It is an exciting time for oil and gas in Eurasia, but many questions surround the direction of some of the region’s top producer countries. Developments in global markets, growing Chinese demand for natural resources, resource nationalism, and the rising potential for resource conflict are just a few of the overlapping issues that present opportunities and challenges in the Eurasian energy scene.
One of the hottest discussions right now surrounds the implications of the North American ‘shale gale’ on Eurasian energy giants like Russia. At a conference I attended in Washington over the summer, industry analysts and think tank gurus predicted that ‘single-crop’ natural resource-dependent countries like Russia would be the biggest losers of the boom in U.S. shale gas production, because it creates a more volatile commodity price environment that challenges the market share of the country’s biggest energy producer Gazprom (Running Out, or Runneth Over? Scrutinizing a Potential New Golden Age of Oil, and What it Could Mean for the Next President, New America Foundation, July 13).
A recent article by the AP also concluded that the boom in American and Canadian shale gas could fundamentally alter Russia’s position as global gas exporter and shake up world energy markets (The Washington Post, September 30). But while developments in oil and gas markets halfway across the world definitely influence the industry here, the direction of Eurasian energy developments also hinges on the interactions of many other variables, local and global.
The purpose of this blog is to examine some of the major local and regional energy issues currently taking place in detail and to link them to a larger global picture. The blog’s focus is not just Russia. I intend to frame the issues in a context that includes other top energy producers of the former Soviet Union. Kazakhstan, Turkmenistan, and Uzbekistan hold significant reserves of oil and gas that are attracting a lot of foreign investment and political attention. Additionally, regional concerns over water, electrification, and energy efficiency are emerging topics of interest for all energy producers and consumers nations. Developments across all of these sectors hold significant strategic implications for policymakers and businessmen involved in this region.
The first few entries here will outline some of the key concepts that create a framework for the rest of the blog, and help readers and myself alike try to better understand some of the key factors that shape the energy scene in contemporary Eurasia.
Geopolitics – A Key Driver for Regional Energy Developments
Access to, and control over, natural resources and export routes are the primary drivers of geopolitical energy interests in Eurasia. Russia’s natural gas ‘pincer move’ to Europe - the Nord Stream and South Stream Pipelines – is one of the clearest examples of geopolitics motivations for energy projects in the region. The construction of these pipelines enables Russia to completely control upstream production and downstream distribution of natural gas, bypassing any troublesome transit state (like Belarus or Ukraine) and establishing a direct physical link between Russia and downstream consumers. I will pick up on the important issue transit states in another post, but for a quick read on one of the most recent developments regarding regional transit states, see my September article on Ust-Luga and the BTS-2 pipeline on our homepage.
Central Asian energy producers, as compared to Russia, are limited by a lack of geographic proximity and ease of access to markets global commodity markets. The region is primarily landlocked, which means that the bulk of hydrocarbons must be transported by rail, road, or pipeline to reach end users. Furthermore, region is surrounded by politically unstable regimes and is the focus of great power interests, multiplying geopolitical concerns over energy in the region.
A number of key Western-backed pipeline projects in Central Asia are currently in the works. The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline is one of the most strategically important projects, as it is part of the U.S. government’s high priority ‘New Silk Road’ strategy to create trade and transportation linkages between the countries of Central and South Asia. ‘New Silk Road’ strategy will also be examined in a later post.
TAPI would supply two of the regions largest economies, Pakistan and India, with much needed natural gas to fuel electric power generation. Both countries’ electricity grids are already at capacity (and sometimes over capacity, see this summer’s electricity outages in India), and both governments are seeking ways to supply growing consumption requirements. TAPI would also (in theory) create a physical link between all of the transit countries, tying the interests of producer and end-users to the security of the pipeline. This is a critical element of the geopolitical equation, since it tethers these countries’ interests to the security of Afghanistan post-2014, when the U.S. is scheduled to leave.
Other pipeline projects include the Iran-Pakistan-India (IPI) gas pipeline and the Trans-Anatolian Pipeline (TANAP) to supply Europe with gas from Azerbaijan. Russia’s Gazprom originally showed interest in participating in the IPI gas pipeline, but was just turned down by Pakistan this week (Bloomberg, October 2). Instead, China is gaining a foothold in the country by securing operational control of a deep-sea port at Gwadar in Pakistan’s Balochistan region (The National, October 7). Chinese authorities are planning to connect the port with China’s western Xinjiang province through rail and road linkages, creating a potential energy and trade corridor that bypasses the volatile Strait of Hormuz.
The Western-backed TANAP project is also gaining ground, as more European countries give their political support for the project. Turkey and Azerbaijan agreed to build TANAP over the summer, which would connect Azeri gas fields in the Caspian Sea to feeder pipelines that would supply Europe (Euractiv.com June 28). Two competitor feeder pipelines, Nabucco West and the Trans-Adriatic Pipeline, are currently on the table and TANAP capacity could be expanded to up to 60 billion cubic meters (bcm) of gas, if a Trans-Caspian pipeline is constructed between Azerbaijan and Turkmenistan.
The economic, political, and security interests of all energy producer and transit countries involved in these projects combines to form a geopolitical playground in Central Asia over the long-term.
Rising Challenge of Resource Nationalism
Another major factor driving policy and business interests in Eurasian energy production is the challenge of resource nationalism. Resource nationalism is a growing trend around the world and has become such a challenge for international oil companies that Ernst & Young labeled it the biggest business risk for extractive industries in 2011-12. Examining the correlation between rising government regulation and increasing outside interest in Central Asian hydrocarbons is an essential part of understanding the regional energy scene, and Kazakhstan is currently the largest post-Soviet country outside of Russia that is experiencing a rise in resource nationalism.
Kazakhstan adopted a creative multi-vector foreign policy after the collapse of the Soviet Union in order to balance out the triangular east-west-Russia relationship. Having been forced to play by Russia’s rules for most of the 20th century, an assertive and independent Kazakh government emerged in the 1990s and sought to establish strong trade and energy links with China and Western majors. But the Kazakh government has changed it’s approach to energy development since the beginning of the 21st century and has attempted to reign in the activities of Western oil majors and other foreign actors in the country’s hydrocarbon sectors. Now, it seems, increased government regulation and moves to strengthen economic and political ties with China spells trouble for international oil companies and others operating in the Kazakh energy industry.
The Kazakh government plans to expand the ‘Kazakhstan-China’ pipeline to 20 million tons capacity per year, according to a press release from the Kazenergy Forum in Astana at the beginning of October. At the same time, however, the Kazakh government is seeking to take back control over the country’s wealth of natural resources from Western IOCs, which it believes took advantage of the turmoil of the 1990s to rob the country of it’s wealth. In fact, Reuters reported on October 2 that KazMunaiGas (KMG), Kazakhstan’s main national oil company (NOC), seeks to take over ConocoPhillips’ stake in Kazakhstan’s giant Kashagan oilfield (Reuters, October 2). KMG’s interest in weaseling it’s way into the project comes as no surprise, as the Kazakh government becomes increasingly assertive in policy towards Western international oil companies (IOCs).
As outlined in my article in September’s issue of Oil & Gas Eurasia, resource nationalism in Central Asia, particularly in Kazakhstan, is growing. This trend is certainly worrying for Western businesses in the region, as it creates uncertainty in the investment climate. I will pick this up in a later post and examine the complicated nature of government-to-government and government-to-business relations in the region.
More on factors shaping the energy scene in the next post…