ENERGY POLICY IN THE COUNTRIES OF CENTRAL ASIA AND THE CAUCASUS

Igor TOMBERG


Igor Tomberg, Ph.D. (Econ.), leading researcher, Russian Academy of Sciences Center for Foreign Economic Studies (Moscow, Russia)


In 2002, the CIS countries produced a total of 467.5m tons of oil and gas condensate, or 13% of world output (3,062m tons), and their net exports of oil and oil products (adjusted for losses) amounted to 296.2m tons, or 16.3% of the world oil market, whose size is estimated at 1,817m tons. During the year, overall oil production in the oil-producing countries of the Commonwealth increased by 44.3m tons, with Russia accounting for 71% of this increase (31.6m tons), and Kazakhstan, for 25% (11.3m tons). The gain in production in Azerbaijan and Turkmenistan was insignificant, and in Uzbekistan oil output declined. Deliveries within the CIS reached 41.5m tons, including 33.3m tons supplied by Russia mostly to Ukraine, Belarus and Kazakhstan. The rest was supplied by Kazakhstan.

Exports from the Commonwealth countries in 2002 included 214.6m tons of oil (72.5%) and 81.5m tons of oil products (27.5%). Exports of oil in this case are 15-20% more profitable than exports of oil products. The huge volume of the latter is largely forced and is explained by two main factors: insufficient capacity of oil export terminals and inadequate connections within vertically integrated companies (VICs).

The above export data include Russian deliveries both of the 137.6m tons of oil recorded by official statistics and of the 26.3m tons that could be described as unrecorded deliveries. Inspections show that all this oil is exported from the CIS by rail, by river-marine tankers, and with the use of more complicated arrangements that include several kinds of transport.1

The main bottleneck in the Commonwealth export strategy is a shortage of transportation facilities, although over the past few years pipeline and terminal station capacity for the export of oil has rapidly increased. In the foreign oil market a tangible role is played by six CIS countries: Russia, Kazakhstan, Azerbaijan, Turkmenistan, Uzbekistan and Ukraine. These are followed by Belarus, which in 2002 produced 1.84m tons of oil. Production in Belarus has been declining by 3-4% a year, and there is no chance of new finds. Exports of oil from the republic that year amounted to 0.6m tons, and those of oil products to non-CIS countries could be assessed at 7m tons. However, the entire export of oil products actually amounts to reexport of Russian oil processed at local refineries, and it is only possible as long as Russian suppliers of raw materials find this profitable.

Russian Federation

The oil market of the former U.S.S.R. is so far fully dominated by Russia. In 2002, Russia accounted for 81% of CIS production, 72% of consumption, and 73% of supply (including oil products) to non-CIS countries. All the qualitative changes in the CIS oil market are connected with such changes in Russia. On 22 May, 2003, the RF government approved Russias Energy Strategy Until the Year 2020. According to RF Energy Minister Igor Yusufov, its main purpose is to ensure the countrys energy security and to maintain its geopolitical positions in world markets. In the words of Prime Minister Mikhail Kasyanov, the energy intensity of the Russian economy, which is now times higher than in the West, is to be halved by 2020. One of the strategic tasks written into the adopted document is to increase oil output to 445-490m tons in 2010 and to 450-520m tons in 2020 (in 2002, the figure was 379m tons).

As regards gas, its production is to increase to 635-665 billion cubic meters (Bcm) in 2010 and to 680-730 Bcm in 2020 (compared with 595 Bcm in 2002).

In 2003, oil production in Russia is forecast at 390m tons, which is 2.6% more than in 2002; refining is expected to reach 190m tons, and gas production, according to the RF Energy Ministry, 603.7 Bcm, or 1.5% more than in the preceding year.2

At the same time, the transportation system is beginning to lag behind the production of energy resources. Thus, Semyon Vainshtok, president of the Russian company Transneft, told Reuters that judging by international experience oil pipeline capacity utilization should not exceed 80%, but by 2012 Transneft will be piping 549m tons of oil (compared with 374m tons in 2002). Consequently, he said, we shall require $3 billion worth of investments solely to maintain the existing facilities, without new routes.3

