the 1990s Russia was deep in the economic crisis of the transition to a market economy, and lacked both the capital and corporate mechanisms for developing natural resources. Major international oil companies (IOCs) moved in, including Chevron, leading to the development of CPC. British Petroleum took the lead in building the Baku–Tbilisi–Ceyhan (BTC) pipeline that originates in Azerbaijan. Russian attempts to oppose BTC failed. Today, Russia views the US presence in the region as an unwelcome stranger, if not an outright intruder. The old outlook on the world being divided into spheres of influence apply to Russia’s positions on the Caspian. Kazakh, Kyrgyz, Georgian and Azerbaijani ties with Washington and NATO meet with suspicion and at times, with hostility in Moscow. In summer 2005 Russia enticed Uzbekistan to end a four year military

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presence in Karshi-Khanabad. In November 2005 Uzbekistan and Russia signed a military alliance treaty, and Tashkent announced that NATO was no longer welcome in the country. After the 1998 agreements on delimiting the northern Caspian and on transporting Kazakhstan-produced hydrocarbons via the Russian piping system, Kazakhstan gave up on seeking alternative routes, at least for a while.5 Meanwhile Russia, concerned by what it saw as the increasing influence of the US in Kazakhstan and the Caspian region on the whole, began working to increase its share in oil projects in the Caspian and in Kazakhstan in particular.6 Russia has several aces in its geopolitical stack of cards, beyond the control of the Samara and CPC export pipelines.

The Shanghai Cooperation Organization and other foreign-dominated organizations Two important factors impacting on the politics and development of the region are the emergence of a number of political organizations dominated by Russia. Additionally, China has appeared on the scene as a major economic and geopolitical player in Central Asia. China launched the Shanghai Cooperation Organization (SCO) as a ‘joint venture’ with Russia, and signed a Treaty of Friendship and Cooperation with Moscow in 2001. Members of SCO include, besides Russia and China, the five ex-Soviet Central Asian countries. In addition, India, Iran, Mongolia and Pakistan are observers. Russia has agreed to allow the Chinese to increase their profile in Central Asia because, prior to 9/11, the

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US demonstrated no abiding interest in the region, despite desperate calls for help against Islamist terrorism, such as the Islamic Movement of Uzbekistan, which is affiliated with Al Qaeda. As Islam and the threat of terrorist attacks went on the rise, Russia and China used the insecurity of regional governments as leverage in offering protection. The SCO and the Collective Security Treaty Organization (CSTO) – the military arm of the CIS – have both developed politicomilitary tools. These include the SCO Secretariat in Beijing, yearly summits and rapid reaction forces stationed in the area, which can be used to combat terrorism and unrest. However the SCO is also aimed at curbing US influence in Central Asia as was demonstrated by the eviction of the US military base in Karshi–Khanabad in Uzbekistan. While Kazakhstan retains its independence, Russian influence is on the rise. In addition to the SCO, Russia is working through two other regional organizations – the Eurasian Economic Commonwealth (EEC) and the CSTO – to reassert Moscow’s influence in Central Asia. The EEC, which includes Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Belarus, focuses on multilateral economic integration, while the CSTO, including the same members plus Armenia, aims to tackle regional security concerns. The two groups are dominated by Russia, with Russian security service generals directing each. Grigory Rapota is in charge of the EEC and Nikolai Bordyuzha serves as secretary general of the CSTO. The influence of the two organizations so far has been rather limited. However, Western experts believe that Russia, intent on limiting American influence as much as possible, will slowly but surely increase its meddling in the affairs of the region. At an EEC summit on

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22 June 2005, political leaders promoted an agenda that includes a regional free-trade zone and customs alliance. During the 2005 EEC summit, Kazakh President Nursultan Nazarbaev noted that trade among bloc members in 2004 totaled US$28 billion, up roughly 40 per cent over the previous year. Russia has devoted particular attention to strengthening economic ties with Kazakhstan, which possesses Central Asia’s most robust economy. Russia and Kazakhstan have agreed to create a regional investment bank with initial capital of US$1.5 billion, the bulk of which is to be supplied by Russia. The bank, expected to be operational by December 2005, is to be headquartered in Almaty, Kazakhstan. ‘This is not a closed bank, it will be open to shareholders from other CIS countries,’ Russian President Vladimir Putin has noted.7 In the beginning of the 21st century, the Russian economy began recovering, and Russian companies, including Lukoil and Gazprom, began demonstrating an increasing interest in energy projects in Kazakhstan. The Russia–Kazakh trade volume grew 47 per cent in 2004 and has now reached US$7 billion a year, one quarter of the total intra-EEC foreign trade volume.8 Nazarbaev realizes that he needs to keep his northern ally happy, and is likely to continue giving priority to Russian companies in major energy development projects. Both China and Russia are using their military muscle as well as their soft and nuanced power to boost their influence in the region. Since the summer of 2002, Russia’s policy in Central Asia and Caspian regions has been premised on ‘while the Americans are here now, we are in the region forever’.9

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Caspian Sea demarcation Azerbaijan, Kazakhstan and Russia have signed bilateral and trilateral documents settling disputes over the delination and demarcation of the Caspian Sea.10 This has increased the level of certainty for foreign investors, as well as for national companies, in developing new reserves. Kazakhstan and Russia in particular are cooperating on the development of oil and gas fields straddling their respective maritime sectors. Problems remain primarily in the southern Caspian Sea, disputed between Azerbaijan and Iran and Azerbaijan and Turkmenistan. Moscow, however, may have an interest in maintaining low-level diplomatic hostility in its relations with the Caspian states. On 17 February 2004, a ‘round table’ dedicated to the realization of a common international system of safety in the Caspian Sea basin was held in Moscow, which included Russian Ministry of Foreign Affairs officials, members of the State Duma and invited experts. According to one keynote speaker, Ambassador Alexander Golovin, a Special Representative of the Foreign Ministry and chief of the Caspian Sea working group, Russia’s position regarding the Caspian is that only Caspian countries have rights concerning the Caspian and its vast oil and gas resources. He specifically emphasized that the US has declared the Caspian an area of interest. V. Skvorcov, Representative of the Federal Security Service (FSB) stressed that it is important for Russia not to tolerate the presence of military forces of non-Caspian countries in the Caspian region. Russia values its overwhelming naval superiority in the Caspian and wants things to stay that way. However, according to the results of a January 2005 conference in Ashghabad, the Special Working

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Group (SWG) on preparing the Convention on the Caspian Sea of the Caspian Sea, the countries ‘agreed to disagree’ with regards to the final status of the Caspian Sea border demarcation. The communiqué noted that: ‘in the spirit of constructive and mutual advantageous understanding.. the parties completed the discussion of the draft of Convention on the Caspian status... and agreed to continue the settlement of the issues that need further decision’.11

Previously, unsuccessful rounds of negotiations on border delineation and demarcation prompted Caspian countries to revise their military pos-

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ture. Since 1997, Russia has doubled its military presence in the Caspian. Iran is building up its naval forces, which are the second-largest after Russia’s, and was involved in an incident, forcing a BP geoseismic vessel to abandon prospecting in disputed waters.12 Kazakhstan opened a militarynaval academy in Aktau, implying that it would build up its naval forces as well.13 While currently the Caspian remains peaceful, Moscow’s and Tehran’s resentment of Washington’s power projection may fuel Russian and Iranian policy coordination and an anti-US arms race in the basin. As China is increasing its energy holdings in the Caspian, it is possible it will attempt to project power in the region as well.

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Kazakhstan

2. Oil and gas export challenges

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azakhstan’s principal geoeconomic value and role is that of a major oil and gas producing economy (Figures 1 and 2). Exports are projected to rise from 1 million barrels/day (mbd) in 2005 to an anticipated 3 mbd in 2015 (50 million tonne/year to 150 million tonnes), putting Kazakhstan in the same category of oil exporters as Kuwait, Iran and Iraq. However, despite the optimistic prognoses, challenges and limitations to adequate production abound. For example, Uzakbay Karabalin, President of KazMunayGaz, the principal Kazakh state-owned company, has expressed concern about bottlenecks affecting Kazakhstan’s oil exports. One of them is Russia’s ability to control Kazakhstan’s access to its pipeline network. Not long ago, Kazakhstan was

allowed only only 2 million tonnes of oil per year to traverse the Russian state-monopolized Transneft system. This has now grown to 15 million tonnes, and Kazakhstan has agreed on further increases with Russia.14 Another bottleneck is limited export infrastructure. Kazakhstan would like the CPC to expand its capacity to 67 million tonnes a year from the current 28 million, 20 million tonnes of which comes from Kazakhstan.

Current export routes Currently, the cheapest route for Kazakhstan oil exports is via the Atyrau–Samara pipeline to Russia, which connects Kazakhstan’s oil pipeline network, and is owned by KazTransOil along with Transneft,

Figure 1. Oil production and consumption in Kazakhstan (1992–2003) Source: the Energy Information Administration, www.eia.gov

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Figure 2. Natural gas production and consumption in Kazakhstan (1992–2003) Source: the Energy Information Administration, www.eia.gov

Russia’s state-owned pipeline monopoly. The transit tariff is US$0.73/ tonnes /100km, which translates into around US$2–3 per barrel, excluding the tariff through Kazakhstan. However, both the capacity of the Atyrau– Samara pipeline and agreements between Russia and Kazakhstan limit shipments to 15–17.5 million tonnes a year through this route, which is used primarily by government-owned or affiliated oil companies. The second cheapest route is the CPC, which carriers a tariff of US$ 3.70 per barrel. Use of CPC capacity, however, is restricted to CPC members; and while they may reassign their capacity to third parties, this requires the approval of all members of the consortium. Another alternative is for Kazakh producers to ship oil through the western Kazakhstan ports of Aktau and across the Caspian Sea to the eastern shore ports (Baku/Makhachkala), and from there onwards to the Russian port of Novorossiysk or the Georgian port of Batumi. As of 2005, a lucrative option is shipping oil to the BTC pipeline: including tanker and of-

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floading costs, the total expense amounts to US$ 3–4 per barrel. Iran represents a profitable, albeit politically complicated export route. Kazakhstan is reaching out to the South-east Asian markets by conducting oil swaps with Iran. Some 100,000 barrels a day of Kazakh oil, exported by barge to the Iranian Caspian ports, such as Neka at the southern shore of the Caspian, are refined and used in Northern Iran, while equivalent amounts are exported through the Persian Gulf to Southeast Asia. After the domestic piping system is complete in Iran, the estimated volume of Kazakhstan’s oil transit to the southern ports of Iran could reach 500,000 bpd.15 However, Russian companies also use this route and will offer stiff competition, while Washington will certainly object to increases in export of Kazakh oil to Iran. Therefore the question remains open as to whether Kazakhstan can utilize the southern export route via Iran. Oil swaps with Iran represent an, increasingly popular shipment option for Caspian basin producers. In a typical swap, the seller delivers oil to the

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port of Neka on Iran’s Caspian shore and takes delivery of the same amount in an Iranian Persian Gulf port. These swaps make a lot of sense for the Iranian side, considering that most of Iran’s refineries and petrochemical complexes are located in the country’s northern and central regions, while the principal oil fields are in the south. Swap deals enable Iran to supply refineries at a much lower cost, while generating income for handling swap operations. On average, Iran swaps cost about US$ 4 per barrel, including a swap fee of approximately US$ 3 per barrel, tanker shipments to Neka and an offloading fee. Independent oil companies, such as Dragon Oil, Burren Energy and Petrokazakhstan all utilize these swaps. Moreover, Lukoil recently announced plans to build a 3 million-tonne a-year export terminal in Astrakhan, located in the north of the Caspian Sea, with an eye to also utilizing the Neka route. Neka is already connected to Tehran’s oil refinery via an old pipeline with a capacity of 50,000 bpd and the new Neka–Sari pipeline built by a Chinese consortium last year, which has the capacity for 50,000 bpd more. Neka–Sari represented the first phase of the new three-phase Neka– Tehran pipeline (392km).16 Following the recent expansions, the current capacity on this route is 170,000 bpd. According to National Iranian Oil Company (NIOC) the total capacity of the Neka–Tehran pipeline will reach about 500,000 bpd through the construction of additional pumping stations.17 Kazakhstan has ordered a fleet of tankers to be built for the Caspian, declaring that these tankers will transport oil to supply the BTC pipeline. However, they could just as easily supply the Iranian system, which the US opposes. Russia has also been eager to maintain its influence

