LET THE COURT DECIDE (Lasciamo decidere la corte)

The unexpected and sudden renewal of the Turkmen-Azerbaijani dispute over three hydrocarbon fields in the middle of the Caspian Sea is the latest setback to the European Union's Nabucco gas-pipeline project.

An argument over ownership of the Caspian fields had soured Turkmen-Azerbaijani relations for more than a decade. But over the last two years, representatives of the two countries -- prodded by EU and U.S. officials -- had been meeting regularly, reviving hopes that Nabucco could be realized.

Those hopes took a hit on July 24 when Turkmen President Gurbanguly Berdymukhammedov cited a report from Deputy Foreign Minister Toyly Komekov during a cabinet meeting.

Berdymukhammedov said the report showed that the impasse over the demarcation of the Caspian seabed between the two countries has remained unresolved "due to Azerbaijan's specific position. The main reason behind this situation is that there are mineral deposits located exactly in the disputed areas of the Caspian Sea. Azerbaijan claims ownership of these deposits, including the deposit known as Promezhutochnoyee during the Soviet era and which we now call our Serdar deposit."

Berdymukhammedov went on to mention the Omar and Osman fields, which he said Azerbaijan is already exploring but which, he claimed, "belong to us." The Turkmen president expressed regret that 16 bilateral meetings had not resolved the issue and then instructed Foreign Minister Rashid Meredov to take the issue to "the International Court of Arbitration."

That could present a major obstacle to the European Union's Nabucco plans. The proposed 3,300-kilometer pipeline starts at Georgia's western border and then heads toward Europe via Turkey. Nabucco wants to include Central Asian gas in the pipeline, particularly gas from Turkmenistan, which has one of the world's largest reserves of natural gas.

For some 15 years now the plan was to construct a "trans-Caspian" pipeline along the Caspian seabed from Turkmenistan to Azerbaijan, where it would be join a pipeline leading to Georgia's western border. But the dispute between Ashgabat and Baku over ownership of the three Caspian fields made construction of this pipeline impossible.

The recent warming of ties between the two countries, including a visit by Berdymukhammedov to Baku last year, raised hopes the pipeline could finally be built.

On state television on July 25, Deputy Foreign Minister Xalaf Xalafov indicated Azerbaijan was prepared to have a court decide on the ownership issue. "We believe that we are ready to defend Azerbaijan's position and rights on all levels," Xalafov said.

Ilham Shaban, an Azerbaijan-based energy expert and the editor of the "Turan Energy" daily newsletter, tells RFE/RL's Turkmen Service that after years of this dispute, a court ruling may be the most "civilized" means of ending the stalemate.

"And to take this matter before a court is a natural step and we also hope the court will render a fair verdict," Shaban says.

Shaban adds that a resolution of the ownership question could then pave the way for dramatic improvement in Turkmen-Azerbaijani ties, which in turn opens up the way for projects like Nabucco. Nabucco foresees that the lion's share of the proposed 31 billion cubic meters of gas for the pipeline would come from Turkmenistan.

"I feel that this court will render a decision that will bring our countries even closer together if Ashgabat and Baku will observe and accept the decision of the International Arbitration Court," he says.

Shaban concedes that if the two countries do not show flexibility and maintain the rigid posturing that has marred bilateral ties for so long, the court case could drag on for years and endanger the construction of the trans-Caspian pipeline and also Nabucco.


RELY ON ALIYEV (Dipendere da Aliyev)

On July 13, the EU and Turkey signed what's been hailed as a historic deal to start work on the Nabucco pipeline, which is designed to give Europe an alternative to the unreliable supply of natural gas from Russia's Gazprom.

On paper, it's simple. By 2014, the Nabucco pipeline should be complete, and Azerbaijan will be the first, or at least among the first, to begin shipping gas to Europe at a modest rate of 8 billion cubic meters (bcm) per year.

The pipeline -- which will run 3,300 kilometers from eastern Turkey, through the Balkans, and finally to Austria -- should be fully operational by 2020, at which time it is expected to be pumping 31 bcm of gas to Europe each year, or approximately 10 percent of Europe's annual gas consumption.

