Thursday, December 2, 2010

Baku spreads its links.... TCGP into NABUCCO....?

Baku spreads its links....
By R M Cutler

MONTREAL - A great deal of attention has rightly been paid lately to the prospects for a Trans-Caspian Gas Pipeline (TCGP) between Turkmenistan and Azerbaijan, with a view to feeding the prospective Nabucco pipeline. Prospects for an undersea oil pipeline from Kazakhstan to Azerbaijan have, however, garnered much less attention.

This prospective 700-kilometer Trans-Caspian Oil Pipeline (TCOP) would run from Kuryk in Kazakhstan, not far from the port city of Aqtau on the Caspian Sea, underneath the sea to Baku. Its purpose would be transport oil from the offshore Kashagan field to world markets.

In the run-up to the recent Baku summit of Caspian Sea littoral heads of state, a bilateral document was signed a few days earlier, in order to create a fait accompli by the two national energy "champions", Kazakhstan's KazMunaiGas (KMG) and the Azerbaijan's SOCAR. This document was nothing less than a joint agreement on the core principles for the Trans-Caspian Oil Transport System (TCOTS) including the TCOP.

The TCOTS is to be distinguished from the Kazakhstan-Caspian Transport System (KCTS) which is the domestic project within Kazakhstan (about 700 km from Eskene to Kuryk with an initial planned volume 500,000 barrels per day, or bpd) that would take Kashagan's oil to Kuryk/Aqtau in preparation for its export to world markets.

The idea had earlier been bruited to include onshore Tengiz oil into the KCTS, in view of Russia's failure to double the capacity of the Caspian Pipeline Consortium (CPC) pipeline from northwest Kazakhstan across southern Russia to Russia's Black Sea coast, this notion is now apparently discarded. As a result, the realization of the KCTS, so also the TCOTS, will depend upon the pace of development of Kashagan alone.

Work on the TCOP is still in the feasibility study stage, but the initial agreements provide for Kazakhstan to furnish 150,000 bpd in the first stage, with the potential to more than double that to 400,000 bpd. However, this early stage of project-making does not mean that other directly related projects are not developing according to their own speed and even faster, in anticipation of the TCOP coming on-line in future years.

Indeed, in direct consequence of the bilateral Azerbaijan-Kazakhstan agreement, the Azerbaijani-Polish economic cooperation commission agreed late last month to work with KMG and SOCAR on the timing of the TCOP so that the Euro-Asian Oil Transportation Corridor (EAOTC) project would take Caspian Sea oil from Georgia's Black Sea coast to Ukraine and from there to Poland and beyond.

The EAOTC project was first discussed among participating parties throughout calendar year 2007; then agreed in May 2008 among Azerbaijan, Georgia, Lithuania, Poland, and Ukraine; and further discussed with a view toward implementation at the Batumi energy conference at the beginning of this year.

The bilateral Polish-Azerbaijani commission has recommended to the European Union that EAOTC be placed on the list of projects to be implemented within the framework of its Eastern Partnership policy (which seeks to coordinate the EU's development assistance to Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine).

EAOTC involves reversing the flow of the Odessa-Brody Pipeline (OBP) back to its original southeast-to-northwest direction; up until the present it has carried Russian oil domestically inside Ukraine in the opposite direction.. The OBP is at present operated by the state firm UkrTransNafta and runs inside Ukraine from the Black Sea port of Odessa to Brody near the Polish border. When operating in its so-called "reverse mode" (that is, northwest to southeast), it generally carried about 285,000 bpd at optimal operation.

There are long-standing plans to extend to pipeline to Plock in Poland, and then still further to the port city of Gdansk, from where the oil could be shipped to international markets. The OBP has long been regarded as an indicator of Ukraine's geo-strategic orientation, and towards the end of the decade became the subject of domestic Ukrainian disputes between various elite factions. (See
Ukraine clash threatens oil to Europe, Asia Times Online, August 2, 2008.)