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over energy transit routes from the Caspian Basin. The Kremlin has pressed Nazarbaev to agree to a 15year deal under which Kazakhstan would commit to exporting at least 15 million tonnes of crude oil per year via the Baku–Novorossiysk pipeline.18

The Chinese factor While maintaining good relations with Russia, the Kazakh leadership is well aware of China’s powerful ascendancy and is, as difficult as it is at times, trying to balance China against Russia and the US. On 23 August 2005, the Chinese government-owned China National Petroleum Company (CNPC) announced that it had put a US$4.2 billion bid on the table for Calgari, Canada-based Petrokazakhstan. If successful, this deal would provide proven and probable reserves at the relatively high price of US$7.6 per barrel and would represent the first major Chinese acquisition in Kazakhstan.19 Kazakhstan has already signed an agreement with CNPC to construct an oil pipeline connecting the Kazakh fields to north-west China (Xinjiang – or Atasu, as Kazakhstan calls it). This pipeline, 998km in length, with capacity of 250,000 barrels a day, will connect to the trans-China pipeline, which will be the longest on the planet at 4,300km, and is currently under construction.20 The China–Kazakhstan oil pipeline construction begun in September 2004, is scheduled to be completed by December 2005 and opened in January 2006.21 Its geopolitical repercussions are comparable to those of BTC. The Chinese government has come up with ample financing for this pipeline (US$3 billion), which is ahead of schedule according to sources in Kazakh government.22

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When completed, Kazakh oil will fill the trans-China pipeline, under construction to bring oil from the Tarym basin in Xinjiang to Shanghai. China and Kazakhstan are also reviewing the possibility of constructing a gas pipeline from Kazakhstan to Xinjiang. This project would cost billions of US dollars and could supply several billion cubic metres of gas. In the long term, the pipeline could be extended further west towards Uzbekistan and Turkmenistan, and be connected with the pipeline grids of Russia and Iran, creating a ‘panAsian global energy bridge’. The outcome and performance of such a gas pipeline would weigh heavily on any decision about whether to build an oil pipeline all the way to coastal China, or to Xinjiang only. The Sino–Kazakhstan gas project is part of the Chinese government’s drive to triple natural gas consumption by 2010. The government hopes to replace some oil and coal consumption with gas to reduce its heavy reliance on oil imports, and to improve the environmental impact of its energy consumption by burning less coal.23 The following is an example of why Chinese companies are successful in promoting oil and gas investment around the world, and why Russian and Western companies often fail to compete effectively against them. Speaking in Almaty in 2004, Mr Zhou Jiping, Vice President of CNPC, expounded his company’s principles when working in Kazakhstan and elsewhere: ‘First, honesty and faithfulness. Investment in due time and amount is essential for international petroleum cooperation. To date, CNPC has made a total investment of US$1.3 billion in Kazakhstan projects, far exceeding the amount specified in the

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contract, fulfilling our investment commitment. Second, win-win principle. CNPC commits to create benefits to local people through petroleum cooperation, supports local economic development by investing in power stations, chemical reagent plants, railways and gas pipelines as well as agriculture projects. In addition, CNPC is an active sponsor of cultural, educational, hygiene and public undertakings, with a total sponsorship of more than US$15 million. CNPC provides financial support to local young people for studying overseas, donates computers to schools in rural areas, donates ambulances to local hospitals, provides living quarters to 80 veterans of the Second World War and to model labourers. All these actions of CNPC are widely recognized and appreciated by local people and governments. The third principle is localization. During cooperation, CNPC makes efforts and investments to train both technical and management persons of Kazakhstan employees for the sustainable development of the local petroleum industry’.24

Chinese oil companies demonstrate that in some cases they have more financing, more nimble management, and a greater need than Russia to acquire hydrocarbon resources in the Caspian area, and as compared with other OPEC and non-OPEC companies around the world. It is clear that China has become a global oil player, while Russia remains predominantly a regional one. Once again, as with its industrialization and gradual transition to a market economy, the Chinese dragon overtakes the Russian bear.

Other challenges Several other challenges represent barriers to a successful increase of

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Kazakhstan’s oil exports. These include sulphur content, which is uneven in Kazakh oils in comparison with Turkmen oils (Table 1). Nevertheless, Kazakhstan’s companies are anxious to get their oil to the market separately from the Russian Urals brand, which has a high sulphur content. There are some technical challenges in separating oil by sulphur content and creating quality banks. While the Chevron-dominated CPC has built a quality bank, thus resolving the issue, the Russian pipeline authority Transneft stubbornly refuses to do so, thus denying Kazakhstan hundreds of millions of dollars in revenue.

Caspian seabed is uneven. In the north, oil fields are found just 15 metres (45 feet) under the sea floor; with the sea being only 5–10 metres (15–30 feet) deep, it freezes in winter. In the southern portion, the depth of sea increases quickly to about 500 metres.26 There are also underwater mud volcanoes – a unique geological phenomenon, which can cause powerful explosions, endangering offshore fields. These volcanoes may also generate gas hydrate – a potential energy source.27 Cooperation with Russia is needed to deal with these and other environmental and geological factors.

Environmental factors Drilling for oil and gas in the Caspian presents particular problems. The

Table 1. Quality of Kazakh and Turkmen oils Country

Oil grade

Density (20°C) kg/m3

Sulphur content (%)

Kazakhstan

Tengiz

812.3

0.53

Kulsary

790.0

0.07

Kalamakas

905.0

2.30

Karazhanbas

941.4

2.10

Martyshi

863.8

0.27

Zaburunje

895.8

0.59

Uzen’

855.0

0.20

Zhetybaj

849.9

0.18

K Kumkol

820.0

0.24

865.0

0.20

Cheleken

874.0

0.25

Nebit–Dag

888.7

0.15

Barsa–Gelmes 865.0

0.20

Karem

0.17

Turkmenistan Kotur–Tepe

873.5

Source: Transneft25

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3. Major oil projects

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azakhstan led the way in attracting foreign investment targeting the post-Soviet oil and gas sector – much to Russia’s chagrin. Based on the win–lose, zero–sum mindset, Russian politicians and oil industry captains resented the quick pace of development and growing outputs of Kazakhstan’s fields. Western oil companies took great risks by investing in Eurasia while the markets were soft.

Tengiz field The largest oil project in Kazakhstan, TengizChevroil, was established in April 1993 as joint venture between ChevronTexaco, ExxonMobil, TengizMunayGaz and Lukoil for the development of the Tengiz oil field. This is one of the largest offshore oil fields discovered in the past 20 years (Table 2). TengizChevroil is the largest oil producer and source of taxable revenue in Kazakhstan. Ever since the company launched production in 1996, gross oil extraction has

increased from 4.5 million tonnes a year to 13.657 million tonnes in 2004. Extraction for the first four months of 2005 was 4.717 million tonnes of oil. In January 2003 the government of Kazakhstan, ChevronTexaco and ExxonMobil signed a Memorandum of Understanding (MoU). It addressed TengizShevroil’s expansion project, which would increase TengizChevroil’s extraction from the current 12 million tonne a year to 22 million tonnes by 2006 by a combination of more intensive exploitation techniques and new drilling. Second Generation Project (SGP) plans include the construction of extracting, refining and supporting complexes with an annual productive capacity of 7 million tonnes. The incorporation of factory construction with natural gas injection would add 3 million tonnes of oil a year. Natural gas injection is an economically attractive alternative to expansion. It would preserve geologic pressure and increase oil production.

Table 2. Companies involved in the Tengiz field project Company

Role in the project

Share (% of total)

TengizMunayGaz (Kazakhstan)

Co-owner

20

ChevronTexaco

Operator

50

ExxonMobil

Co-owner

25

Lukarko (54% belongs to LUKoil)

Co-owner

5

Source: Kazakhstan’s Ministry of Energy and Mineral Resources.

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Figure 3. The Caspian Pipeline Consortium Source: CPC at http://www.cpc.ru/portal/alias!press/lang!en-US/tabID!3357/DesktopDefault.aspx

Caspian Pipeline Consortium (CPC) Today, almost all of Kazakhstan’s oil exports transit through Russia, and the CPC is currently the main export route for Kazakh oil.28 (For the composition of CPC view Table 3; for the

route of the pipeline, view Figure 3.) Chevron initiated negotiations with the Soviets over the Tengiz oil field in the late 1980s. After the Soviet Union collapsed, Chevron continued negotiations with newly independent Kazakhstan. The investment is estimated at US$40 billion over approximately 40 years.

Table 3. The structure of CPC shareholder capital Shareholder

Shareholder capital (%)

Russia

24.00

Kazakhstan

19.00

Oman

7.00

Chevron Caspian Pipeline Consortium Co

15.00

LUKARCO BV

12.50

Mobil Caspian Pipeline Co

7.50

Rosneft – Shell Caspian Ventures Ltd

7.50

Agip International (NA) NV

2.00

Oryx Caspian Pipeline LLC

1.75

BG Overseas Holdings Ltd

2.00

Kazakhstan Pipeline Ventures LLC

1.75

Source: CPC at http://www.cpc.ru/portal/alias!press/lang!en–US/tabID!3360/DesktopDefault.aspx

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Kazakhstan

While estimated oil reserves in the region still rank behind the Persian Gulf and Siberia, companies are looking more favourably to the Caspian region because of the political and managerial difficulties in the Russian pipeline system and the harsh climate of Siberia. Another important reason why firms favour the Caspian is the relative ease of dealing with the governments in the region. Kazakhstan has enticed Western companies to invest and facilitated a fairly standard and efficient contract review process. Additionally, President Nursultan Nazarbaev provided leadership and took a personal interest in negotiations.29 On 13 October 2001, CPC loaded crude oil onto a tanker at its Marine Terminal near the Russian city of Novorossiysk on the Black Sea for the first time. This event commenced the start of shipping crude oil to the international markets. Moreover, it launched a comprehensive testing and commissioning programme for the Marine Terminal. On 13 September 2002 CPC launched the oil quality bank, after another shipper started transporting crude oil through the CPC pipeline. By introducing this bank, the CPC has established a free market mechanism in the region that will allow every shipper to obtain the real market value of their oil, and will ultimately provide greater returns for all of CPC’s shareholders. In April 2003 the first phase of the CPC pipeline system began regular operations. The State Acceptance Commission verified that the pipeline successfully met all construction, safety and environmental protection standards. By this time CPC had shipped over 16 million tonnes of oil. As the CPC pipeline traverses Russian territory, Moscow views it as a politically meaningful project in the Caspian that would entrench its influence on oil producers and

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consumers, and as a counterbalance to the BTC, favored by Turkey and the US. The BTC, located outside of Russia’s borders, ‘deprives’ Russia of transit tariffs, and has been decried by Russia as a US effort to make the Caspian a ‘Western reservation’. Moscow’s late and reluctant acceptance of the BTC has become a political challenge for Iran, which was hoping for Russia’s support in the construction of another oil pipeline from Kazakhstan through Iran to the Persian Gulf – a pipeline which was opposed by the US on political grounds. Moscow, as Tehran’s main arms supplier, is in a favorable position to influence Iran and to alleviate tensions in Azerbaijani–Iranian relations over the borders and oil reserves.30 On 28 April 2003 CPC’s management announced that the first stage of CPC construction – Project of Initial Construction (PIC) – had been finalized, with an estimated capacity of up to 28.2 million tonnes a year. By mid-2004, the CPC pipeline had reached its full initial capacity. Since the beginning of the pipeline’s operation, 50.2 million tonnes have been transported, 22.5 million tonnes in 2004 alone.31 CPC is used to export oil from Tengiz and Karachaganak fields. The planned volume of transported oil through CPC in 2005 is 32.4 million tonnes, including 13.5 million tonnes from the Tengiz field and 7.4 million tonnes from Karachaganak field, the rest filled by other suppliers. However, the planned capacity of CPC will not be able to accommodate the increasing volumes of oil being extracted from the Tengiz and Karachaganak fields. The development process for CPC to reach its full projected capacity, however, is not completed. CPC was designed from the outset to be expanded to 2.5 times its initial capacity.