From the standpoint of the oil and gas industry, the most important region is the Caspian, and the shelf of the Caspian Sea is the most promising albeit risky target for investment. According to U.S. experts, recoverable reserves here amount to 2.4-4.6bn tons, and potential resources are several times larger. Analysts regard this as the most probable estimate, although they do not rule out that it may be too optimistic. Western company estimates of oil and gas resources in Kazakhstan, Azerbaijan, Turkmenistan and Uzbekistan are given in Table 1. It shows that experts differ widely in their assessments, but all are agreed that the largest reserves of oil are concentrated in Kazakhstan, and of gas, in Turkmenistan. And although the question of actual indicators for Caspian offshore fields remains open, investments in the development of already known fields could in the next ten years place Kazakhstan and Azerbaijan among the worlds major oil exporters.

Table 1

Oil and Gas Reserves and Resources in the Caspian Basin Countries

Country

Oil, million tons

Gas, billion cubic meters

Proven reserves

Possible resources

Proven reserves

Possible resources

Kazakhstan

1,300-2,500

12,500

1,840

2,500-3,000

Azerbaijan (shelf)

500-1,700

4,500

1,100

2,000-2,500

Turkmenistan

75-100

4,000-12,000

2,800

4,000-4,400

Uzbekistan

82.5

3,500

1,870

3,000

Kazakhstan

The fuel and energy complex has always been the dominant sector in the republic. In 2001, it constituted 42% of the total volume of industrial production in the country. The oil-producing industry provides 40% of the countrys exports. Among the CIS countries, Kazakhstan has had the most stable rate of increase in oil output: about 10% a year since 1995. In 2002, it produced a total of 42,037.2 thou tons of crude oil and 5,202.2 thou tons of gas condensate. However, the countrys plans for the future are much more ambitious.

Further development by foreign investors of two unique fields, Tengiz and Karachaganak, discovered back in the days of the U.S.S.R., and the development of Kashagan, a new field discovered in 2000, will make it possible to increase oil production 2-2.5 times by no later than 2010. The reality of this forecast is borne out by the smooth operation of major investors, the existence of huge oil reserves, and the successful implementation of projects for the transportation of oil out of the country.

Proven oil reserves at Tengiz are estimated at 825-1,235m tons. Over the past three years, production here has increased at an average of 12% a year. The startup in 2001 of the oil pipeline system of the Caspian Pipeline Consortium (CPC), whose main purpose is to export Tengiz oil, has improved the economics of oil transportation from the field and has laid the groundwork for stable production growth over the next ten years. According to the management of TengizChevrOil, which is carrying out this project, by 2005 production from Tengiz and from the nearby Korolev field is to reach 19m tons per year, and by 2010, 34m tons, or almost three times as much as in 2001.

The proven reserves of oil and condensate at Karachaganak are around 800m tons. For lack of an infrastructure, all the condensate from this field goes to the Orenburg Oil Refinery, and production is limited by the capacity of that refinery. Condensate stabilization plants are soon to be put into service in the field, and these are to be linked to the CPC, which will enable the Karachaganak Integrated Organization (KIO), the consortium that is developing the field, to more than double production over the next two years (to 10m tons of oil and condensate per year).

The recoverable reserves of the Kashagan offshore field are estimated by some experts at 1.375bn tons of oil, and potential resources, at 5.5bn tons. It is being developed by the international consortium Agip Kazakhstan North Caspian Operation Company (Agip KCO) based on a production sharing agreement (PSA), under which commercial production from the field is to start in 2005 (5m tons per year). By 2007-2008, oil production in the Kazakhstan part of the Caspian shelf is to go up to 15m tons per year, and by 2015 it is expected to reach the current level of Norway or Mexico: one million barrels per day. Apart from Italys Agip, the Kashagan consortium also includes ExxonMobil, Royal Dutch Shell and TotalFinaElf (each with a stake of 16.67%), Inpex and Conoco (with 8.33% each).

The above data, together with rising production figures for all the companies operating in the country, bear out the forecast of the republics Ministry of Energy and Mineral Resources: by 2005, oil production is to reach 60m tons. Furthermore, with a buildup of capacity for oil transportation from the region, by 2010-2015 production may well reach 100m tons, or 2.5 times the current figure. In the coming months, Kazakhstan is to complete the preparation of a program for the development of its sector of the Caspian shelf, under which production there is to increase to 100m tons of hydrocarbons by 2015. These figures were announced in early May 2003 by the republics Minister of Energy and Mineral Resources Vladimir Shkolnik. The plan target for the production of oil and condensate in 2003 is 47m tons, and by 2015 output is to go up to 150m tons.