That would relieve Europe of the risk of relying on Russia for gas, although the EU says that's not the point. But privately, EU officials say the continent has to find an alternative source, given Russia's recurring price disputes with transit country Ukraine that last winter left Europe struggling with a gas shortage.

Yet there are questions as to whether Azerbaijan can meet its annual commitment of gas. Baku says it has enough to get the pipeline going, but estimates of its reserves are just that: estimates.

Stephen Blank, who is a professor of national security affairs at the U.S. Army War College, says the issue is not whether Azerbaijan has an adequate supply of gas to get Nabucco started, but whether the country can afford to finish the project and will be able to resist pressure from Russia.

While Blank acknowledges that one issue is the question whether the Nabucco project has the financial muscle to "give their suppliers credible guarantees that a pipeline can be built from their country, through the Caspian Sea or [somewhere] else [in] Europe, and will it stand up to Russia?

"It looks like it will stand up to Russia, but the financing has to be there," he continues. "These are arranged marriages, and like arranged marriages, they're supposed to last a long time, so they take a long time to negotiate."

Blank says these political and economic risks merge into one overall risk: That Russia may persuade Azerbaijan to withhold its gas from Nabucco, and as a result, perhaps no one in the region will step up to supply financing for the pipeline.

If that happens, he says, Russia will have won a significant battle in what he calls an economic war that Russia has been waging on Europe.

"If Nabucco can't be built, [Russia's] South Stream [pipeline project] or the Russian pipeline through Ukraine and Belarus become the only option to the south. And Russia gets the ability to play the great power game and leverage its power in Europe as a gas power," Blank notes.

He says Moscow has "nothing else they can use [but] a lot of economic and political intrigue. It's nasty, it's brutal, but it's mainly economic. It's not guns and troops moving over borders. But it's hard power."

Azerbaijan isn't the only source of gas for Nabucco. EU officials are reluctant to discuss alternatives to Azerbaijan, but they have to be considered, says Kenneth Green, who studies energy issues at the American Enterprise Institute, a private Washington policy center.

But Green stresses that not all alternatives can be considered equally, either because of how much -- or little -- gas they can generate, and for political reasons as well.

He points to Iran and Iraq as good examples. Both are said to have generous gas reserves, but for the immediate future, he says, Iraq is a far more reliable source of gas than Iran, at least from a political standpoint.

"We have an interest in helping Iraq get back on its feet and realize revenues for rebuilding through [the] sale of natural gas and because they are, at least titularly now, they're a democratic regime that's going to be friendly to the West. One has a greater expectation that they won't play games politically with the supply," Green says.

"But when you have Iran, which is under sanctions already because of its nuclear program, is making threats to U.S. allies and to European allies -- I mean, going from Gazprom to depending on Iran is like going from the frying pan into the fire."

Green says it's also possible that, given its recent electoral trouble, Iran, too, may have a change of government and become a reliable source of gas, even if its foreign policy were to remain contrary to Western interests. That's because now, Iran lets ideology rule its economy.

Iran can maintain its current ideology -- including a harsh foreign policy toward Israel, plus support for militant groups such as Hamas and Hizballah -- if it separates politics from economics. In other words, it could do business with the EU, with which it has strong disagreements, as long as it makes a profit doing so.

Iran aside, Green says other Caspian states -- Kazakhstan and, in particular, Turkmenistan -- might be even better alternatives to Azerbaijan than Iran. But these countries also are former Soviet republics, and Russia may be able to persuade them to run their gas through Russian pipelines, not through Nabucco.

Like Blank, Green says there are so many options, so many countries, and so many other variables involved that it would be foolhardy to try to anticipate what will happen with Nabucco -- even whether it will eventually be built.


WILL THEY PLAY NABUCCO? (Suoneranno il Nabucco?)

A raft of transit agreements to be signed on Monday by the architects of the planned Nabucco natural gas pipeline will give some much-needed shape to the pipeline which has been delayed due to infighting.

But critics of the 7.9 billion euro ($11 billion) pipeline, which plans to pump 31 billion cubic metres of natural gas to Europe by 2014, say the meeting will do little to stop a Russian-backed pipeline from gaining ground on the Europe-backed project.

The agreement will be signed by five members of the six-country Nabucco consortium through which the pipeline is planned to run. They are: Turkey, Bulgaria, Romania, Hungary and Austria. The sixth country, Germany, does not have a transit role.