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Kazakhstan

The expansion of the pipeline will involve the construction of new pump stations, storage facilities, and a third loading buoy at CPC’s marine terminal at Novorossiysk. Ultimately, CPC will be able to transport 67 million tonnes per year. In fact, for the shareholders – governments and companies – expansion is vital to the realization of CPC’s full economic potential. The matter was escalated to the level of heads of state during their January 2005 meeting in Almaty. Nursultan Nazarbaev termed the project of CPC capacity expansion from 28 million tonnes to 67 million tonnes per year a ‘serious operation that is. somewhat stalled,’ adding that the realization of this project would be ‘beneficial to both, Russia and Kazakhstan’. Putin offered to discuss the CPC matter separately, and the parties have since agreed that existing CPC problems can be solved.32 According to Dr Luzyanin from the Russian Institute of International Relations (MGIMO), Russia and Kazakhstan reached a compromise, under which Russia receives part of the (formerly Kazakh) Kostanay region, completing the border demarcation agreement. In exchange, Kazakhstan secured Moscow’s endorsement for increasing the capacity of the CPC, which, according to the expert, is not beneficial for Russia.33 CPC’s shareholders agreed upon the main principles and conditions for CPC expansion during working group sessions held in March 2005. An MoU between the CPC shareholders, signed by shareholder representatives and Russian Minister of Industry and Energy, Victor Khristenko, on 1 March specifies:
responsibility to maintain volumes
reduction of interest rates

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debt elimination priorities tariff increases expenses for asset operation financing.

The following questions required additional discussion and were deferred:
force majeure principles for the responsibility ‘pump or pay’ as applied to the development of new and existing fields
creation of a mechanism for tariff adjustment in cases of its application to operation expenditures
recommendation to the working group on CPC expansion to assess and develop suggestions on all debated questions and prepare the final version of the MoU, which was signed on 16 May 2005. CPC has a complex organizational structure. Three governments and ten companies representing seven countries participate in the project. Two joint stock companies – CPC-R (Russia) and CPC-K (Kazakhstan) – have been created to implement the project. Shareholder companies seconded CPC managers and specialists. The initial construction of the pipeline was funded by oil companies, combined with assets provided by the host governments. Future pipeline capacity expansions will be financed from CPC’s revenues. CPC is unique to the region, in that it is a shipper-owned pipeline – financed and constructed on behalf of a group of shareholders, who have or expect to have oil to transport. This is a radical difference from the existing regional pipeline systems that are common-use transporters and transport third-party crude oil.

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CPC tariffs are defined on the basis of the agreement between the shareholders, and not by way of regulation. CPC is governed by a comprehensive shareholder agreement, which defines the contractual obligations of all parties. CPC has had a substantial beneficial impact on the host governments. For Kazakhstan, CPC has allowed major oil-field developments to proceed, bringing with them substantially increased royalties and taxes, ensuring through the quality bank that Kazakhstan receives full value for its light oil, and reducing the cost of transportation in comparison with rail tariffs. For Russia the benefits have also been substantial:
US$525 million was paid to Russia in taxes, duties, fees and charity donations from 1998 to the third quarter of 2004. Additional financial benefits have been paid through payroll taxes as well as payments to Russian contractors (and, in turn, their taxes to Russia).
Russian assets in the CPC system previously were mothballed until acquired by CPC in 1997 and subsequently rehabilitated and substantially upgraded. These assets were assigned a value which, in turn, was converted into a loan from Russia to CPC.
Eighty-five per cent of all of CPC’s operational expenditures in Russia goes to Russian suppliers and the Russian gov-

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ernment – around US$90 million per year.
Each dollar spent by CPC on goods and services provided by Russia can generate an additional US$2 of incremental GDP, ie the total positive impact is three times larger than the direct one.
In November 2004, CPC commenced the injection of Russian oil into the system at Kropotkin in Krasnodar Krai. Injected Russian volumes here will rise to 6 million tonnes in 2005, providing an additional and valuable export outlet for Russian crude, with taxes and export duties paid to the government. The benefits to both Russia and Kazakhstan will increase considerably after expansion. At the present tariff rates 67 million tonnes a year will generate well over US$1.5 billion a year in tariff revenue, providing both host governments with a high level of secure income for the next 35 years. CPC’s economics were always based on a full build out of the system, and with the assumption that the final stage of the project would be completed in the year 2014. In fact, volume forecasts for the next five years require individual expansion stages to be compressed, so that full system build out must take place much earlier than predicted. This means that the predicted rate of return for CPC remains robust and may well exceed the original assumptions made by its shareholders.34

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4. Marine exploration

W

hile land exploration is attractive and lucrative, the real wealth is hidden beneath the Caspian Sea. Kazakhstan is fortunate to have the majority of the Caspian maritime oil deposits. Russia, however, covets participation in these littoral developments and is putting pressure on Kazakhstan to be involved in the maximum number of oil and gas exploration projections (Table 4). Lukoil plays a key role as the conduit for Russian power in the Caspian.

Lukoil’s chairman, Vagit Alekperov, described the stability of Kazakhstan’s legislative base as a great asset. Alekperov’s inclusion in the 2004 Russian government delegation to Kazakhstan and his comments mark a meaningful moment for Russia’s new foreign policy. He and others, such as the Gazprom and EES chiefs, are promoting Russian policy much more effectively than the officials from the now-defunct Ministry of CIS Affairs.35

Table 4. Lukoil, Rosneft and affiliates’ involvement in extraction Company

Project

Stake in the project (%)

LukArko as part of Tengizshevroil

Development of the Tengiz hydrocarbon field

5

Lukoil Overseas Karachaganak as part of Karachaganak Petroleum Operating

Development of the Karachaganak hydrocarbon field

15

Lukoil Overseas Kumkol as part of Turgay Petroleum

Development of Kyzylkumskoye, Kumkolskoye and Kyzylzharminskoye hydrocarbon fields in Kyzylordinskaya region

50

Lukoil Overseas Shelf

PSA project on Tyub–Karagan field operated by Tyub–Karagan Operating Company

50

Lukoil Overseas Holding Ltd. as part of Atash company

Development of the hydrocarbon field Atash in the Caspian sector of Kazakhstan

50

Rosneft as part of Aday Petroleum Company

Development of the hydrocarbon field in the Biikzhal Aday bloc in the Atyrau region

50

Rosneft with KazmunayTengiz

Kurmangazy

25

Source: Kazakhstan’s Ministry of Energy and Mineral Resources

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Specifically, the Kurmangazy, Khvalynskoye and Tsentralnaya projects are being developed jointly with Russia, according to the Protocol of 13 May 2003 of the Russia–Kazakhstan Agreement on the division of the northern part of the Caspian Sea, whereby each country secures its sovereign rights over resources. According to the 1998 intergovernmental protocol between Russia and Kazakhstan on demarcation of the north Caspian seabed, the transborder oil field of Kurmangazi, was transferred to Kazakhstan’s jurisdiction, while the Khvalynskoye and Tsentralnaya fields were transferred to Russian jurisdiction.36 That protocol determined the fundamental conditions for a production sharing agreement (PSA) for Kurmangazy, and a production agreement based on Russian legislation for Khvalynskoye and Tsentralnaya.

The Kurmangazy project The Kurmangazy (Kulalinsky) structure is located on the northern shelf of the Caspian Sea. Its recoverable resources are estimated at 550—1,800 million tonnes. Its productive layers lie at a depth of 300—2000 metres. After long delays, on 13 May 2002 Presidents Putin and Nazarbaev signed the Protocol to the Treaty on the Northern Part of the Caspian Sea Bottom Delimitation in Order to Exercise the Countries’ Sovereign Right for Subsurface Use. This allowed development of the hydrocarbon resources of Kurmangazy, Khvalynsky and Tsentralnaya structures to begin. In signing the Protocol, Russia and Kazakhstan arranged for delimitation of the northern part of the Caspian Sea subsurface. Rosneft–Kazakhstan LLC is a subsidiary of the GOR-owned Rosneft Oil Company, which was authourized by GOR Decree No. 1094-r

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dated 8 August 2003 to participate in the development of Kurmangazy and to finance the Russian share in the project. The Kazakh side authourized the MNK KazMunaiTeniz Oil Company, a subsidiary of KazMunaiGas Oil Company, to participate in the project. The Protocol stipulated a PSA on the Kurmangazy as the contract for subsurface use. Russia and Kazakhstan agreed that the Consortium will have the following structure:
KazMunaiTeniz Oil Company JSC — 50 per cent
Rosneft–Kazakhstan LLC — 25 per cent (until the Russian party’s right of choice is implemented, the company has rights and obligations in the amount of 50 per cent)
Russian future designee— 25 per cent. Negotiations between Rosneft and KazMunayGaz on the Kurmangazy project resumed after Kazakhstan passed amendments to the tax code that would improve profitability for the hydrocarbon exploration projects in the Caspian Sea and make them attractive to further investment. The PSA for Kurmangazy was signed on 6 July 2005.37

The Khvalynskoye and Tsentralnaya projects Since the Protocol adoption, there have been legislative changes in Russia that complicate the implementation of PSAs for exploration of the Tsentralnaya and Khvalynskoye fields. While the Kurmangazy project will be realized according to a PSA, the other two projects will be carried out based on routine licensing without PSA guarantees. Lack of progress on

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Kazakhstan

the Khvalynskoye and Tsentralnaya projects could complicate Russian– Kazakh relations. This problem was discussed at a meeting of Prime Minister of Kazakhstan Danial Akhmetov and Minister of Industry and Energy of Russia Khristenko in Astana on 4 February 2005. The Ministry of Energy and Mineral Resources of Kazakhstan together with KazMunayGaz sent an official letter from President Nazarbaev to President Putin regarding the possibility of applying the PSA to Khvalynskoye and Tsentralnaya projects and on suggested changes to the 2003 Protocol. On 14 March 2005, the Embassy of Kazakhstan in Russia forwarded diplomatic note No. 722, to the Russian government. From a geographic point of view, the Khvalynskoye field is on Kazakhstan’s territory, but even before the 1998 agreement, Lukoil representatives, who were developing the field, were sure they wouldn’t have to leave.38 In 2003, Kazakhstan’s Minister of Energy, Vladimir Shkolnik, accused Lukoil and Gazprom of delaying the development of the Tsentralnoye field and hence, of failure to comply with the intergovernmental agreement on Caspian seabed division. Lukoil and Gazprom have other priorities and have not been particularly responsive to Kazakhstan’s insistence to develop the Caspian. Gazprom is more interested in the development projects in Yamal due to its large financial potential. Lukoil is also more interested in oil than in gas (Tsentralnoye field is 75 per cent gas), and so finds the Severny and Yalama–Sumur in the Caspian more attractive.39

Atash project Exploration of the Atash field is carried out according to contract

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No. 1289 between the Ministry of Energy and Mineral Resources and KazMunayGaz of 29 December 2003. The operator of the project is Atash JV, established by KazMunayGaz and Lukoil. Spring and summer ecological and seismic tests (1057km) were conducted in 2004. The investment was 622 million tenge in 2004 (US$4.78 million), and 123.6 million tenge is planned for 2005 (US$9.24 million). Seismic data interpretation and preparations for the exploratory drilling are also planned for 2005.