In the sphere of energy resources, Astana has been actively developing its ties with Beijing. The China National Petroleum Corporation (CNPC) has a 60% stake in the joint venture Aktobemunaigaz, which is planning to invest $300m in 2003. The company is to put into operation a refinery in Zhanazhol with a capacity of 2m tons of oil and 1.5 Bcm of gas per year. And in Aktobe it is to build enterprises for the production of bitumen and lubricating oils.

The CNPC is also planning to build an oil pipeline from Kazakhstan to China with a capacity of 30-50m tons per year, a project of strategic importance to Astana.

Azerbaijan

The main hopes for an increase in oil production in the republic are connected with the Azerbaijan International Operating Company (AIOC), which is developing the Azeri-Chirag-Gunashli group of fields, and also, to a lesser extent, with more than 20 other projects based on production sharing agreements with the participation of foreign companies. At the same time, production by the largest (about 60% of the countrys total) and oldest oil producerthe State Oil Company of the Azerbaijan Republic (SOCAR)is to be halved over the next 20 years.

Recoverable reserves at the Azeri-Chirag-Gunashli block, discovered back in the 1980s, are assessed by the PSA partners at 620m tons of oil, 100 Bcm of associated gas, and 100-150 Bcm of natural gas. Two exploratory wells drilled in the Shah Deniz field, discovered in 1999, confirmed the forecasts about the presence of gas condensate and natural gas, whose recoverable reserves are assessed at 85m tons and 330 Bcm, respectively. However, with the drilling of new exploratory wells these data could be adjusted. At present, oil production under the Azeri-Chirag-Gunashli project is actually carried on only at the Chirag field (5.6m tons in 2001). In 2003, the company is to begin developing the Azeri field, so launching the Phase-1 project for the full-scale development of this group of three fields. According to AIOCs plans, from the end of 2004 onward total production from these fields under the Phase-1 project is to be around 20m tons of oil per year. The Phase-2 project provides for the production of oil only in mid-2006, and annual output under that project could be around 40m tons. Under Phase-3 (end of 2008), the figure is to go up to 50m tons. As regards the Shah Deniz gas field, the first stage of its development is to begin in 2004-2005. The production of gas in that period should be around 2 Bcm, reaching 16 Bcm by 2008, and the production of gas condensate is expected at around 1.5m tons per year.

So, based on these estimates and with due regard for the decline in production by SOCAR, one can safely say that in 2010 oil production in the republic will be close to 47-50m tons. The only restraining factor here could be the lack of sufficient capacity for its supply to international markets. By 2020, SOCAR specialists forecast a level of 55-60m tons, but these forecasts are hardly justified, because by that time production under todays largest project, Azeri-Chirag-Gunashli, will be past its peak, whereas under other projects there is still no confirmation of sufficient reserves.

Turkmenistan

The plans for increasing oil production and export in that country are also fairly ambitious. Thus, under the national socioeconomic development program, by 2010 oil production is to go up to 48m tons, and export, to 33m tons, which is almost 10 times as much as today. Special attention is to be paid to creating more favorable conditions for the attraction of foreign investments, primarily for operation on the Caspian shelf. But the implementation of these plans is open to question.

The current investment climate holds no promise of large-scale investments in the oil industry; on the contrary, foreign investors appear to be leaving the country. ExxonMobils decision to cease its activities under one of the most promising oilfield development projects is symptomatic in this respect. Only two foreign companies are now producing oil in Turkmenistan (less than 6% of total production). Many companies have long shown an interest in work in the country, but things have not gone beyond the signing of framework documents.