The five transit countries are likely to agree on a series of legally binding conditions as well as agree on where the pipeline will begin. Turkey has demanded that the line start near Ankara, but other possibilities include Georgia and Azerbaijan.

Security for the pipeline will also be ironed out in the agreement, an important condition for easternmost Nabucco member Turkey, which will be responsible for preventing attacks on the pipeline. Last year the ethnic separatist group Kurdistan Workers Party (PKK) carried out an attack on the Baku-Tblisi-Ceyhan oil pipeline, halting supplies.

One of the thorniest issues that has not yet been worked out is a demand from the Turkish side for the right to use 15 percent of its gas for domestic use or for re-export. That issue will all but certainly not be resolved in this agreement, but rather will be worked out separately.

Turkey's Energy Minister Taner Yildiz has said Turkey will not back down from the demand, but the European Energy Commission has also stated that the demand is unacceptable. Analysts say the demand makes the pipeline commercially unfeasible as supply countries will be unwilling to sell discounted gas to Turkey.

Nabucco was conceived as a way to decrease Europe's dependence on Russian natural gas after Moscow turned off its gas to Ukraine in 2006 in what was seen at the time as a political conflict. Fear of future suppliers using energy as a political weapon strengthened the case for the Nabucco.

Monday's agreements, although they will not address the more divisive issues, will most likely boost investor sentiment in the plan, which is suffering due to the economic global downturn and lack of gas throughput supplies for the line.

Nabucco may also gain more seriousness in the eyes of gas suppliers. "It might come as a good sign for countries that will be potential suppliers, giving them an indication that Nabucco is more serious than they might have thought," said Ana Jelenkovic at Eurasia Group.

Working out Turkey's 15 percent demands, however, would help put the Nabucco substantially ahead of the Russian-backed South Stream pipeline in that the Nabucco Consortium could then begin work on the open season, when firms buy up portions of the pipeline's capacity for consumers.

The South Stream, which has increased its capacity expectations to 63 billion cubic metres, edged ahead of Nabucco late last month when gas-producer Azerbaijan said it would give Russia priority in buying gas when the second phase of its Shakh-Deniz gas production project came online.

No concrete deals have yet been signed for Nabucco, and none are expected to be signed until all transit details are worked out among its members. A lack of supply agreements have hampered political will and financing, analysts say.

The Nabucco Consortium has mentioned Egypt, Azerbaijan and possibly Russia and Turkmenistan as sources for gas. Iran can participate in the pipeline if Washington normalises relations with Tehran, the U.S. Secretary of State's Special Envoy for Eurasian Energy said earlier this year.

ALL EYES ON ANKARA (Occhi puntati su Ankara)

Azerbaijan, once the cradle of Russia's fledgling oil industry, wants the best deal possible for the natural gas craved by European consumers keen to reduce their energy dependence on Moscow.

But Europe needs assurances that gas from below the Caspian Sea will flow through costly new pipelines. Resolving the political stalemate, including a key transit deal with Turkey, will determine when Azerbaijan can start pumping more gas. "We are increasingly seeing infrastructure projects that are driven by politics, not business," said Sveinung Dankel, Statoil Hydro Azerbaijan's lead negotiator for gas transportation.

"The Nabucco project is a case in point. Clearly an important link is missing: the sourcing of gas," he said.

Azerbaijan, which plans to produce 45 percent more gas by 2015, could potentially supply much of the gas to fill the Western-backed Nabucco pipeline, an alternative route for European consumers reliant on Russia for a quarter of their gas.

But Azerbaijan, which has yet to agree on the amount of gas Turkey would take from the pipeline, has other options. As well as other routes through the 'Southern Corridor' to Europe, Baku could also sell its gas to Russia, Georgia or Iran.

Azeri President Ilham Aliyev, addressing the 16th Caspian International Oil and Gas Conference in Baku this week, said the energy sector had become very politicised.

"If we are negotiating sales and purchase contracts, the price should be reasonable. If the issue of transit is on the table, we should also get a reasonable price," Aliyev said.

For Western producers and consumers alike, the delays are a cause for concern.

The second phase of the Shah Deniz field could potentially supply 16 billion cubic metres a year, half of Nabucco's planned capacity, but project leaders StatoilHydro and BP cannot commit to a start date until contracts are signed.