The Tyub–Karagan project The Tyub–Karagan field is located in the central part of Kazakhstan’s sector of the Caspian Sea. The field is being developed according to a PSA between the Ministry of Energy and Mineral Resources and KazMunayGaz of 29 December 2003. The operator of the project is the Tyub–Karagan Operating Company, which is 50 per cent owned by Lukoil Shelf and 50 per cent by Marine Oil Company KazMunayTeniz. The Operating Company carried all costs incurred during the exploration period of the project until commercial discovery. The amount invested for 2004 was 5,855.316 million tenge ($45 million). The first exploration drilling, geological and geophysical data analysis, geological modeling and operational assessment of the reserves, as well as preparations for the comprehensive seismic testing took place in 2005. The first exploration well was abandoned in August 2005.40

The Imashevskoye field The Imashevskoye gas condensate field, located in the west of Kazakhstan in the area adjacent to the Astrakhan

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Kazakhstan

oblast (region) of Russia, was the last unsolved frontier problem between the two countries. The length of the exploration was estimated to be six years and extraction will take 34 years. On 16 March 2000, Munaygaz and the government of Kazakhstan signed a contract on exploration and extraction of hydrocarbons from the Imashevskoye field. An Expert Commission of the Ministry of Energy transferred the extraction rights to Atyraumunaygaz in 2003. Kazakhstan had traditionally insisted on ownership of this deposit, but the agreement signed by Putin and Nazarbaev in January 2005 recognizes both countries as having equal rights to the field (‘parity division’).41 The Kazakh Ministry of Energy Resources urged the governments of Russia and Kazakhstan to determine which companies would participate in the creation of the joint venture. The

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field is to be developed by the Russian energy giant, Gazprom, and the Kazakh state oil company KazMunaiGaz.42 JSC Munay received a 40-year licence for hydrocarbon extraction in this field on 4 December 1997. As ordered by the government of Kazakhstan on 6 January 2000, JSC Munay was reformed into Munaygaz, and it received an additional exploration extention. Overall reserves at Imashevskoye are estimated at 172.1 billion cubic metres (bcm). Reserves of condensed gas category C1 are estimated at 20.688 million tonnes, and category C2 at 6.97 million tonnes, for estimated total reserves of 27.7 million tonnes. As of 1 January 2004, the extractable resources of free gas category C1 are estimated at 128.715bcm, with free gas category C2 at 43.399bcm.

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Kazakhstan

5. Gas projects

I

n addition to oil, Kazakhstan is blessed with large quantities of natural gas and condensate. Land-based reserves are estimated to be 1.8 trillion cubic metres, with littoral reserves up to 3.3. trillion cubic metres.43 Gas production is projected to grow, while exports of gas are stagnant (Figure 4). The bottleneck for gas exports is that Kazakhstan has no independent export capacity, which would bypass Russia. Gazprom buys Kazakh gas at about US$44 per thousand cubic metres, which is between on third and one half of what it charges its European customers.

Large-scale development of the hydrocarbon fields in the northern Caspian are being approached differently by Russia and Kazakhstan. While Russia maintains an almost-absolute state monopoly in the gas sector (Gazprom), Kazakhstan promotes its gas reserves to foreign investors around the world. Total, Royal Dutch and Repsol are already participating in gas projects. Russia, on the other hand, divides the fields among a small group of Russian companies without any assistance of the foreigners. Thus, Lukoil, Gazprom and Rosneft were the only Russian companies operating

30.00

billion cubic meters

25.00

20.00

Gas Production

15.00

10.00

Gas Export 5.00

0.00 1990

1995

1998

2000

2001

2002

2003

2004

2005

Year

Figure 4. Kazahstan’s gas production and export Data source: Kazakhstan: Investment Climate and Market Structure in the Energy Sector, Energy Charter Secretariat, 2002

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Kazakhstan

in the region, with the exception of Dagestan.44 Following the election of Vladimir Putin in 2000, with his newly articulated emphasis on involvement in the ‘near abroad’, Gazprom increased its activity in the entire territory of the former USSR. A few years prior, the CIS market had not been very attractive for Gazprom due to payment arrears on the part of the main players. A significant portion of the Soviet republics’ market was reassigned to ITERA, a private company affiliated with some of Gazprom’s heavyweights, headed by Igor Makarov. ITERA appeared in the gas market in 1994 and started selling Turkmen gas in the CIS countries. All this happened with the blessing (and to the profit) of Gazprom because natural gas was transported via its pipelines. The management of Gazprom did not grant access to the pipelines to any other company. Using its status of private company, ITERA practised such ‘methods of discipline improvement’ as suspension of gas supplies, and offsetting debts with barter deals and shares of debtor companies. Kazakhstan featured prominently as a transit country for ITERA. Cooperation between Kazakhstan and Russia in the gas sector is based on the long-term agreement between the governments of both countries, which determined basic principles and strategies of cooperation, signed on 28 November 2001. The cooperation is based on the following foundations:
the transit of Russian and Central Asian gas through Kazakhstan, and
the purchase and marketing of Kazakhstan’s natural gas, including the gas of Karachaganak field.

This joint venture is in charge of purchasing and marketing Kazakhstan’s natural gas, including the Karachanak field gas. KazRosGaz was established in Kazakhstan on 10 June 2002, in accordance with the 28 November 2001 agreement between the Kazakh and Russian Governments on cooperation in the gas industry. The shareholders are KazMunayGaz (Kazakhstan) and Gazprom (Russia) with 50 per cent stakes of authourized capital. KazRosGaz mainly purchases gas from the Karachaganak field through Karachaganak Petroleum Operating BV. The volumes of purchased gas increase every year: 5.5 billion cubic metres (bcm) in 2003; 6.5bcm in 2004; and planned 8bcm in 2005 (projected). Turkmen gas was a traditional basis for ITERA’s supply to the CIS countries. For transportation of this gas via Uzbekistan, Kazakhstan and Russia, ITERA received 42 per cent of transported gas and sold this gas in Ukraine at US$67 per 1,000 cubic metres. However, ITERA’s business started to decline with the emergence of Gazprom on the CIS market. At first, the monopoly decided to negotiate with gas-producing countries Turkmenistan, Uzbekistan and Kazakhstan. However, Gazprom failed to establish control over gas exports from the Tengiz field.45

Transit of Russian and Central Asian gas through Kazakhstan According to agreements with Gazprom, the volumes of international transit along Kazakhstan’s gas pipeline infrastructure in 2004 were as follows:

Gazprom established the KazRosGaz company, with a 50 per cent stake.

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Kazakhstan


transit of Turkmen and Uzbek gas to Russia – 43.35bcm. (40.3bcm in 2003)
transit of Russian gas – 66.05bcm. (65.34bcm in 2003) The following volumes are planned for 2005:
transit of Turkmen and Uzbek gas – 42.97bcm
transit of Russian gas – 61bcm. Due to agreements on gas trade with Turkmenistan and Uzbekistan, Gazprom is interested in the safe and continuous transit of Central Asian gas through Kazakhstan to third-country markets. The exploitation of Kazakhstan’s current gas pipeline infrastructure is a national priority. Kazakhstan is willing to modernize and reconstruct its gas pipeline infrastructure to create adequate capacity for Turkmen and Uzbek gas transit.

Development of a gas pipeline infrastructure ‘Central Asia – Centre’ Moscow is in the process of reviving and expanding the Soviet-era’s gas project to bring gas from Central Asia to European Russia and further on to Western European markets. The pipeline network will unite Turkmenistan, Uzbekistan, Kazakhstan and Russia. Moscow wants to ensure transportation of Kazakhstan’s future gas production and Central Asia’s output gas for export through the ‘Central Asia – Centre’ system. The volumes are estimated at 100bcm per year. The rationale for the project is simple: gas extraction on the Caspian shelves and mainland fields, such as

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Tengiz and Korolevskoye is projected to increase. Russia’s agreements with Turkmenistan and Uzbekistan on gas trade require pipeline capacity. Bateman Oil and Gas BV completed a strategic modernization programme, including gas pipelines Central Asia – Center (Turkmenistan–Uzbekistan–Kazakhstan –Russia–Ukraine–Europe) Makat–North Caucasus (Makat–Atyrau–Northern Dagestan–North Caucasus) and Okarem (on the Caspian coast in Turkmenistan) – Beineu (Western Kazakhstan, Mangistau region). Currently, KazMunayGaz, KazTransGaz and Gazprom are coordinating the technical details of this project. The Russian institute, Giprogazcentr, conducted a study at the request of Gazprom and according to Kazakhstan’s Minister of Energy, Vladimir Shkolnik, in 2004, the volume of transit gas through Kazakhstan’s pipeline system was 121.5bcm, with the annual growth of gas transit through Kazakhstan projected at about 3–5 per cent. ‘To achieve this goal, large investments will be needed as well as the appropriate investment climate and certainly, political stability in the Caspian region,’ said Shkolnik. He added that modernization of the system Central Asia – Centre began in Kazakhstan. It aims at increasing the capacity from current 55bcm to 80–100bcm in the future. ‘We intend to complete (the project) in nine years,’ said Shkolnik. The cost of the project is estimated at US$2 billion.46

Purchasing and marketing Kazakhstan’s natural gas Gas purchased from Karachaganak Petroleum Operating Company is transported to the Orenburg Gas Refinery in Russia. Part of this refined

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Kazakhstan

gas is then consumed in Western Kazakhstan and the rest of it is exported. In 2003 KazRosGaz exported 4.4bcm of gas, including 1.5bcmto Gazprom. The overall volume of export in 2004 was 8.8bcm, including 4.7 billion to the Russian– Kazakh border (Alexandrov region) for further sales in the CIS. In 2004, KazRosGas exported 4.1bcm to Azerbaijan. The transportation of gas through Russia was performed according to the agreement with Gazprom. According to the production programme, in the near future KazRosGas plans to increase exports to 10.1bcm, including 4.1bcm to Azerbaijan and 6bcm to Russia.

The outlook for Kazakhstan’s gas The Kazakh government laid out the main strategies for accelerated development of Kazakhstan’s gas industry in the Development Concept of Kazakhstan’s Gas Industry Until 2015. By that year, the planned production volume is expected to grow up to 33bcm. Currently, the most attractive option is to export Kazakhstan’s gas to Europe through Gazprom’s pipeline system, however Russia’s monopolistic position, lack of other export options, and complicated price negotiations will define the attractiveness of such a scenario on both sides. Kazakhstan is also interested in exporting its gas to the other countries, from China to Turkey — and beyond. Due to the growing volumes of exported gas from Kazakhstan through the Russian pipeline system, the following issues will be crucial:
access to the Russian gas pipeline system

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direction and terms of transit for Kazakhstan’s gas through Russia to world markets
coordination of bilateral gas trade between Russia and Kazakhstan for the years 2005– 2020 and development of a long-term plan for the transit of Kazakhstan’s gas through Russia
construction of the Kazakhstan– China pipeline. At the moment, bilateral gas trade is non-transparent due to lack of reliable figures regarding the volume of Karachaganak gas refining at the Orenburg Gas Refinery.

Establishment of the gas alliance A Russian-led ‘gas OPEC’ Since his election, President Vladimir Putin has demonstrated an unprecedented level of activity in the international arena. Putin clearly would like to go down in history as the leader who reversed the centrifugal processes of post-Soviet disintegration. His Administration has consistently sought ways to increase its leverage over former Soviet republics. Energy, and specifically natural gas, on which many of them depend, has always been a core element in Russia’s control over the former Soviet republics. The Russian leadership understands that Moscow’s control of gas prices can enhance its overall geopolitical power. The Kremlin has successfully launched an OPEC-type structure to regulate the production and prices of the natural gas.47 This ‘gas OPEC’ would make energy exporters in the region – Azerbaijan, Kazakhstan, Turkmenistan and

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Uzbekistan – more dependent on Moscow, as Russia is the globally predominant natural gas producer, ‘the Saudi Arabia of gas’.48 The alliance is focused on the transit of Central Asian gas. The ‘gas OPEC’ in the CIS was formed based on the principles similar to those that underlie OPEC itself – not only are the suppliers part of it, but so are transit nations, such as Syria, Tunisia and Egypt.49 The agreed-upon price of the gas supplied to Russia by Kazakhstan is similar to the price paid to Turkmenistan – US$42–45 per 1,000 cubic metres. However, while Turkmenistan is paid half of its fee in Russian barter, Kazakhstan is paid in cash. Kazakhstan and Uzbekistan have agreed with Russia on supplying 9bcm of gas per year to Russia. This will include compensation for Russia’s assistance in the development of gas resources in Kazakhstan and Uzbekistan and modernization of the Bukhara–Ural and Central AsiaCentre gas transit systems. These systems, on which the welfare of the energy-exporting newly independent states hinge, are important for tying the Central Asian states to Russia over the long term, both strategically and economically. The 6 May 2003, a decree by the Kazakh Minister of Energy confirmed Kazakhstan’s membership in a working group for the creation of a gas alliance with Russia. According to Kazakh officials, their participation in the suggested alliance makes sense. Kazakh experts believe that creation of a gas alliance will significantly help its members with coordinating export–import and investment policies, and with forecasting the energy commodity markets. KazMunayGaz, in particular, supports the idea of such an international gas alliance. It considers the development of a long-term strategic gas cooperation between Kazakhstan, Russia, Turkmenistan

