Eurasian Pipelines: A Gordian Knot for Russia and Kazakhstan? Richard E. Ericson ECU

Eurasian Pipelines: A Gordian Knot for Russia and Kazakhstan? Richard E. Ericson ECU

1 November 2006 Eurasian Pipelines: Gordian Knot? 2

Nature of the Problem Russia, Kazakhstan embedded in Inherited Networks Pipelines (Gas, Oil) and Electric Power lines Pursuing Conflicting Political-Economic Objectives Networks create Interdependencies for Value, Constraints on Ability to Act Hold-up problems, giving leverage When power asymmetric, facilitate exploitation Mutually benefit sustained by substantial outside options and/or good will 1 November 2006 Eurasian Pipelines: Gordian Knot? 3

Nature of the Problem Energy Resources critical for modern existence Demand high & growing China, Japan, India Turkey, Europe Entangling Networks connect and restrict energy resource flows Generate rents to network controllers/owners Generate income to producers/suppliers Support economic activity of users Greatest Value from Outsiders if a net exporter Struggle to control exports 1 November 2006 Eurasian Pipelines: Gordian Knot? 4

Kazakh Energy Export Networks Oil Russian Controlled Atyrau-Samara Pipeline Kenkyak-Orsk Pipeline CPC Pipeline: Tengiz-Novorossiisk Gas Gazprom from Turkmenistan to Russia Soviet Central Asia-Center Pipeline; Bukhara-Urals Pipeline KazRosGaz developing Kazakh gas export to/for Russia Karachaganak to Orenburg Kashagan awaiting infrastructure Electric Power Split north & south 2 northern systems tied to UES southern system tied to Soviet Central Asian system 1 November 2006 Eurasian Pipelines: Gordian Knot? 5

Central Asian Networks 1 November 2006 Eurasian Pipelines: Gordian Knot? 6

Conflicting Objectives Russian Drive for Hegemony over Energy in the Region Gas OPEC Eurasian Alliance of Natural Gas Producers Energy Security through control of natural gas and oil transportation and distribution networks Participation/Control in Production Kazakh Drive for Economic Autonomy Diversifying the Investor Pool Developing own Resources, Integrating own Networks Diversifying Customer Base/Outlets Russian vs. Asian Demand for Region s Energy 1 November 2006 Eurasian Pipelines: Gordian Knot? 7

Russian Strategy Overcommit Resources, reducing dependence on users Increase China Exports: New Pipelines, both oil and gas, to Manchuria (ESPO) Rail through Mongolia Block Trans-Caspian Export Options Fill Nabucco to block Tracecca Environmental and legal objections Preempt European Market: Blue Stream expansion: Turkey-Hungary Black Sea Aegean Sea trans-bulgaria Oil Pipeline Limit CPC Capacity Develop Kazakh Gas/Oil Reserves with Russian Capital Preempt Chinese/Western Investment in Kazakh energy 1 November 2006 Eurasian Pipelines: Gordian Knot? 8

Russian Strategy 2 Set up Joint Companies with National Firms for Distribution and Retail RosUkrEnergo KazRosGaz ArmRosGaz European JVs with Wingas, E.OnRuhrgas, ENI, etc. Maximal Control of Central Asian Energy Exports Pressure through access rationing, threats to cut off Play off East Asian and European Demand Expand own Infrastructure Capacity Pipelines, storage, and terminals Block all private Gas export (e.g. Sakhalin I) 1 November 2006 Eurasian Pipelines: Gordian Knot? 9

Kazakh Strategy: Diversify Exports and Investment Sources New China Pipelines: Atyrau-Druzhba Now 10 mmt/yr capacity built; 20 mmt in 2 yrs Filling Capacity requires 8 mmt Russian Oil Allowing Chinese and Western Shares in Ownership encourage investment Trans-Caspian Gas to Baku-Ceyhan (BTE), Nabucco Diversify Oil Export: CPC to BTC, Baku-Supra New Black Sea Europe Pipelines Constanta (Rom)-Trieste from South Caucasus New Iran Pipeline: Aktau-Neka/Tehran 1 November 2006 Eurasian Pipelines: Gordian Knot? 10

Kazakh Export Options 1 November 2006 Eurasian Pipelines: Gordian Knot? 11

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Proposed Pipeline to China

Other Players China insatiable demand Investing in/buying Kazakh energy companies Financing pipeline requiring Russian oil India growing demand Bidding for Kazakh Companies Investing in pipeline projects Iran meeting localized regional needs Supporting pipeline development; swap deals Turkey key outlet for Russian & Cent Asian Oil Pipelines for Bosporus by-pass The West Looking for Energy Security 1 November 2006 Eurasian Pipelines: Gordian Knot? 14

Potential Resolutions Armenianization of Kazakh Energy Gazprom control of gas transportation, distribution Russian ownership in oil production, transportation Russian control of refining & processing Integration into Russian marketing/export plans Autonomous Kazakh Integration into World Markets (Equilibrium balance of forces) Independent Supplier to World Markets: Own pipelines Multiple export channels to each market Diversified Ownership/Control of Production, Transportation, and Distribution Networks Substantial private (inc. foreign) ownership Competitor to Russia in Energy Markets Independent export to East, South, and West 1 November 2006 Eurasian Pipelines: Gordian Knot? 15

Implications and Consequences Continuing Russian-Kazakh Competitions over cash cow Pipelines to China: ESOP+ vs. Atyrau-Druzhba CPC/Bluestream vs. BTC/BTE to Turkey/ Mediterranian For Turkmen and Uzbek gas shipping Control of CPC Investment in Energy Resource Development ( competition with China, India, & the West ) Outcomes will determine which Resolution holds: Armenianization vs. Autonomous Equilibrium Gazprom/Transneft/Russia hold the current advantage: locked in supplies, pipeline control, focused national strategy to control transport & distribution assets among producers, intermediaries and users China/India/Europe/US have strong interest in supporting Kazakh autonomous equilibrium : Investment, Energy Charter, new pipelines, downstream divestiture Autonomy of other Central Asian producers depends on the equilibrium outcome - Russian pawns in current struggle 1 November 2006 Eurasian Pipelines: Gordian Knot? 16

Who wields the sword? 1 November 2006 Eurasian Pipelines: Gordian Knot? 17