Although Turkmenistan has substantial oil reserves, its leadership has pinned its hopes on gas. In 2003, the country is to increase gas production by 26% to 67.6 Bcm, by 2005, to 85 Bcm, and from 2010 onward it is to produce almost 120 Bcm per year. At the same time, the requirements of the domestic market do not exceed 12-15 Bcm per year. On 10 April, 2003, Turkmenistans President Saparmurat Niyazov and RF President Vladimir Putin signed an agreement on the delivery of Turkmenian gas to Russia, which was immediately described as revolutionary, since it can bring Russia a return of $300bn. Under the agreement, over the next 25 years Moscow is to purchase around 2 Tcm of gas from Ashghabad. The price of purchase from Turkmenistan and the price of delivery to other CIS countries are roughly equal. One can assume that given successful implementation of the agreement Gazprom will be receiving gas which could be exported, for example, to the Commonwealth countries (at a zero rate of return for Turkmenistan-Russia-CIS deliveries).

This will provide Russia with an opportunity to use its own surplus gas for export or for domestic consumption. In 2008-2009, the supply of gas to Russia under the agreement is to increase by 10-20 Bcm, so that Gazproms gain from gas transit will increase still further. Additional benefits will accrue to Gazprom from the use of barter in payment for gas, including deliveries to Turkmenistan of gas equipment from Russia.

That agreement enables Ashghabad to resolve a strategic task: to regain access to the main market for its blue fuel. The development of the countrys gas sector is totally dependent on the opportunities for export (80% of production) and on foreign consumers ability to pay. By means of the agreement, the republic is in a sense returning to its Soviet past: it will be able to renovate and almost fully utilize its export capacity (estimated at up to 80 Bcm a year), raising overall production to 100 Bcm by 2010. This will help to realize the potential of the countrys gas industry.

For all its magnitude and political importance, the project also has its shortcomings. Although the interests of the parties obviously coincide, the project contains a significant element of uncertainty connected with future pricing. Within three years of the agreements entry into force, the price of gas is to be pegged to the price of oil. During this period, both parties will be highly interested in making active use of the modernized export infrastructure, and Turkmenistan will also probably seek to boost its export earnings by raising prices. In addition, the agreement may have its opponents. First, these are European countries which find it more advantageous to have direct agreements with Turkmenistan with the use of Gazproms transportation infrastructure alone (in 1990, such deliveries constituted up to 12% of European gas imports). Second, these are Ukraine, Kazakhstan and, to a lesser extent, Iran, which could lose a part of Turkmenistans gas deliveries as these are reoriented toward Russia. Third, after 2010 the question of a more fundamental expansion of Ashghabads export capacity will once again come on the agenda, reopening the problem of alternative export routes bypassing Russia.

Uzbekistan

According to forecasts by the analytical centers of the worlds leading oil companies, primarily European and U.S., the countrys oil and gas reserves are much larger than those of all the other Central Asian republics taken together. Today Uzbekistan has 171 known oil and gas fields. Of these, oil is produced from 51 fields, gas from 27 fields, and condensate from 17 fields. Another 53 fields are prepared for commercial development, and 35 fields are being explored. Undiscovered possible resources of oil and gas are estimated by experts at over $1 trillion, while developed and identified productive formations and traps (there are over 100 of these) make it possible to carry on successful prospecting work in all the oil-and-gas-bearing regions of the republic.4

In the years since the disintegration of the U.S.S.R., the country has increased the production of oil 3.2 times, of gas by 38%, and of gas condensate 2.2 times. The Kokdumalak fieldthe republics largest field recently brought on streamprovides 86% of its entire oil output. The government has been working actively to attract foreign investors. The problems it has to face in creating a favorable investment climate largely coincide with similar problems in Turkmenistan.

Jointly with the British company Jebco Seismic Ltd, the National Holding Company (NHC) Uzbekneftegaz has prepared packages of geological-geophysical documents for the six most promising blocks of Ustyurt. This work is aimed to attract foreign direct investment in accordance with international conditions. The packages have been presented to the major oil companies of Britain, U.S.A., Japan, Canada, Germany, Italy, Belgium and the Netherlands. In addition, a comprehensive program (enacted into law) for attracting foreign companies to take part in oil and gas projects operates in the country. In the investment program for 2002, special attention is given to the British investor UzPEC Ltd, engaged in the development and production of hydrocarbons in the Gissar region and carrying on geological exploration work in Ustyurt.

In Central Ustyurt and Southwest Gissar, a joint oil and gas exploration project is being implemented with another British company, Trinity Energy. In April 2002, that company (for the first time in the republics history) signed an agreement on production sharing between its specially established subsidiary and NHC Uzbekneftegaz, which acted on behalf of the countrys government.