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and Uzbekistan key to promoting joint resource exploitation and increasing strategic cooperation between national gas companies. Russia promoted the establishment of a Eurasian gas alliance during Putin’s official visit to Ashgabad as early as the year 2000. Putin repeated his entreaties during Turkmen President Saparmurad Niyazov’s visit to Moscow in January of 2002. However, Niyazov insisted that only Turkmenistan and Russia would be members.50 Putin, on the other hand, reportedly suggested establishing an alliance to include the four gas-extracting countries of the CIS – Russia, Turkmenistan, Kazakhstan and Uzbekistan. The Russian president’s concept, as noted earlier, was much closer to a ‘gas OPEC,’ – these countries would coordinate the volume of gas extraction, construction of pipelines, tariffs on transit and, most importantly, price policy. Going with Putin’s suggestion would offer Turkmenistan an unprecedented ability to raise the price of its gas. Consumers of Russian and Turkmen gas, such as Ukraine, would lose alternatives of supply and would be at the mercy of the supplier. If this alliance does eventually become a reality, it will radically influence the world gas market. Russia is the region’s largest gas producer, while Central Asian states would become key players, albeit Russia’s business competitors.51 Realization of this plan will position Moscow to work toward seizing the initiative of post-9/11 energy projects in Central Asia and Afghanistan from the US. Moscow is concerned that US influence in this region is growing and that the US’ next goal will be launching energy extraction and transportation projects to the world markets, such as the much-discussed

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Turkmenistan–Afghanistan–Pakistan –India gas pipeline. Moscow is also concerned that the US will freeze it out of energy projects, giving priority to Kazakhstan and Azerbaijan. Nor does Russia favor the growth of Western influence in Afghanistan, since it considers Afghanistan a transit country for energy flows from Turkmenistan and Kazakhstan to Pakistan and India. Thus, Moscow believes that it is especially important to cement a strategic energy relationship with Turkmenistan and secure Russiaoriented gas exports from there.52 When it was initially proposed, the concept of the gas alliance also promoted the ability to develop Caspian resources without the division of the seabed, and hence to overcome stalled negotiations on the Caspian Sea delineation.53 The idea of establishing such an OPEC-like organization dates back to the mid-1980s, when the demand for natural gas, including liquefied natural gas (LNG), in the industrialized countries began rising, resulting in direct competition between world oil and gas producers. The processes of international energy market integration, especially between Western Europe and Eurasia, have intensified. The December 2005 appointment of the former German Chancellor Gerhard Schroder to the chairmanship of the joint German-Russian gas pipeline consortium illustrates this trend. Meanwhile, the coordination of interests in the post-Soviet area creates regional hubs within the Gas Alliance – such as between Russia and Kazakhstan – which have to coordinate the transit of Kazakh gas to Europe. Russia has attempted to create a similar consortium with Ukraine, however, the new Yushchenko Administration is an unlikely partner for such a venture. However, Russia did

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succeed in securing agreements with Turkmenistan, which will set the conditions of sale for Turkmen gas to Russia over the long term. Russia needs this cartel to influence policies in the world gas market. According to Gazprom, the fall of European gas prices is possible as a result of increased competition between suppliers. However, Gazprom is competitively positioned to compensate for losses through the growth of Russia’s exports. A decrease in prices would also press the Netherlands, Norway, Denmark and Great Britain to lower their gas prices as well, which are considerably higher than the price of Russian gas. Norway, not an EU member, has been vocal against the gas-exporting cartel of the Netherlands, Great Britain and Denmark in Western and Central Europe. Hence, Oslo may be a potential partner of the post-Soviet gas bloc. The appearance of the Turkmen – and in the future, Uzbek and Kazakh gas – on the European market complies with the decisions of the EU on liberalization of the ‘Eurogas’ market, that is broadening the list of the supplier nations while padding Gazprom’s bottom line. Hence, the CEO of Gazprom, Alexei Miller’s, reaction to the Turkmen–Russian agreements was such that he described them as ‘historically and extremely beneficial to Russia’.

Future issues of cooperation and competition The situation in Central Asia is in flux. Much depends on the US’ ability to withstand the joint Sino–Russian pressure to squeeze America out of the area, as well as on the dynamics in relations between China and Russia and how each of these will form relations

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with India. Future conflicts between China and India or between China and Russia may affect Central Asia and stability in the region.54 In the 1990s Russia was slow to clearly formulate its political and ideological interests in the post-Soviet area. Over time, under Yeltsin and especially under Putin’s leadership, Russia’s foreign policy became increasingly linked to the economic profitability of state monopolies and large Russian companies. However, regardless of the immediate profitability of economic relations between Russia and Kazakhstan, some see joint development projects that will be carried out over the next 10–20 years as an important dimension to ensuring stability in Russia itself. Among other important issues is the transparency of the Russian– Kazakh border for criminal activity and drug trafficking. The current situation, when people and goods move freely, requires either a strengthening of the border between Russia and Kazakhstan and/or helping Kazakhstan to strengthen its borders in the south. Economically speaking, this project is as costly as sealing the US–Mexican border, but geopolitically, Moscow sees it as necessary. Russia’s negotiating positions towards its CIS partners have become tougher and more businesslike. As one Russian journalist put it: ‘if you can’t pay off the debt, give us your enterprises instead.’55 Another reason why Russia and Kazakhstan may become more economically integrated is the creation of the United Economic Space (UES) between four former Soviet republics: Russia, Ukraine, Belarus and Kazakhstan. This is supposed to be more than a customs union and a free-trade zone, and will eventually include an area with unlimited movement of labour and a common currency along

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the line of the EU. Russia has ambitions to dominate such a sphere. The agreement for the creation of the UES was signed on 19 September 2003 in a symbolic location: Yalta. The consolidation and bureaucratic construction of the UES has been taking place in earnest since 2004.56 However, in the wake of the ‘orange revolution,’ Ukraine is attempting, albeit clumsily, to pursue a rapprochement towards the EU, while authoritarian Belarus has more statist economic policies than Russia.57 The future outlook for the UES has become less certain. Still, Moscow believes that Kazakhstan is almost ideally suited for an economic merger with Russia, which presents a real challenge to Kazakh independence. One of the long-term goals of Russia is to project its economic and security power. Russian policy makers and experts believe that strengthening the country’s strategic position is achieved by promoting ‘stability’ rather than democracy. This is understood by the ruling elite in Moscow as efforts to squeeze out such players as the US, and in the future, possibly China, from Central Asia. This may leave Kazakhstan isolated to face its old imperial masters.58

The Kazakh gas supply to China Energy-thirsty China is expanding its presence in Central Asian energy markets, as the US$4.2 billion bid for Petrokazakhstan demonstrated. China is willing to commit major financing to bring home not just Kazakh oil, but also gas. President Nazarbaev announced a ‘mutual understanding’ between China and Kazakhstan during his visit to Beijing in May 2005. Several possibilities of a gas pipeline route were discussed.

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A decision may be made in 2005, and completion of a gas pipeline is scheduled for the end of 2008. At that point, China will be able to buy 8– 10bcm of Kazakh gas, and by 2020, 30bcm.59 According to Uzakbay Karabalin, President of Kazmunaygas, the first route will ship Uzbek and Turkmen gas, which are currently transported towards Almaty. Kazakhstan will construct a gas pipeline from Almaty to the Chinese border. Judging by the US$600 million agreement signed in Beijing by Islam Karimov, President of Uzbekistan, in June 2005, to build a gas pipeline to China via Kazakhstan, Beijing is taking this route seriously. The second route includes supply of Kazakh gas from the fields in western Kazakhstan. According to Pavel Klimov, Deputy Director General of KazTransGaz, the new line will connect the Zhanazhol and Karachaganak fields with the Boukhara–Ural main pipeline via Kzyl–Orda, and will connect to the Shymkent–Almaty pipeline. Again,

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construction of a 750km Almaty– China pipeline will be necessary. Finally, the third route will include construction of the Ishim (Russia) – Petropavlovsk–Kokchetav–Astana–Karaganda–Balkhash–Druzhba gas pipeline, which may be used for the transportation of Russian and Kazakh gas.60 The positive aspect of such a pipeline route is the capability to supply the northern, central and southern regions of Kazakhstan, as well as to export to China. The pipeline would also serve for gas swaps with Russia. Under such swaps, Russian gas supplied to the Ishim region can be swapped for Kazakh gas from the Caspian region and western Kazakhstan going to Orenburg and beyond. The project takes into consideration Russia’s interests in diminishing the transportation expenses on the gas supplies from Siberia to the European part of Russia, Kazakhstan’s interest in supplying gas to new regions and China’s interests in diversifying its gas suppliers.

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6. Electricity

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ver the 1990s and early 2000s, Russia’s electric power monopoly, United Energy Systems (RAO UES), created a ‘free-trade zone’ in electricity, which includes most of the countries of the CIS and Lithuania. This regime has been effectively in place since 2003. Russia plays the central role of technical designer, general contractor, engineer, systems integrator and financier in the post-Soviet space. This allows Moscow to acquire an important source of leverage over its former dependencies.61 No wonder the RAO UES Chairman and the former architect of the Russian privatization, Anatoly Chubais, stated: ‘The power industry is a unique example of real integration unparalleled in any other sector…It is akin to Russian business simply overtaking and swallowing up businesses in adjourning countries. Moscow is beginning to control the key sectors in the economies of these countries and, all in all, their existence. A decent winter in Tbilisi is now our concern too.’62

These statements are noted with a shudder in Astana. Russia is striving to control the economically efficient power generation resources in the former Central Asian republics, primarily the hydroelectric stations in Tajikistan and Kyrgyzstan and a massive coal-fired power plant in Ekibastuz. For example, as of 2003, RAO UES is buying

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Tajikistan-generated electricity from its Soviet-era hydroelectric stations. Central Asia, with its high mountains and altitude drops of hundreds of metres can be a net exporter of energy, especially electricity. Kazakhstan has a place of honour as a transit country for Tajik and Kyrgyz power generation capabilities.63 Kazakhstan also has massive coal and uranium supplies (see below), which may allow it to produce electric energy competitively. However, no uranium-powered stations function in its territory. The current structure of energy generation and distribution in Kazakhstan is presented in Figure 5.

Creation of a Kazakh–Russian company based on the stock company Stantsiya Ekibazstuzkoy GRES-2 A typical example of how Russian– Kazakh cooperation in the power generation sector works is Ekibazstuzkoy GRES-2, a giant power station built in the Soviet era. An expert working group including representatives from the Russian and Kazakh Ministries of Energy, Finance and Justice was organized to create a Kazakh–Russian joint venture based on Ekibazstuzkoy GRES-2. It is supposed to reconcile the current debts of Kazakhstanenergo and Kazakhstan’s electricity distributing companies to Russia’s

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Figure 5. Structure of electrical energy production in Kazakhstan Source: Energy Sector Overview in Kazakhstan64

UES, and the debt of Russian Ministry of Nuclear Industry to Kazakhstan. The working group together with UES representatives, developed the mechanism and schedule to reconcile the debts. In March 2005, Kazakhstan’s Ministry of Energy, Russian EES and Access Industries (a US-based company) signed a threeparty protocol in Moscow on the reconciliation of the arrears and creation of a Kazakh–Russian joint venture based on Ekibazstuzkoy GRES-2, which was approved by the energy ministers of both countries, Shkolnik and Khristenko. As determined in the schedule approved by Deputy Prime Minister of Kazakhstan Esimovin in April 2005, the project of the Kazakh– Russian joint company was finalized by 1 July 2005. On 5 May 2005 Ekibazstuzkoy Energotcentr announced a tender for the transfer of 100 per cent shares of

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Stantsiya Ekibazstuzkoy GRES-2, due on 6 June 2005. Kazakh and Russian parties prepared draft agreements and other documents. Based on an agreement between Russian Minister of Energy Khristenko and Kazakhstan’s Prime Minister Akhmetov, the protocol of negotiations between Shkolnik and UES Chairman of the Board Chubais was prepared. The negotiations reconciled Kazakhstanenergo’s debt and facilitated the creation of the Stantsiya Ekibazdtuzkaya GRES-2 company. The protocol was forwarded to the Ministries of Finance, Economy and Budget Planning, and Ministry of Justice of Kazakhstan for review and coordination. This bureaucratically driven and slow process of power generation by a state is a far cry from the market-driven approaches to power generation typical for some developing countries.