"First come the politics, then comes the industry. Set the framework and the industry will do the rest," said Robert Klein, managing director of the Trans Adriatic Pipeline, an alternative route to southern Europe.

"This is what politics can do: a clear statement in Azerbaijan that gas is flowing to Europe; a clear statement from Turkey about transit terms and conditions; a clear statement from the EU that it's bringing in gas from new resources in the Caspian region."

Azeri state energy firm Socar says gas production could rise to 34 billion cubic metres by 2015 from 23.4 bcm last year. Annual exports could exceed 30 bcm within 10 to 15 years, said Kristian Hausken, president of StatoilHydro Azerbaijan.

Europe will need to import between 400 and 450 bcm annually by 2020, up from 267 bcm in 2007, said Elio Ruggeri, business development director at Edison SpA and project director for another pipeline alternative, ITGI.

The Caspian region could supply about half of the additional volumes, he said, with Azerbaijan in pole position to start flows ahead of Turkmenistan and other Central Asian states.

Interest in Azeri gas, particularly from the second phase of Shah Deniz, is strong. Elshad Nasirov, vice-president for investment and marketing at Azeri state energy firm Socar, said Russia, Iran and Georgia had all offered to buy the field's gas.

"We will consider all proposals," Nasirov told Reuters. Socar is also a shareholder in Shah Deniz, as well as Russia's LUKOIL, France's Total and Iranian and Turkish state firms.

Observers say a transit deal between Azerbaijan and Turkey will play a large role in determining whether Azeri gas will flow into Nabucco or other European pipelines, or north into Russia -- an option the Shah Deniz partners have not discounted.

Turkish Energy Minister Taner Yildiz said this week Ankara had not given up its demand to take 15 percent of the gas to be carried by the Nabucco pipeline, either for domestic demand or for re-export. Azerbaijan has previously opposed such a plan.

"It's critical that Azerbaijan and Turkey reach an agreement on pricing and on transit in the near future that will give confidence to the project," said Richard Morningstar, the U.S. Secretary of State's Special Envoy for Eurasian Energy.

A partner in the Shah Deniz project, speaking on condition of anonymity, was more blunt: "If we don't reach agreement with Turkey, we'll sell to Russia."


ASSAULT AT PAVLODAR (Assalto a Pavlodar)

KazMunaiGas (KMG) is still in talks with Central Asia Petroleum, an Indonesian company which controls the Pavlodar oil refinery, trying to close the deal that would give the national oil company control over the downstream assets in Kazakhstan.

In April, Central Asia Petroleum, a murky entity with supposed ties to Kazakh leadership, agreed to sell its upstream assets to a joint venture of KMG and Chinese CNPC for $3.3 billion. These exploration assets were part of MangistauMunaiGas, an independent vertically integrated oil company, whose other assets included a 58-percent stake in the Pavlodar oil refinery and a network of gasoline stations operating under the brand Helios.

MangistauMunaiGas was one of the largest independent oil producers in Kazakhstan, and its acquisition was a coup for both the Chinese and the Kazakh side, eager to increase their reserves. The Pavlodar refinery, however, was excluded from the deal, leading to speculation over who will gain control over the valuable downstream asset, or rather, who will join KMG in managing the refinery.

Analysts estimate the market value of the refinery at $600-700 million. A similar sum would probably be needed to modernize the plant. KMG, while eager to solidify its control over Kazakhstan’s refining assets, may have to rely on a deep-pocketed partner to complete the acquisition and much needed modernization.

In the last twelve years, the refinery underwent numerous changes in ownership. In 1997, the Kazakh government awarded a five-year concession to operate the plant to CCL Oil Ltd., an unknown oil company registered in Connecticut but rumored to be run by a group of ethnic Korean businessman from Kazakhstan. At that time, the state owned 82 percent of the plant while the remaining 12 percent were owned by its employees. Shortly after awarding the concession, however, the government transferred the asset to Kazakhoil, a state-owned predecessor of KazMunaiGas, and power struggle over control over the company ensued. In 1999, CCL Oil Ltd. found itself on the losing side of the battle and was stripped of the concession, ostensibly for failing to fulfill its contractual obligations. Later that year, 58 percent of the company has been quietly transferred to MangistauMunaiGas, reportedly as a barter payment to cover government’s debt with the company.