Potential investor interest in the oil and gas complex of the republic has markedly rekindled with the adoption of a Law on Production Sharing Agreements. Its purpose is to regulate relations arising in the process of conclusion, performance and termination of production sharing agreements in carrying out investments in mineral exploration, prospecting and production.

A U.S. congressional delegation visiting the country also devoted its attention to the development prospects of the oil and gas industry. Earlier on, during the visit to Russia by U.S. President George W. Bush, a group of congressmen led by Curt Weldon and representing 11 American states showed an interest in the projects of the international group of companies Itera, notably in its projects within the CIS, including Uzbekistan.

The longstanding cooperation between NHC Uzbekneftegaz and Itera is yielding practical results. Thus, the partners have completed their joint construction of the Gazli-Kagan pipeline, whose importance to the republic is hard to overestimate. A 76 km-long gas pipeline with a transmission capacity of 30 million cubic meters (Mcm) of gas per day is to connect the Bukhara-Khiva oil-and-gas-bearing region with the Central Asia-Center and the Bukhara-Urals main pipelines, substantially increasing the industrys export capability. Uzbekneftegaz and Itera are soon to get down to a new stage of joint work: the construction of a booster compressor station at the Gazli underground gas storage facility.

Gas production will also increase when the Kandym group of fields is brought on stream. The main parameters of its contract package have already been agreed by NHC Uzbekneftegaz with the Russian company LUKoil and with Itera. At present, the holding companys specialists are preparing feasibility study requirements for the project and an agreement on production sharing with these two major partners.

Unfortunately, Uzbekistan is short of funds for the development of new fields. That is why when the republic passes the production peak at such fields as Kokdumalak, it could turn from an exporter into an importer of oil. Apart from legal and tax conditions that are insufficiently attractive to foreign investors, the increase in hydrocarbon production and export from Central Asia and the Transcaucasus is held back, as noted above, by the absence of reliable routes for their supply to international markets. The striving of investors, the owners of raw materials, to ensure reliable marketing of their products has resulted in the preparation of a number of projects whose implementation should help to increase oil and gas supply to the world market.

Tajikistan

The republic is now producing no more than 350 barrels of oil per day (compared with 1,300 barrels in 1992). Such a sharp drop is due to the civil war, which lasted until 1997. The reason why oil production has not been resumed on the prewar scale, according to the government of Tajikistan, is the complicated relationship with Uzbekistan, whose oil supplies now meet 70% of the countrys needs.

Tajikistans oil reserves, estimated at 12m tons, lie in the Sogdi region in the north of the republic. Their full-scale development is to begin in 2003.5

Power Industry Turning Toward the East

The transportation infrastructure created in the days of the U.S.S.R. provides for transit of raw materials to sales markets solely through Russia. For the time being, this enables Russia to influence the main export flows of oil and gas from Central Asia and the Transcaucasus (about 70% of all the oil exported by Kazakhstan, Azerbaijan and Turkmenistan to Far Abroad countries, and the entire volume of Turkmenian gas pass through Russian territory). But such a state of affairs does not suit either foreign investors or the political leaders of these states. The fact that Moscow has no clear-cut transit policy with regard to raw material exporters, who are mainly interested in stable rules of the game, has induced investors to consider a dozen or so projects for the transportation of hydrocarbons without transit through Russian territory. Moreover, the leaders of countries that have only recently gained independence regard alternative export routes as an element of real sovereignty, and this results in political support for the new transit projects.

The end of the war in Iraq and changes in the world oil market could lead to a situation where Moscow will also step up its activities in the construction of eastern pipelines. The point is that the actual monopolization of Arab oil by the Americans does not suit the leading Far Eastern consumers: Japan and China. Tokyo and Beijing have a vital stake in diversifying energy sources.

The prospects of dynamic and sufficiently rapid economic growth in the APR are predominant in determining the role of that region in international energy cooperation. And the importance of the APR to the leading exporters of energy resources is hard to overestimate. This market (over 20 countries) already accounts for over 60% of world energy consumption, but the region itself has only 14% of the world reserves of oil, 43% of gas, and 63% of coal. Two countries of the regionJapan and Chinarank second and third in the world (after the U.S.A.) in terms of energy consumption. In the near future, Russia may well become one of the leading suppliers of hydrocarbons to the region.