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7. Coal industry cooperation

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adical changes in the social and political situation in Kazakhstan at the beginning of the 1990s brought a radical transformation to the state-owned Kazakh coal industry. As a result of independence, the development of a market economy, and the decline of Soviet-era coal mining, there was a perceived need to restructure the coal industry. Kazakhstan is one of the top ten coal producers in the world. Its reserves and mines are the third largest in the CIS, while its income from coal mining per capita is the largest in the CIS. The five largest coal producers in Kazakhstan are located in the Pavlodar and Karaganda regions and account for 87.7 per cent of the coal mined in the country. According to proven coal reserves, Kazakhstan has the eighth largest reserves in the world, possessing four per cent of global coal. The most valuable are energy-rich and coking coals. Kazakhstan’s coal

reserves are valuated at US$35 billion (2004 prices). Coal sector improvements in 1991–1998 ensured the continued operation of the industry, attracted investment and significantly diminished social tensions in the coal-mining regions. The most important factor in this restructuring was the privatization of large companies and the shutdown of unprofitable enterprises. Today, all coal-mining companies in Kazakhstan are in private hands; the main coal producers in the country are given in Table 5. New owners have concentrated their activities in the country’s most profitable mines. These measures have improved the exploitation of principal reserves, reduced management costs and, as a result, reduced the net cost of coal mining. Additionally, foreign investment has created vertically integrated structures such as coal–metallurgy, coal–electricity etc,

Table 5. Main coal producers of Kazakhstan Company

Share of national extraction (% of total)

Bogatyr Access Komir (Pavlodar region)

42.8

Eastern section Eurasian Energy

20.7

Corporation (Pavlodar region) JSC Maykuben–West (Pavlodar region)

3.3 and 96.6 of national extraction of brown coal

Coal department Mittal Steel Temirtau

12.3

(Karaganda region) Coal department Borly of corporation

8.7

Kazakhmys (Karaganda region) Source: Kazakhstan’s Ministry of Energy and Mineral Resources

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which ensure the stability of the supply and profitability of production. Today, coal companies and metallurgy are incorporated in Mittal Steel Temirtau, while coal and electric energy companies are incorporated in Kazakhmys (a copper producer), the Eurasian Energy Corporation and Bogatyr–Access–Komir. Private ownership halted the industrial decline of the country and stabilized coal mining. Nowadays, the coal industry is one of the largest overall industries in Kazakhstan’s economy.

The Kazakhstan–Russia Coal Connection More than 30 per cent of extracted coal in Kazakhstan is exported to Russian power plants. Kazakhstan exported 5,953 million tonnes of coal in the period of January–March 2005 – 7.9 per cent less than the same period over 2004.65 Russian coal mining companies and regions, however, engaged in active lobbying against the import of Kazakh coal, 95 per cent of which is from the Ekibazstuzkoy field and is used at ten large power plants in the Urals and Siberia.

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Suggestions to decrease the consumption of Kazakh coal have been rejected. Chubais’s RAO UES firmly stated it would not reduce consumption of Kazakhstan’s coal, which is supplied as barter for the country’s electricity debt arrears.66 The principal argument against imports of Kazakh coal to Russia is its high ash characteristic and low heating capacity (compared with the Kuznetsk basin coal), which is why it is priced lower. In addition, high transportation costs for Kazakhstan’s coal via Russian railroads further reduce its competitiveness in the Russian markets. The government of Kazakhstan has confirmed the implementation of a programme called The Bilateral Development of Fuel and Energy Balance of Kazakhstan and Russia until 2020. This was done to secure future Russian demands for the Ekibazstuzkoy coal. On 12–13 February 2004, a joint Russian–Kazakh Commission established bilateral trade targets for the years 2004–2020 at the session of in Moscow. These targets determined quotas for export of Kazakh coal to Russia: 25 million tonnes in the period of 2004–2010 and 22 million tonnes in the period of 2010–2020.

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8. Uranium mining and nuclear fuel cooperation

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uring the Soviet era, a majority of natural uranium deposits were in now-independent Kazakhstan and Kyrgyzstan, while all uranium enrichment facilities remained in Russia.67 The powerful Russian nuclear ministry, Minatom, has concluded that cooperation needs to be developed with the neighbours. Russia continues to purchase a large portion of the uranium it needs for its nuclear power plants. In parallel, Minatom is working on better ways to organize geological prospecting for uranium deposits in Russia. The demand within the Russian nuclear power industry for uranium is growing.68 As Kazakhstan harbours 30 per cent of the world’s uranium reserves, the potential to produce nuclear power is inherent in its large deposits of uranium and residual technical expertise that has survived from Soviet times. However, currently coal- and natural gas-powered stations dominate: 68 per cent of electricity is produced by coalburning stations, 20 per cent by gas and fuel oil plants, and 12.3 per cent by hydroelectric stations. The relative lack of energy diversification in Kazakhstan, as evidenced by the marked absence of significant hydroand nuclear-power generating capacity, raise questions regarding the country’s energy security. The Kazakh Ministry of Energy believes that the development of nuclear power stations, may allow the

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country not only to produce energy competitively, but also to export nuclear-power produced electricity. This will generate higher added value than selling unprocessed raw materials.69 Russia has been connected to Kazakhstan’s nuclear activities since the Soviet era. Semipalatinsk, the site of Soviet nuclear testing, became a symbol of irresponsible nuclear policy. Thousands of Kazakh citizens died and became sick because of massive testing which the Soviets conducted without adequate safety measures and without warning the civilian population. Hundreds of thousands of Soviet Gulag inmates were involved in uranium mining in Kazakhstan and Kyrgyzstan, often paying with their lives for the creation of the Soviet nuclear arsenal. The question is, what has happened since the collapse of the Soviet Union? When it comes to nuclear energy, Russia’s interest in Kazakhstan and Kyrgyzstan is no accident. For years Russia, devoid of any uranium deposits on its own territory, saw Uzbekistan’s drift towards the US – as well as Tajikistan’s unacceptable economic terms – as barriers to further integration. Consequently, Russia’s key partners in the nuclear fuel development field for Russia remain Kazakhstan and Kyrgyzstan.70 However, with Uzbekistan and Tajikistan drifting closer to Moscow in 2005, the relatively competitive positions of

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Kazakhstan and Kyrgyzstan may deteriorate. After Kazakhstan became independent, Russia remained committed to involvement in the Kazakh nuclear industry. On 6 July 1998, the Kazakh and Russian governments signed the Agreement on Integration of NuclearEnergy Cycle. As part of the Agreement, the Kazakh–Russian–Kyrgyz joint venture, Zarechnoye, was formed for the development of the large uranium field in the Otrarsk region of the Southern Kazakhstan oblast. The venture was registered on 26 December 2001. The shareholders of Zarechnoye are Kazatomprom (45 per cent), TVEL (20 per cent), Techsnabexport (15 per cent), and Atomredmetzoloto (10 per cent) from the Russian side, and Karabaltinskiy Metallurgic Refinery (10 per cent) from the Kyrgyz side. So far the venture has invested more than US$5 million to develop the infrastructure and future sites for the company. The peak volume of extraction during the first stage of field exploitation was estimated at 500 tonnes per year of natural uranium. This was projected to increase up to 1,000 tonnes per year during the second stage. Production started in 2005, with projected extraction at 70 tonnes per year. Russia fully financed Zarechnoye by investing some US$14.5 million in its development. Moreover, despite the fact that Russia and Kazakhstan are equal partners in this project (45 per cent each), Moscow manages the venture in view of Minatom’s control over Kyrgyzstan’s Karabaltinksy Ore Refinery in 2002. ‘This event is politically significant and Moscow had been waiting for Kazakhstan to determine its position,’ said the head of strategic planning service of the Border Cooperation Association, Alexandr Sobyanin. He continued that:

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‘Previously, Astana had been balancing between Moscow and Washington, cooperating with Russian and American nuclear companies. Virtual transfer of Zarecnoye to Russia means that Kazakhstan has made its choice and prefers nuclear cooperation with Russia rather than the US’.71

There are environmental concerns with regards to this venture. The Zarechnoye field is located in the north-western part of the Karaktaus– Aryss national park, and according to Articles 23 and 47 of Kazakhstan’s Legislation on Specially Guarded Territories, mining in national parks is prohibited. On 23 May 2005 Kazakhstan’s Prime Minister Akhmetov ordered the Minister of Agriculture, the Agency for the Land Resources Management and the Head of the southern Kazakhstan district to confirm the borders of the Aryss and Karaktaus national park, taking into the consideration the Zarechnoye field, which comprises some 4000 hectares. The Kazakh Ministers of Environment and Agriculture were directed to draft additional ecological requirements for the Aryss and Karaktaus national parks, taking into account the Kazakh–Russian–Kyrgyz company’s development of Zarechnoye. Ukraine, like Russia, has a nuclear power industry based on Sovietdesigned reactors. On 31 October 2001 the Ukrainian–Kazakh–Russian Company, UKRTBS, was formed to produce nuclear fuel to supply Ukrainian nuclear plants equipped with BBER-1000 reactors. All parties have even stakes in the cooperative company – 33.33 per cent of authorized capital. On 3 May 2003 Kazakhstan’s and Russia’s governments and the Cabinet of Ministers of Ukraine signed an agreement on

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cooperation in developing and operating UKRTBS. Kazakhstan benefits from the stable production of nuclear fuel at the Ulbinskiy Metallurgic Company. In the medium term (until 2007), the levels of supplies of nuclear fuel (powder and tablets) to the Russian market (Minatom) will be preserved: 300 tonnes of low-enriched uranium tablets for power plants per year and 150 tonnes of uranium dioxide powder per year. KazAtomProm announced that it produced 3,719 metric tonnes of uranium in 2004, a 10 per cent increase on the previous year. It plans to boost output to more than 4,000 metric tonnes in 2005, rising to as much as 15,000 metric tonnes annually by 2010. This will make Kazakhstan the world’s largest uranium producer. The Central Asian nation has 30 per cent of the world’s uranium reserves and is currently the fourth biggest uranium producer, according to KazAtomProm.72 Finally, disposal of Kazakhstan’s nuclear waste has become a subject of national debate. There are more than

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a dozen inactive and closed uranium mines to be secured— as well as large quantities of contaminated equipment. Some argue that it is not profitable for Kazakhstan to export its nuclear waste to Russia for processing. They believe that construction of a long-term storage facility in the Semipalatinsk or Ak Tau region would be much cheaper. According to Kazinform, Kazakhstan has 237.2 million tonnes of nuclear waste in 500 locations.73 Mukhtar Dzhakishev, President of Kazatomprom, has stated that importing waste from rich countries was the only way of raising the more than US$1.1–2 billion required for coping with his country’s nuclear legacy. According to Mr. Dzhakishev, Kazakhstan gets US$10 for extracting a cubic metre of uranium ore, but will get US$100 or more to deposit the same amount of nuclear waste. However, any future work in nuclear waste must take into account security and environmental standards in order not to create more contamination and keep nuclear waste from the hands of wrong-doers.

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9. Conclusions

T

he Russian leadership, elites and some Russia experts are busy promoting the notion that Kazakhstan will benefit from integration with Russia even at the price of giving up ‘parts’ of its sovereignty or significantly diminishing it. Specifically, Russia would like to control Kazakhstan’s ability to manage its foreign relations with Washington and Beijing, and to have a decisive say in the country’s potential accession to the WTO. Russia would like to see Kazakhstan as a member of a modern version of the ‘Warsaw Pact’ – a combination of the Shanghai Cooperation Organization, CSTO and EEC. These advocates juxtapose the country’s conversion into a Russia-led UES against integration into the global economy. According to this approach, Kazakhstan should give preference to Russian capital and to exports of its natural resources via Russian (and possibly Chinese) pipelines. Kazakhstan agreed in recent years to give up its territorial claims to several cross-border offshore oil and gas fields, which were predominantly located in the Kazakh territory. This is symbolic of an inferior negotiating position. The notion of integration advanced by Russia also involves increased military cooperation with Moscow, which

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presupposes massive military purchases by Kazakhstan. Limitations on the size of the Kazakh navy in the Caspian are also likely to be part of the package. Limiting the sovereignty of Kazakhstan has important repercussions in the energy area. Specifically, Russia and China are likely to put pressure on Kazakhstan to prevent construction of a pipeline connecting its oil fields with BTC, and to pre-empt Western-led oil and gas consortia from playing a leading role in new developments of Kazakh oil. Moscow is also likely to encourage Kazakhstan’s state sector, as opposed to the private and foreign companies, from developing new deposits. The West, and particularly the US, should balance this approach by offering Kazakhstan incentives to keep its thriving economy open to foreign investment; for continuing market liberalization; and for remaining a secular, progressive country friendly to the West. Kazakhstan is a unique phenomenon in the heart of Asia, combining elements of the East and the West, and it is too important to allow it to fall in the hands of nostalgic empire builders – or rising authoritarian powers.

