Caspian pipeline options hinge on many political deals

Eastern line may help settle routing

China hopes to build an extensive pipeline system to tap Caspian Basin oil and gas reserves. Secondary lines could develop linking China to Siberian and Iranian petroleum resources. [31,172 bytes]
PART IV: This is the last in a four-part series dealing with key issues of the Caspian Sea Basin. Part I, II, and III dealt with Caspian geology and reserve potential, ethnic problems and geopolitics. The series is a summary of the James A. Baker Institute's Caspian Basin Policy Study.

The huge distances between the Central Asian and Caucasus hydrocarbon reserves and the world's major energy consuming regions require a considerable financial investment to bring the reserves to market. The countries must rely on expensive pipelines constructed through foreign territories as the chief means for transport.

In the case of Tengiz Field in Kazakhstan, and Chirag, Guneshli and Azeri fields in Azerbaijan, oil production could be made available on schedule. Stable transportation arrangements remain in question. It remains unclear whether there will be significant enough export flows from the region to justify a large-scale export line in the near or intermediate term.

The region is distant from major supply centers for exploratory equipment and faces a crippling shortage of modern drilling equipment and other related materials. A well completion can take up to two years in Central Asia or Azerbaijan.

The development of pipeline corridors has been a slow and painstaking process with many possible routes through Russia, Georgia, China, Afghanistan, Iran, and Turkey. To date, transportation problems have restricted the flow of available export oil.

Export volumes from the region are not likely to reach significant levels for the next two or three years. This means that there will continue to be pressure to develop more limited, makeshift export solutions.

One unknown in the Black Sea is the degree of constraint of tanker transit through the Bosporous Straits of Turkey in the future. Turkey would like to tighten physical access to the Bosporous Strait by shipping in order to reduce the risk of a collision. As a result, several international oil-producing consortia are pursuing short-term transport solutions.

Oil transport

Starting in 1997, the AIOC consortium began shipping a limited volume of oil from its Chirag field in Azerbaijan through the northern route: Baku, Azerbaijan to Grozny and Tikhorestsk, and Russia to Novorossiysk on the Russian Black Sea. AIOC is also in the process of refurbishing a western route from Baku to Tblisi that will end in the Georgian port of Supsa. Regional leaders have called upon Western consortia members to declare a final plan for a long-term route for transport of over 1 million b/d of oil by late 1998 (1).

The Caspian Pipeline consortium (CPC) is trying to finalize plans for a private 1.34 million b/d pipeline from the Tengiz field in Kazakhstan to Tikhorestsk to Novorossiysk, utilizing an existing Russian line from Tengiz to Grozny. The development of the CPC line coupled with lines to Supsa or other Black Sea ports will put additional pressure on the Bosporous Straits.

Iran has proposed that Azerbaijan and Turkmenistan export their oil to Iran's northern refining centers at Tabriz, Tehran, and Arak, and swap it for exports of Iranian oil from its main Persian Gulf terminal at Kharg Island. The maximum amount of oil that could be swapped would be 400,000 to 500,000 b/d.

Gas exports

The Central Asian region is predominantly a gas-producing region. Kazakhstan has the largest oil reserves while Turkmenistan holds the largest gas reserves. Total proven oil reserves are estimated at 18.5 billion bbl while gas reserves amount to 246 Tcf of gas. For leaders of the Caspian republics, the challenge has been to re-direct trade patterns both east and west without Russian dominion.

Landlocked and practically surrounded by countries that could be better served by having the Caspian remain dormant, the gas producing countries of Central Asia and the Caucasus have an uphill task confronting them in creating commercial export plans. Several countries have ample reserves to support export projects including Turkmenistan, Kazakhstan, Uzbekistan, and Azerbaijan.

Two basic gas pipeline routes are being discussed to export 2 Bcf per day from Turkmenistan to either Turkey or Pakistan/ India. The Turkish route passes through 1,200 km of Iran while the Pakistan route transverses 770 km of Afghanistan. The core problem remains commercial viability.

Turkmenistan

Over half of Turkmenistan's 3 Tcm of gas reserves are concentrated in the giant Dauletagbad-Donmez Field, bordering neighboring Iran. The key to Turkmenistan finding a market in Europe will rest on the political decision among buyers to opt for supply diversity over price. Turkmenistan and Iran will also have to be willing to sell gas at bargain prices in order to monetize otherwise idle and stranded reserves. Existing European suppliers have large reserves. Russia, Norway, Algeria, the Netherlands, and the UK can supply gas for the next 40 years.

With fierce competition facing Turkmenistan to the west, eastern routes to Asia present a viable economic alternative. To the east and southeast are Pakistan, India and China, which among them contain over 40% of the world's population. These populations desperately need cleaner sources of primary energy and have no existing import links by gas pipeline or LNG. Natural gas would be useful to assist in replacing coal and oil as energy sources.

In terms of commercial viability, the best option for gas exports from the Caspian region appears to be sales directed at Pakistan and India. These markets provide unlimited growth for gas and the ability to pay prices that could finance the pipeline and reward producers with acceptable wellhead earnings.

The major problems with this route are security along the route through Afghanistan and financing. US$1.4 billion is needed. Early last year, a 1,500-km southeastern route was agreed upon by Unocal and Turkmen officials which would move oil and gas through war-torn Afghanistan and into Pakistan's network.