The war in Iraq has served as a kind of catalyst for a turn in the Russian (and also in the Kazakh, Uzbek, etc.) oil strategy toward the East: toward China, Korea, Japan, and the entire Asia-Pacific Region.

China

In 2001, the countrys growing economy used 231.9m tons of oil, which amounted to 6.6% of its world consumption. Specialists say that over the next ten years China will overtake Japan and become the second largest player in the world oil market.

According to data for the beginning of 2002, explored reserves of oil in the country are around 33bn tons, or 2.3% of world reserves. Despite a gradual annual buildup of domestic production, in 1993 China became a net importer of oil, and the volume of imports has steadily increased. Thus, in 2001 the country imported 60.3m tons of crude oil and about 28m tons of oil products. In 2002, the import of crude oil increased by 15%. Russian deliveries that year amounted to only 4.4% of the total: about 1m tons was supplied by sea from Sakhalin, and the rest was carried by rail from Siberia by the companies YUKOS and Sibneft. Most of the imported oil is delivered to China by supertankers from the countries of the Middle East (34.2m tons), and some of it comes from Africa and even from Latin America. An expansion of Russian supplies is hindered by the absence of main pipelines linking the two countries.

At the beginning of 2002, the overall reserves of natural gas in the PRC stood at 1.37 Tcm, or 0.9% of the worlds total reserves. Today gas constitutes only 2.7% of the overall consumption of primary energy resources. Traditionally, the main sphere of their use in China (around 40%) is the production of chemical fertilizers, with fertilizer plants located in the immediate areas of gas production. The early 1990s brought an increase in household use of natural gas, and the gas distribution network has developed accordingly. With the construction of small gas-fired thermal power plants in Beijing, Tianjin, Chengdu and some other cities, there has been an increase in the use of methane in the electric power industry. According to the forecasts of government experts, by 2010 the demand for gas in the country is to multiply three or four times, to 60-90 Bcm. About 40% of that volume is expected to go to electric power stations.

The main reserves of natural gas in China lie in the western part of the country. The geography of the basic fields and markets determines the direction of the projected domestic gas pipelines: from West to East. The largest of these projectsthe construction of the West-East pipelinewas launched on 4 July, 2002. This 4,022 km-long pipeline is being built with the participation of Russias Gazprom and is to run from the Lunnan field in the Xinjiang-Uighur autonomous region through the Gansu, Shaanxi, Shanxi, Henan, Anhui, Jiangsu and Zhejiang provinces to Shanghai. A joint venture set up for its construction includes Royal Dutch Shell, ExxonMobil, Gazprom and Sinopec. The overall cost of this project, to be completed in 2005, is $5.2 billion. By 2008, the pipeline is to reach its design capacity: 12 Bcm per year.

At the end of 2002, the overall capacity of Chinas electric power stations was 353m kW, and by the end of 2003 it is to go up to 370m kW. International experts have every reason to say that over the next 20 to 40 years the countrys electricity market will be the most dynamic and promising market in the world. According to Chinese specialists, from 2003 to 2010 the average annual rate of growth in demand for electricity will remain at 6.6-7%, and from 2011 to 2020, at 4.5-5.5% (compared with a world average of 2.7%).

Russia has a number of advantages enabling it to become the PRCs priority partner in the fuel and energy sector. First, in view of its advantageous geographical location, any routes for the export of energy resources from the North will be shorter than, say, from the Arab East. Second, the comparable size of these two countries enables Russian companies to act as a kind of consultants to their Chinese colleagues. Thus, Gazprom has already offered its assistance in the development of an integrated national gas distribution network in the PRC modeled on the Russian network. RAO Unified Energy Systems of Russia has come out with a similar initiative. Whether these prospects are realized will depend on many factors, including Moscows diplomatic initiatives directed toward the East.

The diplomatic part of this work appears to be going well. During the first visit abroad by PRC President Hu Jintao, which he made to Moscow in late May 2003, it was announced that Russia was to increase its oil exports to China. Last year oil supplies to China totaled 3m tons. This year we intend to increase the volume of supplies, said Russias President Vladimir Putin. Russia is also considering the possibility of building oil and gas pipelines to China. President Putin said: The question of how these routes are to be developed must be answered by specialists. But Russia is interested in access to the Chinese market, and we are prepared to promote the implementation of these projects.