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Notes and references 1

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In 1987, the Soviets signed an agreement to develop Tengiz and build an export pipeline to the Black Sea, known as Caspian Pipeline Consortium (CPC). Ariel Cohen, Russian Imperialism: Development and Crisis, Praeger, 1998. pp. 80-82, 90-97. Numerous interviews by author with senior Russian officials, intellectuals, experts and journalists. Moscow, 1992-2005. Pre-World War II major production in Azerbaijan was primarily based on pre-revolutionary (1917) discoveries, which were in decline by the 1960s, and triggered additional urgency to develop deposits in Western Siberia. Major modern off-shore fields in the Caspian were either undiscovered or undeveloped until the 1970s-1990s. Vladimir Akramovsky, ‘A Region of Strategic Interest,’ Oil of Russia, International Quarterly Edition, No. 4, 2004, http://www.oilru.com/or/ 21/320/ Bagila Bukharbayeva, ‘Putin Underscores Russia’s Interest in Kazakh Energy Sector,’ Associated Press Worldstream, 12 January 2005 [LexisNexis]. Sergei Blagov, The Geopolitical Balance in Central Asia Tilts Towards Russia, 6 July 2005 http:// www.eurasianet.org/departments/insight/ articles/eav070605a.shtml Adjar Kurtov, ‘Zdravy Smysl Protiv Fobii’, Novay Politika, http://www.novopol.ru/ material1303.html Roy Allison, ‘Strategic Reassertion in Russia’s Central Asia Policy,’ International Affairs 80, 2 (2004) pp. 227-193. CIA Factbook, International Disputes, http:// www.cia.gov/cia/publications/factbook/fields/ 2070.html; Kazakhstan Approves Caspian Sea Delineation with Azerbaijan News Central Asia, http://www.newscentralasia.com/ modules.php? name=News&file=article&sid=26 ‘ North-Caspian Parity and Eastern Dissonance,’ Caspian Energy No 30 (Russian), www.caspenergy.com Ariel Cohen, Iran’s Claim Over Caspian Sea Resources Threaten Energy Security Heritage Foundation Backgrounder No. 1582, 12 September 2002. Konstantin Alexandrov, ‘Divided Seabed, Common Water,’ Neftegaz.ru, 16 July 2002 (Russian) Martin Sieff, ‘Interview: Kazakhstan’s Oil Company Chief,’ United Press International, 28 June 2004 [LexisNexis]

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‘ Kazakhstan Planning to Export Oil Via Southern Ports of Iran,’ Iran News, 4 October 2004 (Russian), www.iran.ru ‘New Neka-Tehran pipeline more than doubles Iran’s crude ‘swaps’ capacity,’ Payvand Iran News, 27 August 2003, http://www. payvand.com/news/03/aug/1145.html Caspian ‘Big Three’ with ‘Oil Shield’. Baku-TbilisiCeyhan is the Most Strategic Caspian Pipeline, Think Russian Investment Companies http:// www.caspenergy.com/ 28/2005_01_10_00e.htm Sergei Blagov, ‘Nazarbayev and Putin Pledge ‘God-Given’ Friendship,’ Eurasianet.org, 19 January 2005. ‘CNPC/PetroKazazkhstan,’ The Financial Times, 22 August 2005, http://news.ft.com/cms/s/ d6633fae-12f8-11dabeee-00000e2511c8.html Zhou Jiping, Hand in Hand for Brighter Future of China-Kazakhstan Cooperation http:// www.cnpc.com.cn/english/xwygg/speeches/ 200507220003.htm (Mr Zhou Jiping is Vice President, CNPC). China Ready to Join Pakistan, India, Iran: Gas Pipeline Construction http://www.dawn.com/ 2005/05/04/ebr12.htm Author’s interviews, Almaty, April 2005, and Washington DC, May 2005. Sources requested anonymity. Zhou, China, Kazakhstan Discuss Cross-border Gas Pipeline http://www.cnpc.com.cn/english/ xwygg/speeches/200507220003.htm http:// www.china.org.cn/english/BAT/105031.htm Zhou Jiping, Hand in Hand for Brighter Future of China-Kazakhstan Cooperation http:// www.cnpc.com.cn/english/xwygg/speeches/ 200507220003.htm (Mr Zhou Jiping is Vice President, CNPC). Transportation of Russian Oil to the Southern Destinations. Oil quality aspects http:// www.transneft.ru/Projects/Default.asp? LANG=EN&ID=224 Martin Sieff, ‘Interview: Kazakhstan’s Oil Company Chief,’ United Press International, 28 June 2004 [LexisNexis]. Akper A. Feyzullayev, Gas Hydrates in Submarine Mud Volcanoes, the Southern Caspian Sea The American Association of Petroleum Geologists, http://aapg.confex.com/aapg/da2004/ techprogram/A86662.htm Bagila Bukharbayeva, ‘Putin Underscores Russia’s Interest in Kazakh Energy Sector,’ Associated Press Worldstream, 12 January 2005 [LexisNexis].

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Vincent P. Bonner, ‘Kazakhstan and Oil’, http://www.american.edu/ted/kazakh.htm ‘ Russia Strengthening Its Positions in the Caspian Region,’ Neftegaz.ru, 11 April 2001, www.neftegaz.ru (Russian) Paul Starobin, ‘Creation of the Caspian Pipeline Consortium,’ Profil, No. 48 (270), 24 December 2001, www.profile.ru (Russian). Caspian Pipeline Consortium http://www.cpc.ru/ portal/alias!press/lang!en-US/tabID!3357/ DesktopDefault.aspx ‘Nazarbayev, Putin Discuss Border Delimitation, Cooperation in Energy and Security Areas’ Kazakhstan News Bulletin, 13 January 2005, http://www.kazakhembus.com/011305.html Elena Shchedrunova, ‘We Are Talking About Strategic Space Cooperation,’ Radio Mayak, 19 January 2005, www.radiomayak.ru/archive/ text?stream=schedules/6852&item=19376 (Russian) Caspian Pipeline Consortium http://www.cpc.ru/ portal/alias!press/lang!en-US/tabID!3357/ DesktopDefault.aspx ‘Russian Web Site Says Lukoil Role in Putin’s Kazakhstan Visit ‘Meaningful,’ Gazeta.ru, 9 January 2004 [LexisNexis]. ‘ North-Caspian Parity and Eastern Dissonance,’ Caspian Energy No 30 (Russian), www.caspenergy.com Rosneft, ‘Kazakhstan’, http://www.rosneft.ru/ english/projects/kazakhstan.html ‘Five Can Be Divided by Two,’ Izvestia, 13 May 2002, www.izvestia.ru/politic/article18098 (Russian). Nana Bendukidze, ‘Kazakhstan Rushing Russia,’ Neftegaz.ru, 29 January 2003, www.neftegaz.ru (Russian). Rigzone, Lukoil Abandons Tub-Karagan Well in the Caspian Sea http://rigzone.com/news/ article.asp?a_id=24219 ‘ North-Caspian Parity and Eastern Dissonance,’ Caspian Energy No 30 (Russian), www.caspenergy.com Sergei Blagov, ‘Nazarbayev and Putin Pledge ‘God-Given’ Friendship,’ Eurasianet.org, 19 January 2005. Amina Jalilova, Golubaya Mechta dlia Kitaya Novoye Pokoleniye, 11 February 2005 No 06 (350) http://www.np.kz/2005/06/rissled3.html ‘Russia and Kazakhstan Have Different Approaches to Caspian Seabed Development,’ Kommersant, 28 August 2003, (Russian), [LexisNexis]. ‘The Gas Pipeline Remains the Most Efficient Tool of Russia’s Influence in CIS and European Union,’ Russky Fokus, October 13, 2003, [LexisNexis] ‘ Annual Growth of Gas Transit Through Kazakhstan is 3-5%,’ RosInvest.com, 17 June 2005 (Russian) http://www.rosinvest.com. printnews/103003/ ‘Nursultan Nazarbayev Is Ready to Discuss Cooperative Strengthening of Its Southern

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Borders with Russia,’ Interfax, 28 December 2003, www.interfax.ru/r/B/0/0.html? id_issue=8175360 (Russian). Energy Charter, Energy Transit. The Multilateral Challenge Moscow, 1998. A. Yevplanov and A. Chichkin, ‘Gas Fist,’ Rossiyskaya Gazeta, 22 April 2003 (Russian) http://www.rg.ru/business/econom/982.shtm Sanobar Shermatova, Confidential Friendship http://english.mn.ru/english/issue.php? 2002-9-3 Viktoria Panfilova, ‘Turkmenbashi Didn’t Finish His Game,’ Nezavisimaya Gazeta, 23 January 2002 (Russian) http://www.ng.ru/ printed/cis/2002-01-23/5_niyazov.html ‘ Sanobar Shermatova, ‘Moscow Got Its Chance’, Moskovskiye Novosti, No 3, 2002 (Russian), http://www.mn.ru/issue.php?2002-3-5 ‘Putin Is For Creation of Gas OPEC,’ Infomarket, quoting Vedomosti, (Russian) http:// www.infomarket.md/oldversion/business/ 012201/Opek.htm ‘Central Asia – 2025. A Lot of Oil and a Lot of Conflicts,’ Washington ProFile, 31 May 2005 (Russian). Alexey Bogaturov, ‘Russia in Economic Class,’ Profil, No. 47 (317), 16 December 2002 (Russian). ‘Nursultan Nazarbayev Is Ready to Discuss Cooperative Strengthening of Its Southern Borders with Russia,’ Interfax, 28 December 2003, www.interfax.ru/r/B/0/0.html?id_issue=8175360 (Russian). Sergey Pletnev, Edinoye Economicheskoye Prostranstovo Obrastaet Plotyu http:// www.ukraine.ru/stories/ 01/11/23/2089/226627.html Nurlan Organbayev, Russia and Kazakhstan are Leaders in Integration in United Economic Space RusEdina.org, 15 December 2003, www.rusedina.org/print/?id=5058 (Russian). Arun Shagal, ‘Growing Influence of Russia in Central Asia,’ Eurasianet.org, 9 November 2004 (Russian), reprinted on www.inopressa.ru/print/eurasianet/ 2004/11/09/14:13:24/region Amina Jalilova, Golubaya Mechta dlia Kitaya Novoye Pokoleniye, 11 February 2005 No 06 (350) http://www.np.kz/2005/06/rissled3.html Amina Jalilova, ‘Golubaya Mechta dlia Kitaya,’ ibid. Alexei Chichkin, ‘Skovannye odnoj tsepyu. Elektricheskoj.’ Rossiyskaya Gazeta, 1 October 2003,http://www.rg.ru/2003/10/01/ SkovannyeodnojtsepuElektricheskoj.html ‘Chubais Seen Urging ‘Strong’ Russia Integrating CIS Electricity Systems,’ Global News Wire, 11 October 2003 [LexisNexis]. Albert Valentinov, ‘Koltso Energii i Sotrudnichestva’, Rossiiskaya Gazeta, http:// www.rg.ru/2003/09/17/ Koltsoenergiiisotrudnichestva.html