The most ambitious project for Turkmen gas exports is a plan to build an 8,000-km pipeline through China to Japan. The pipeline would run along an existing route through Kazakhstan and connect to a new line built in China's western Xinjiang Autonomous Region and Tarim Basin on its way to the eastern port of Lianyungang. Plans include a leg that would tunnel under the Yellow Sea, over South Korea, and under the Sea of Japan.

Other producers

Kazakhstan: The country's traditional links to the Russian gas infrastructure will make it difficult for the country to find markets in either Europe or Asia. The Russian pipeline system may not be sufficient in the long term, and Turkmenistan may not want to share its system to carry Kazakh gas to market. If the country exports, it will be through regional sales to Uzbekistan, Kyrgystan, and Tajikistan. A heavily subsidized eastern pipeline route (US$4.4 billion) was agreed to in September of 1997 by Kazakh and Chinese officials. As part of the deal to secure crude into China, Beijing promised not only a US$3.5 billion, 1,800-mile crude line to China, but also one to refineries in northern Iraq.
Azerbaijan: Azerbaijan could play an important role in the Caspian as a key transit-point to Turkey (2). Much of Azerbaijan's gas development over the next 10 years will focus on developing domestic reserves located around Baku for domestic use in the oil and power generation sectors. Azerbaijan could be self-sufficient in gas within five years.
Uzbekistan: Uzbekistan has been the most resourceful in developing export markets. It has acted regionally to establish an export market for up to 250 MMcf/d of gas sales to its neighbors.

China

China's growing economic momentum, coupled with its energy vulnerability, has led the country to look westward for additional resources. It has an oil deal with Kazakhstan to help develop Aktyubinskneft Field and is negotiating for Uzenmunaigaz Field, the second largest oil field in the country after Tengiz.

China faces several economic challenges. Inadequate oil output from its western regions makes construction of west-east national pipelines uneconomic. This in turn maintains existing bottlenecks to national petroleum market balancing. It also has difficulty receiving large foreign resources and the huge investment and institutional arrangements required to de-bottleneck the country's infrastructure.

China is seeking an eastbound pipeline route from Turkmenistan through Kazakhstan and on to China, around 6,300 km in length. This route faces technological and environmental challenges. Japanese Mitsubishi Corp. originated the pipeline design in 1992. It is under study by CNPC, Exxon, and Misubishi Corp.

While that system is under study, a shorter pipeline from western Kazakhstan to Karamai in Xinjiang Province (China) is about to be built. A feasibility study was to be completed in October 1998 and construction of the pipeline is to begin by year-end. It is China's hope that the oil supply in Xinjiang could increase to 40 million tons taking into account Central Asian imports. This would make construction of the west-east pipeline economically feasible.

As China moves to take advantage of Caspian basin oil and gas, it supports the Caspian States independence and promotes peaceful and constructive bilateral relations among all parties. It seeks a balance of power between the competing countries using market-oriented policies to create multiple options. It also seeks to expand its geo-economic space from Siberia to the Persian Gulf.

Recommendations

The littoral states of the Caspian Sea can absorb much of the projected export surplus of Caspian oil. This will help alleviate congestion on the Bosporous Strait.
The use of several pipelines - instead of one large line - may not be the optimal solution. Multiple routes will result in substantially higher oil transport costs for "late" oil.
Geological and logistical difficulties in amassing large oil exports volumes from Central Asia and the Caucasus region argue in favor of a multi-party negotiation regime where inclusivity rather than competition is encouraged.
Proposals to construct a pipeline through Turkish Thrace to bypass the Bosporous Straits have significant economic merit, compared to other well-known options. The Turkish Thrace route would relieve congestion in the Straits and Turkish environmental concerns.
Saudi Arabia transport discounts to Europe and the security concerns of Persian Gulf oil traffic groups argue against an Iranian route from either Azerbaijan or Kazakhstan.
Natural gas exports to Asian consumers have more promising longer-term economic potential for Turkmenistan. Proposed Turkmen projects will have to compete with an Iranian project to bring Iranian Gas from the South Pars field via Iran's southern coast to Pakistan.
Selling Turkmenistan gas in Turkey and Europe would require a drop in production costs to realize profits. Azerbaijan has an advantage since much of its gas production is associated with oil production.

Reference

"Unlocking the Assets: Energy and the Future of Central Asia and the Caucus, A Political, Economic and Cultural Study," James A. Baker Institute for Public Policy, Rice University, Houston, 1998.

Editor's notes:

(1) Azerbaijan's government has expressed a preference for a route south through Turkey to Ceyhan on the Mediterranean coast.

(2) A gas pipeline route from Turkmenistan across the Caspian Sea's Apsheron producing trend, through Azerbaijan and on to Turkey has been approved and is under study. This was a competitive response from Turkmenistan to Russian Gasprom's actions, which stopped Turkmenistan export earnings from gas sales to Ukraine and other former-Soviet states. Gazprom is planning to build a pipeline south across the Black Sea to feed Turkey's growing demand for natural gas. A Turkmenistan gas connection through Turkey opens access to European markets and could re-establish sales to Ukraine and other states overland by way of the western Black Sea.