As though in support of the presidents words, on 28 May the oil company YUKOS signed the largest contract in the history of cooperation between the two countries. Over the next three years, it is to supply 2m tons of oil by rail (transaction amount$1.1bn). In addition, YUKOS and the China National Petroleum Corporation have concluded a general agreement on the basic principles and understandings of oil supply along the Angarsk-Daqing pipeline, which is to be built in 2005.

Russian oil is gradually beginning to fill the Chinese market and, as the head of YUKOS Mikhail Khodorkovskiy promised, with the completion of the pipeline it will take up about 10% of that market (in 2001, the CNPC purchased about 730 thou tons of Russian oil, and in 2002, 1,050 thou tons). From 2005 onward, YUKOS is to supply the PRC with 20m tons of oil produced in Western Siberia, with a subsequent increase to 30m tons per year. Under the general agreement, the delivery period is 25 years, but CNPC President Ma Fucai has expressed his confidence that this period will not be confined to 25 years.

Mikhail Khodorkovskiy said, for his part, that the oil supply deal with China is estimated at $150bn, and $60bn of that is to go into the Russian budget. He also said that the parameters of the contract are based on world oil prices. Thus, the average price of Russian oil supplied to China is to be $29 per barrel (the current price of Urals crude oil is $25).

Japan

The possibility of Japans participation in building pipelines from Russian oil and gas fields in Eastern Siberia and the Sakhalin shelf was one of the main topics of the January 2003 meeting between President Putin and Prime Minister Junichiro Koizumi of Japan.

The implementation of any of these projects will enable Tokyo to markedly reduce its dependence on oil supply from the countries of the Middle East. According to Japans Ministry of Trade, only in November 2002 the country imported 4.3m barrels of Middle Eastern oil per day. The Middle East meets 82.5% of Japans fuel requirements, and the countrys authorities are increasingly worried about such heavy dependence on one group of suppliers, especially since apart from the war premium, which pushes up prices to a considerable extent, Japanese importers have to pay high tanker freight rates for carrying the oil from the Persian Gulf. As a result, each barrel of oil costs the Japanese almost $1 more than it does the Europeans or Americans.

By investing funds in the construction of an oil pipeline, Tokyo expects not only to ensure supplies of low-price Russian oil, but also to induce the Kremlin to make concessions on the issue of a return of the Kuril Islands.

So far Japan has not given up these intentions. Its government is prepared to provide Russia with preferential credits along the lines of Japans Bank for International Cooperation if Moscow decides to build an export pipeline to the Pacific coast (Angarsk-Nakhodka). That readiness was reaffirmed by the head of Japans Agency for Natural Resources and Energy Iwao Okamoto at a meeting with RF Energy Minister Igor Yusufov held in Moscow in early March 2003.

EurAsEC: Single Energy Market

Energy cooperation in the territory of the former USSR is gradually becoming more civilized, with deepening integration in this area as the newly independent states move closer together in economic terms. Nor has this issue escaped the attention of the members of the Eurasian Economic Community (EurAsEC), the most advanced regional association in the post-Soviet space.

The aggregate fuel and energy potential of the Community countriesRussia, Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistanincludes substantial reserves of oil, gas and coal and an impressive array of energy facilities. To this must be added the wide opportunities for hydropower generation (especially in Kyrgyzstan and Tajikistan). Development of the Communitys own powerful fuel and energy potential is one of the key lines of cooperation between the EurAsEC countries. Their objective interest in this area is dictated by the historically shaped interconnection of their fuel and energy complexes. The Community countries have real opportunities for creating an integrated energy system. This problem is being addressed, in particular, by the EurAsECs Council for Energy Policy, which includes the heads of the respective agencies of the five states. Work is now underway to draft legal documents on mutual transit of energy resources, including such strategic resources as oil, gas and electricity, through the territories of neighboring member countries.