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Azhar Kadrzhanova, Energy Sector Overview in Kazakhstan http://www.buyusainfo.net/ docs_orig/x_5598441.doc ‘Kazakhstan Reduced Export of Coal in the First Quarter by 7.9%,’ Interfax.kz quoted in Professional No 72, 16 May 2005 (Russian) www.prof.in.kz/cgi-bin/pro.pl? infa&sho=34541&how=4&cat=2&pv=1 Sergey Zanin, ‘Gas or Coal, Coal or Gas,’ Neftegaz.ru, 29 August 2002 (Russian) www.neftegaz.ru Oral Karpishev, ‘Kazakh-Russian-Kyrgyz Uranium Venture to Be Created in Kazakhstan,’ TASS, 2 October 2003 [LexisNexis]. ‘Russia Seeking to Develop Ties With CIS Uranium Suppliers,’ BBC Monitoring International Reports, 20 December 2003 [LexisNexis]. T. Zhantikin, A. Baldov, S. Koltyshev, Development Concept of Nuclear Energy Sector in Republic of Kazakhstan http://nuclear.kz/docs/ knowledge/9/

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‘Russia’s Interest Towards Kazakhstan and Kyrgyzstan Isn’t Accidental,’ RusEnergy, 26 January 2004 (Russian). www.rusenergy.com/ newssystem/opened/ 37/20040126/405963.htm ‘Russia Re-gains ‘Nuclear Control’ Over Central Asia,’ RBC Daily, 3 October 2003, (Russian) www.rbcdaily.ru/cgi-bin/oranews/ get_news.cgi? tmpl=print_version&news_id=46039 ‘Kazakhstan Increases Uranium Production’, Bellona 14 April 2005, available at http:// 64.233.167.104/search?q=cache: 6VYorJBiHOgJ:www.bellona.no/en/international/ russia/nuke_industry/co-operation/ 37776.html+uranium+tablets&hl=en (cached) ‘Kazakhstan Doesn’t Benefit from Transporting Its Nuclear Waste to Russia,’ Neftegaz.ru, 26 July 2001 (Russian), www.neftegaz.ru

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About the series: Russian foreign energy policy reports

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his series of reports establishes for the first time the confluence of Russian foreign policy with the acquisition of foreign energy assets by Russian entities. Nine specific country profiles focus on the oil, gas, electricity and nuclear power industries. Each report, written by an author of international standing, explains how Russian foreign energy downstream mergers and acquisitions are transpiring to consolidate the new Russian empire. These unique studies address many questions of substance for energy industry professionals, investors, policy experts, and decision makers who seek to make sense of the dynamic changes that have overcome the Russian energy complex and altered the balance of global energy geopolitics. Series Editor Kevin Rosner Ph.D., is a specialist in Russian oil and gas, security of critical energy infrastructure, and international energy-security policy. He is an external expert to the NATO and presently serves as the Director, NATO Forum on Energy Security. He is a Senior Fellow both at the UK Defence Academy and at the Institute for the Analysis of Global Security (IAGS) in Washington, DC. Posts held include Senior Security Advisor to the Baku-Tbilisi-Ceyhan pipeline company, Project Director with the Program on Cooperation with the Russian Federation at the OECD, and Project Manager with the UNESCO Science Division in Paris. Dr. Rosner is the founder of The Rosner Group serving leading members of the global oil and gas community with energy and security analytical products.

‘Russian Involvement in Eastern Europe’s oil, Petroleum Industry: The Case of Bulgaria’ Adnan Vatansever

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his report answers questions such as: as one of the largest foreign acquisitions by a Russian company occurred in Bulgaria, what lessons are applicable to charting future Russian downstream takeovers? Why have Eastern Europe and Western FSU countries been the primary focus of Russian acquisitions? What drives LUKoil (and other Russian oil companies) to pursue acquisition of assets in these regions? Finally, what is the stance of the Russian government in terms of promoting such acquisitions abroad? Adnan Vatansever is a freelance energy consultant and the author of a number of reports for Cambridge Energy Research Associates. He is currently in the process of completing his Ph.D. dissertation on Russia’s energy sector at the Paul Nitze School of Advanced International Studies, Johns Hopkins University. He holds a B.A. in International Relations from the Middle East Technical University in

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Ankara, M.A. in Russian and East European Studies from Georgetown University’s School of Foreign Service. Hardcopy ISBN 1-905050-40-2 E-report ISBN 1-90505080-1

‘Kazakhstan: Energy Cooperation with Russia – Oil, Gas and Beyond’ Dr Ariel Cohen

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his important study explains how Russia, with its private sector and policy makers working in tandem, has exerted a significant amount of control over Kazakhstan’s vast natural resources and its economic freedom. It looks at the way Russia and Kazakhstan agreed to divide the Caspian Sea shelf and how Kazakhstan has managed to maintain good relations with Moscow overall, despite its insistence on exporting energy resources to China and Europe directly and its hopes to export through Iran. Ariel Cohen, L.L.B., Ph.D., is an international expert in international security/ terrorism; Russian, Eurasian, European and Middle Eastern foreign, security, economic and business policy. He is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security at the Davis International Studies Institute at the Heritage Foundation. Dr. Cohen has conducted conferences and briefings for the US Government departments and agencies. He appears on major US and foreign TV networks. Dr. Cohen also has extensive experience consulting for the private sector, international organizations, and technical assistance projects in the Central and Eastern Europe and CIS regions. Hardcopy ISBN 1-905050-41-0 E-report ISBN 1-905050-81-X

‘Georgia: Russian Foreign Energy Policy and Implications for Georgia’s Energy Security’ Liana Jervalidze

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his report shows that as Georgia has restructured its energy sector, the new Russian and Georgian political elites exerted their influence, particularly through the participation of Russian gas company Itera in privatizations of Georgian gas enterprises. And how, over the past few years, Russian-Georgian business groups with their offshore capital have been working to monopolise the Georgian economy and Russia’s gas industry has been consolidating its hold over the CIS pipeline infrastructure, particularly through the expansion of Gazprom. However, Gazprom failed to take control of Georgia’s pipeline infrastructure and Georgia is insistent on developing its pipeline potential in order to boost its role as a transit route to Europe, Turkey and Iran. Liana Jervalidze has worked with several government and research institutions working on Caspian region energy policy and development. She has advised private sector companies in on the development of east-west energy corridor and Georgia’s

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potential role in regional integration. Since 2003, Ms.Jervalidze has been working on the development of Georgia’s gas market. She has spoken on regional energy policy at international conferences in the CIS, Europe and the US. Her analyses have been published in both Georgian and English. Hardcopy ISBN 1-905050-35-6 E-report ISBN 1-905050-84-4

‘Russia’s Energy Interests in Azerbaijan’ Fariz Ismailzade

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n 2003-2004, an increased number of senior Russian officials and major energy companies, such as Itera, Gazprom and RAO UES visited Baku in the hopes of participating in energy projects in Azerbaijan. While maintaining diplomatic relations with Moscow, Azerbaijan is more hesitant when it comes to close cooperation with Russian energy companies. Baku fears that if Russia gains more assets in Azerbaijan, control of these assets will be used for political purposes. This unique study looks at the confluence of Russian private and public sector interest Azerbaijan’s energy sector. Fariz Ismailzade works with the Inter-national Republican Institute in Baku and is a part-time lecturer at the department of political science at the Western University in Baku. He holds an MA in Social and Economic Development from Washington University, St. Louis, and a BA in Political Science from Western University, Baku. Hardcopy ISBN 1-905050-42-9 E-report ISBN 1-905050-87-9

‘Ukraine: Post-revolution Energy Policy and Relations with Russia’ Olena Viter

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his report looks at how the new Ukrainian government plans to decrease Russian influence over Ukraine’s energy sector. President Viktor Yushchenko has declared goals which include the diversification of oil and gas supply sources, the reform of the domestic market, and the creation of a strategic oil stock. Ukraine’s search for more partners in the energy sphere has affected the relationship between Ukraine and Russia; from a “brotherly” relationship to one of pragmatic interest. Olena Viter is a Senior Adviser to the Operational Department of the Secretariat of the President of Ukraine. She is Coordinator of Energy Programs at the School of Policy Analysis, National University of Kyiv-Mohyla Academy, and a member of the non-governmental Expert Council on Energy Security. In 2002, she was an intern at the Hudson Institute, and in 2003 she participated in drafting Ukraine’s Energy Strategy. Hardcopy ISBN 1-905050-31-3 E-report ISBN 1-90505077-1

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‘Turkmenistan-Russian Energy Relations’ Gregory Gleason

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urkmenistan has large gas reserves, but as its immediate neighbours have little import demand, Russia holds the key to its gas transport. In April 2003 Turkmenistan and Russia concluded a 25 year transport and marketing agreement for Turkmen natural gas. The new arrangements permit Turkmenistan’s gas production to reach 100,000 million cm per year in 2007. This unique study details the background and looks at the prospects for Turkmenistan’s gas production and export in the context of Russian strategy, and at Turkmenistan’s role in the new energy strategies throughout Eurasia and the Middle East. Gregory Gleason, Ph.D., is an internationally recognized expert in energy policy and international relations. A professor of political science and public administration at the University of New Mexico, Dr. Gleason has extensive field experience in Turkmenistan and the other countries of Eurasia and Central Asia. He has served as a consultant to Lawrence Livermore National Laboratory, Sandia National Laboratories, the Asian Development Bank, and the US Agency for International Development. His research has been sponsored by the National Science Foundation and the National Academy of Sciences as well as other public and private foundations. Hardcopy ISBN 1-905050-33-X E-report ISBN 1-905050-82-8

‘Belarus: Oil, Gas, Transit Pipelines and Russian Foreign Energy Policy’ Dr Margarita M Balmaceda

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elarus relies on Russia for about 85% of its total energy needs, while Russia needs Belarus’ oil and gas pipelines to export its supplies to Western Europe. How will energy exports from Russia and Belarus’ transit capabilities impact Western Europe if this interdependent relationship ends, either through political changes in Belarus or if Russia ends its energy subsidies to Belarus? This report looks at transit, infrastructure and investment issues and analyzes both the state of the current infrastructure, as well as the possibilities this transit opens to Western investors, particularly as the Yamal Pipeline nears completion. In addition, it looks at the current conflict between Belarus and Russian investors for control of the country’s gas transit system and oil refineries. Margarita M. Balmaceda is Associate Professor at the John C. Whitehead School of Diplomacy and International Relations, Seton Hall University, New Jersey, and an Associate of Harvard University’s Davis Center for Russian and Eurasian Studies and the Harvard Ukrainian Research Institute. She received a Ph.D. in Politics from Princeton University (1996), and Post-Doctoral training at Harvard University. She has published widely on Russian, post-Soviet and East European energy and foreign policies. Hardcopy ISBN 1-905050-34E-report ISBN 1-905050-83-6

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‘Gazprom and the Russian State’ Dr Kevin Rosner

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azprom is the world’s single largest producer of natural gas, long acknowledged as a state-within-a-state. In 2005 it reached a turning point in its history when the Russian government reasserted its majority stakeholder position, whilst also continuing its own push to gain control over an increasing share of Russia’s energy complex overall. This timely report provides answers to questions such as: what do these movements mean for the future of the Russian energy sector? What will be the impact of state control over Gazprom on domestic and foreign shareholders? And what do these changes portend for the future of natural gas exploitation, production, distribution and the ultimate export of Russian gas to downstream consumers? And what will these changes mean to world? Hardcopy ISBN 1-905050-30-5 E-report ISBN 1-905050-85-2

‘Baltic Independence and Russian Foreign Energy Policy’ Dr Harold Elletson

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stonia, Lithuania and Latvia are uniquely dependent on the Russian Federation for energy supplies. The security of energy supplies are national security issues in the three ex-Soviet republics, which are now part of the EU. Increasingly dependent on Russian gas imports and with negligible sources of domestic energy supply, the Baltic countries have been the target of aggressive Russian commercial activity and a sustained attempt to lock them into a long-term reliance on Russia. Now, as Baltic political leaders, energy specialists and intelligence analysts consider their options, the implications for the security and independence of the three Baltic States are a matter of concern well beyond the Baltic. This important report will be essential reading for anyone with an interest in the future energy supplies of both the Baltic States and eastern Europe. Dr Harold Elletson leads The New Security Programme, which conducts research into the implications of the new security environment. He was previously Director of the NATO Forum on Business and Security. A former Member of the UK Parliament, he served as Parliamentary Private Secretary to the Secretary of State for Northern Ireland and as a member of the Select Committee on Environment. An international public affairs consultant and a fluent Russian speaker, he has advised many leading companies on aspects of their business in the former Soviet Union, including BP in Azerbaijan and Alstom in Siberia Hardcopy ISBN 1-905050-36-4 E-report ISBN 1-905050-89-5

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