The Pavlodar oil refinery, constructed in 1978, currently has capacity of about five million tons of crude oil per year. This is almost 30 percent below its original capacity of seven million tons due to wear and poor maintenance. Even then, the plant does not operate at full capacity and refined only 4.27 million tons of crude oil in 2008.

Nonetheless, as the largest and most modern refining facility in Kazakhstan, it produces more than 50 percent of high-octane fuels. Among its products are high-octane gasoline (93 RON and 05 RON), diesel and heating fuel, mazut, liquid gas etc. Automobile gasoline and diesel fuel make up the largest share of its production. In 2008, the refinery produced about 1.2 million tons of gasoline, almost 50 percent of the country’s entire production. However, its products do not comply with the strict international standards which have gradually begun to be introduced in Kazakhstan.

Moreover, the refinery’s location in Pavlodar, near the Russian border in northern Kazakhstan, makes it logistically difficult to refine Kazakh crude produced in western Kazakhstan, where most of the country’s oil production is located. In fact, during the Soviet times, the plant refined almost exclusively Russian crude from the West Siberian oil fields.

Analysts warn that by 2014 Kazakhstan’s existing refining capacity will be insufficient to satisfy the growing demands for refined oil products. In the last two years, Kazakhstan has already experienced localized shortages despite its vast hydrocarbon wealth, leading to calls for government intervention. The modernization of the country’s refining industry is therefore a priority of the government.

Russian Gazprom Neft and LUKOIL, Indian ONGC and Chinese CNPC figured early as potential partners for the project. A Russian company would be a logical partner given the traditional ties of the Pavlodar refinery to the Russian oil industry. At the same time, however, China’s state-run oil companies may be the only ones willing and able to invest billions in Kazakhstan’s downstream assets. China has already advanced $10 billion in loans to Kazakhstan this year to gain a stronger foothold in the country’s oil industry, as it has done in Russia and Brazil.

Yet, China, while keen to enhance its access to reserves and diversify its supplies, may not show the same level of interest to a downstream asset oriented primarily on the domestic market. The Kazakhstan-China oil pipeline, which has been completed ahead of schedule this June, will have a capacity of 20 million tons per year. Filling the completed pipeline will likely be a priority for Chinese oil companies in Kazakhstan. Moreover, China already has a major oil refinery in western China near Urumchi with refining capacity of 6 million tons a year, projected to rise to 10 million.
(Silk Road Intelligencer)

THE END OF THE THIRD PART (Fine della terza parte)

Kazakhstan’s KazStroyService has completed the construction of the Kenkiyak-Kumkol pipeline, giving China direct access to Kazakhstan’s oil provinces in western Kazakhstan, Reuters reported citing an announcement by KazStroyService.

KazStroyService reportedly successfully completed the first test oil shipment.

The Kenkiyak-Kumkol link is the third part of the so-called Kazakhstan-China pipeline which runs from Atyrau near the Caspian Sea to Alashankou in China’s northwestern Xinjiang region. The first stage of the project was completed in 2003 and runs westward across Western Kazakhstan from the oil fields of the Aktobe region to Atyrau. This line will be reversed when all stages are complete. The second stage from Atasu, in northwestern Kazakhstan, to Alashankou was completed in 2006. The newly completed Kenkiyak-Kumkol pipeline will connect the two links and will give China access to CNPC’s Aktobe and Kumkol fields and the newly acquired MangistauMunaiGas upstream assets.

Kazakhstan and China agreed to build the 3,000 km pipeline in 1997 and have said they would later double the capacity of the combined pipeline from the current 10 million tons a year.

China extended a $10-billion loan to Kazakhstan in April in exchange for greater access to the country’s hydrocarbon wealth. Already, with CNPC’s recent purchase of a 50-percent stake in MangistauMunaiGas, China’s share in Kazkahstan’s oil production amounts to 22 percent, a local financial newspaper reported recently citing government data.

China is also building a pipeline to import up to 40 billion cubic meters of Central Asian gas a year. The link originates in Turkmenistan and goes through Kazakhstan and Uzbekistan.
(Silk Road Intelligencer)