A graphic example of energy integration is the cooperation between Kazakhstan and Russia in the fuel and energy sector. In 2001, they restored the simultaneous operation of their energy systems, and in 2002, signed an agreement on long-term transit of Kazakhstan oil through Russian territory (17.5m tons per year) and set up a joint venture in the gas sector, the KazRosGaz joint stock company. The two countries have also agreed on the joint exploitation of three Caspian offshore fields: Kurmangazy, Khvalynskoye and Tsentralnoye. This experience helps to work out common approaches to the pursuit of a concerted energy policy within the EurAsEC framework, notably with the use of cartel principles, and also to prepare for joint access to foreign markets. In this context, a topical item on their agenda is the establishment in the near future of a gas alliance with the participation of a number of other countries.

In April 2003, the EurAsECs Council for Energy Policy met in Almaty for its third session, at which experts from Russia, Belarus, Kazakhstan, Tajikistan and Kyrgyzstan considered the problem of creating a common energy market. The idea of such a market has long been discussed by the member countries. Thus, at a recent economic forum of that organization, RAO UES Chairman Anatoly Chubais called for the establishment of an interstate group to work out the mechanisms for creating a single energy market within the EurAsEC framework. He said that the formation of a common economic space between Europe and Asia operating in conformity with uniform technological standards was a realistic prospect. That initiative was supported not only by the EurAsEC, but also within the CIS framework and at negotiations with representatives of the European Union.

The establishment of a common energy market could become a major incentive to integration. Technologically, this task has already been resolved. In the view of analysts, the only thing that remains to be done is to work out a common approach to its creation acceptable to all the EurAsEC countries, which will naturally take some time and will require political will.

Conclusions

Given the raw material orientation of Russia, Kazakhstan, Azerbaijan and Turkmenistan, their economic development strategies for the next ten years regard the fuel and energy complex as the main driving force behind the structural changes in their economies. But similar strategic targets induce these countries to compete among themselves in the world oil and gas market. Today there is every reason to believe that over the next ten years the production of hydrocarbons in the Caspian region will increase several times, with a corresponding increase in their exports. And it is quite probable that most of this oil and gas will go to Europe. In this case, Russia will lose its positions in the European market, which is so far the main market for its oil and gas exports.

The Russian Federation cannot afford to simply increase oil and gas production in its territory, because this will lead to a sharp drop in prices in the world market and to a squeezing of Russian companies out of that market in view of the high cost of production. That is why broader involvement of these companies in oil and gas production in Kazakhstan, Turkmenistan and Azerbaijan is the only way for Russia to retain its positions in the European market.

Oil production and exports by the CIS countries are still insufficient for the creation of a bloc capable of exerting a serious influence on the world market. But the role of the Commonwealth in this area has been growing rapidly and, given a favorable scenario, by 2010 the main oil producing countries of the CIS will be able to meet 25% of world demand for oil and gas. Russias influence in the CIS oil market is increasing. This situation could well be used to create a petroleum bloc on the basis of the Commonwealth. Over the next three to five years, it could become an equal partner of OPEC and of the OECDs International Energy Agency in regulating world oil prices.

Integration between Russia, Kazakhstan, Turkmenistan and Uzbekistan, which have huge reserves of gas and have been actively developing its production and transportation infrastructure, is an objective condition for the establishment of a large regional gas alliance. The existence of potentially boundless markets, say, in India, Pakistan, China, etc., makes this idea even more attractive. The only thing lacking for its translation into concrete practical steps is due political will on the part of the potential members of such an alliance, although this topic is something of a must in all bilateral talks between the leaders of these countries. In the view of some Russian mass media, by signing the 25-year gas cooperation agreement the presidents of Russia and Turkmenistan in effect completed the formation of a gas OPEC based on the CIS states. Prior to that, Gazprom had already agreed on gas purchases with Uzbekistan and Kazakhstan. The breakthrough in the negotiations with Turkmenistan, the leading gas producer in Central Asia, took place in early April, when a Gazprom delegation in Ashghabad led by Alexey Miller coordinated the terms of an interstate treaty with the leadership of that country. Despite the negative assessment of that document by some mass media, the event was of key importance.


1 See: Mirovaia energeticheskaia politika, No. 3, 2003.
2 Interfax, 14 March, 2003.
3 Reuters, 14 February, 2003.
4 See: Nezavisimaia gazeta, 11 July, 2000.
5 See: Neftegaz.ru, 16 January, 2003.

SCImago Journal & Country Rank
UP - E-MAIL