A first trial run reversing the Odessa-Brody flow was recently concluded with the participation of Belarus, which is seeking to diminish its oil import dependency in view of the increased prices for energy that Moscow imposed upon Minsk. This is part of its policy of maximizing profits from its westbound energy exports, targeting in the first instance Ukraine but also affecting Belarus as well as Poland and other EU members.

So just at the end of last month, the OBP's first trial shipment of oil to Belarus's Mozyr refinery was successfully completed. According to a representative of the Belarus state company Belneftekhim, 500 bpd were transited from OBP to Mozyr during the trial run via the Druzhba trunk pipeline while a little more than twice that amount went to the Czech Republic, Hungary, and Slovakia via the Mozyr-Brody-2 pipeline.

The quantities were so low because this shipment was intended as a proof-of-concept "demonstration project". After the success of the experiment, local engineers and pipeline executives announced that with some minor upgrading, the system would be able to transport about 300,000 barrels per year. Also it is intended that products refined in Belarus will be sold in Europe.

According to local officials, the oil for this experiment did not of course come from Kazakhstan via the South Caucasus and the Black Sea, but was instead Russian Urals blend delivered to Belarus on swap terms by its buyer Venezuela, whose president, Hugo Chavez, has been lately deepening his personal and political relations with Belorussian dictator Aliaksandr Lukashenka and with whom he signed nearly two dozen agreements on the occasion of the latter's recent visit to Caracas.

Other supply patterns are possible, but this is the main one that project implementers are working on, at least until the TCOTS-EAOTC link becomes operational, which was first expected to happen in perhaps five years but now will not take place probably for close to a decade. The contract for a Belarus-bound trial shipment of oil via OBP was signed only in late October, and upon its success further such swaps are now contracted for the period 2011-2013.

So the EAOTC project proceeds apace even in view of new delays in the TCOP and TCOTS. The reason for this new delay in the realization of the latter projects is directly linked with the postponement of the date for first oil from Kazakhstan's massive offshore Kashagan field.

While the development of this field has been subject to subtly forced institutional reorganizations so as to shift more influence within the consortium to KMG (see
Kazakhstan reins in oil majors, Asia Times Online, November 7, 2008), the reason for the new delay of first oil from 2014 to 2016 is likely linked to environmental concerns to which the Deep-water Horizon blowout in the Gulf of Mexico drew new attention. The actual development of the Kashagan deposit is daunting because the enormous undersea oilfield is surmounted by a huge dome of natural gas, in turn held in place under unimaginable pressure by an overlying salt dome.

Kazakhstan has always paid serious attention to the ecological consequences of hydrocarbon development, even if it has not always had the enforcement capabilities that it desires. While some press commentaries warn about the damping effect of such measures on the interests and motivations of multinational energy companies, the ecological issues are not artificial but indeed reflect public sentiment. Kazakhstan was for four decades, until the late 1980s, the site over 450 Soviet nuclear tests, including over 100 above ground, at Semei (Semipalatinsk), in addition to 45 Chinese nuclear tests at the trans-border Lop Nor site from the mid-1960s through the mid-1990s.

The health consequences for the general population are well known in the country. In the era of Gorbachev's perestroika, it was a social movement protesting environmental degradation and health effects of that nuclear testing that brought now President Nursultan Nazarbaev to power in the late 1980s. The country's parliament is in the process of drawing up legislation to provide for prison terms for the executive officers of companies found responsible for environmental damages.

The recent developments in the EAOTC, linked to the slow but steady progress on the TCOP, illustrate how relatively small projects can have game-changing consequences even at the present stage of developing energy relations between Central Asia and Central Europe. Other examples come from the recent attempts to develop smaller transit projects for natural gas across the Black Sea such as, but not limited to, the Azerbaijan-Georgia-Romania Inter-connector (AGRI).

These various projects are in turn driven by Azerbaijan striving for autonomy in determining the directions of its energy exports, which it pursues on a strictly commercial basis but always taking into account the need to balance delicately among the several larger powers in its own "near abroad" - Russia, Turkey, and Iran in the first instance, but not even limited to these.

Such a commercial basis is one that cannot in the present day be rationally criticized by any observer, and it serves well as the foundation for introducing subtler geopolitical and geo-economic nuances into national policy.

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