Central Asian Oil & Gas Development:Alternative Infrastructure Solutions

Vladimir Milov

Carnegie Endowment for International PeaceWashington D.C., October 23rd, 2007

Why the search for oil & gas transit alternatives is vital for Central Asian nations?

• Dependence on the Russian transit monopoly

• Kazakhstan’s challenge: how to evacuate additional oil if the oil production grows from 1.5 mbd to 3 mbd by 2015?

• Turkmenistan’s challenge: how to diversify gas exports, ensure direct access to consumers other than Russia, and ensure fair level of gas export prices?

Kazakhstan’s oil production surging…

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1995 2000 2006 2015*

Kazakhstan's oilproduction, mbd

* Projection of the Kazakhstan government

…but how this new oil will be evacuated?

• Atasu-Alashankou oil pipeline to China: first stage completed, expansion expected

• Shipments of oil via Baku-Tbilisi-Ceyhan pipeline remain an option

At the same time:• No real progress with CPC expansion – transit through Russia

remains a problematic option• Question’s rise with regard to the consequences of the recent

Kazakh government attacks on foreign investors (the Kashagan consortium)

Potential alternative routes of evacuation of new Turkmen gas

• Trans-Caspian gas pipeline

• Trans-Afghani gas pipeline

• “Caspian” gas pipeline via Kazakhstan and Russia

• Various options of gas supply to/via Iran

• Turkmenistan-China gas pipeline

Unresolved Caspian dispute can effectively block the construction of any Trans-Caspian pipelines

• Bargaining among Turkmenistan and Azerbaijan on Kyapaz/Serdar, Azeri/Khazar, Chirag/Osman fields continues

• No progress achieved at the summit of the heads of Caspian littoral states on October 16th, 2007, in Tehran

• Very hard to imagine a common position between Turkmenistan and Azerbaijan can be reached any time soon

Trans-Caspian gas pipeline remains a dream.

“Caspian” pipeline

“Caspian” gas pipeline also remains a dream.

• Despite massive media coverage of the trilateral Russia-Kazakhstan-Turkmenistan summit of May 12th, 2007, no real progress on the pipeline construction has been observed ever since

• Governments of the three countries were supposed to come up with “specific” agreement on pipeline construction by September 1st, 2007 – but that still didn’t happen

• In fact, hardly any negotiations are taking place

• Turkmen gas supply guarantees to Russia (50 bcm/year) expire at the end of 2009

• Currently, an issue of severe gas supply price increase apparently will dominate the agenda of Russian-Turkmen gas relations

Map: East European Gas Analysis

Turkmen gas: more and more expensive for Russia

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2004* 2005 9m 2006 2007 2008? **

Price of Turkmen gas exports to Russia, USD/tcm on Turkmen-Uzbek border

* Monetized equivalent of a price used in barter transactions** As suggested by Turkmen President G.Berdymukhammedov in September 2007

Other alternative options for Turkmen gas supplies

• Trans-Afghani pipeline remains controversial both on security, resource base and economic grounds

• Trans-Iranian pipeline probably would work, but the United States would most likely do their best to block it’s construction

Turkmenistan-China gas pipeline: the most realistic to-date alternative for Turkmen gas

• Fundamental link with upstream access (right bank of Amudarya, other fields) makes the project advantageous to China as compared to the Russian gas pipeline project

• Project not plagued with complicated geopolitics as compared to other competing projects

• China is capable of resolving problem issues of gas transit via Kazakhstan and Uzbekistan

• Although price issue is still unresolved, the project has good perspectives for moving forward

Above: picture of symbolic first section of Turkmenistan-China gas pipeline laid on August 30th, 2007

Big questions surrounding the development of Turkmen gas production

• Remaining lack of clarity on resource base

• Will the opening of upstream sector to foreign investment ever happen?

• Is Turkmenistan seriously considering a breakaway from a Russian gas transit monopoly, or simply using this threat to push Russia to agree for a higher gas purchase price?

Conclusions

• Central Asian countries are very close to the potential break-up of the Russian oil & gas transit monopoly

• However, the net winner appears to be China, not the European market

• Successful development of the upstream oil & gas production in Central Asian countries is challenged by either worsening attitude to foreign investors (Kazakhstan) or the lack of it’s openness to foreign capital (Turkmenistan)