Among China, Europe, and Russia, the competition over oil and gas from Central Asia and the Caucasus is intense and growing. In this rivalry China enjoys a cash advantage, while Russia builds on decades-long cultural and political ties. European companies offer more-advanced technology than is available from their Chinese and Russian competitors.
Rivalries aside, the external powers share an interest in promoting political stability in this major energy-producing region. Competition for political influence is likely to complicate the full utilization of the Caspian hydrocarbon wealth (see related story nearby).
More regional and international cooperation is needed. The speedy development of the region's oil and gas resources would benefit all concerned parties.
European security
Europe, with its high standards of living and limited hydrocarbon resources, brings to this competition an historic reliance on external energy supplies. In 2008, Europe imported 54% of its energy. Heavy dependence on foreign supplies has prompted European leaders to articulate a strategy to enhance their energy security. In November 2008, the European Commission issued a new strategy, called the EU Energy Security and Solidarity Action Plan, underscoring the significance of good relations with energy suppliers.
The Caspian region already supplies oil and gas to the EU. Azerbaijan and Kazakhstan export oil to several European countries. Similarly, since 2007 small but growing volumes of Azeri gas has reached several European destinations. In the next few years, oil and gas production from the Caspian region is projected to rise, and Europe's dependence on imported supplies will deepen. The Caspian region therefore is likely to play a bigger role in meeting the EU's energy needs. The question is how to ensure the continuity of these supplies.
The EU has simultaneously pursued several strategies. The Nabucco pipeline is at the heart of European efforts to secure energy supplies outside of Russia. It would bring Central Asian gas to Europe without passing through Russian territory. A consortium of European energy companies, including Turkey's Botas AS, Bulgarian Energy Holding EAD, MOL PLC of Hungary, Austria's OMV Gas & Power GMBH, RWE AG of Germany, and Transgaz SA of Romania, has been planning Nabucco's construction since 2002.
The EU sponsored two conferences in 2009—one in Budapest in January and the other in Prague in May—to rally support for the scheme. In Prague, Azerbaijan, Egypt, Georgia, and Turkey signed an agreement to participate in the huge project, while Kazakhstan, Turkmenistan, and Uzbekistan refused to sign due to pressure from Russia.
The pipeline would connect eastern Turkey, transiting Bulgaria, Romania, and Hungary, with Austria. It would carry 31 billion cu m/year of gas, starting in 2014. Engineering began in April.
Another proposal is the Trans-Caspian pipeline between Turkmenistan and Turkey via Azerbaijan and Georgia. The EU strongly supports the construction of this link; however, the project faces hurdles including the lack of agreement on the legal status of the Caspian and strong opposition from Iran and Russia.
Another project under construction is the Samsun-Ceyhan pipeline, which will carry Russian and Kazakh oil from Turkey's Black Sea port of Samsun to Ceyhan on the Mediterranean coast. The project is being developed by a 50-50 joint venture between Italy's ENI and Turkey's Calik Energy. It will bypass Turkey's narrow and dangerously congested Bosporus Strait and ease traffic in the Dardanelles.
Like Nabucco and the Trans-Caspian pipelines, White Stream is planned to bypass Russia and diversify gas supply routes and sources. It will run from Turkmenistan through Azerbaijan to the Georgian port of Supsa and then through the seabed of the Black Sea and through Crimea in Ukraine to Romania and Poland. The pipeline's capacity will be 30 billion cu m/year.
Russia's advantages
Compared with other foreign powers, Russia enjoys several advantages in the Central Asia and Caucasus region.
Given the Soviet legacy, Russia has strong cultural, economic, and political ties with most of the peoples and governments in the region. Also, the existing energy infrastructure still connects these former Soviet republics to Russia. Almost 2 decades after the demise of the Soviet Union, Russia controls a significant proportion of Kazakh and Turkmen hydrocarbon exports.
And, despite serious efforts to reduce economic and political dependence on Russia and to establish close relations with Europe and the US, Moscow maintains the capability to punish or reward most Central Asian and all the Caucasus nations. An obvious recent example is the 2008 war in Georgia.
Against this background, Russia's relations with Azerbaijan, Kazakhstan, and Turkmenistan have evolved in the last 2 decades. A major drive has been to protect Russia's oil and gas interests and contain competition by other external players, such as China, Europe, and the US.
Gazprom makes most of its profit by selling gas to European buyers. In the last several years Gazprom, for two reasons, has been increasingly concerned about meeting its contractual obligations. Russia's domestic consumption is rising while production is stagnant. One solution is to fill this growing gap by importing gas from the Caspian producers and reselling it to Europe. Another option is to consolidate Moscow's control over transit routes from the region. This strategic framework makes Russia's recent initiatives in Central Asia and the Caucasus easy to understand.
In early 2009 Gazprom and Azerbaijan's national oil company SOCAR signed a memorandum of understanding for supplying Azeri gas to the Russian company beginning in 2010. The companies will conduct joint technical inspections of the Baku-Novo-Filya pipeline, which runs along Azerbaijan's Caspian coast to the Russian border, and do the necessary repairs. Azeri President Ilham Aliyev noted that a deal with Russia would entail little additional investment because there are no transit countries and the pipelines are already in place. This agreement raises doubt about the availability of gas supplies for the Nabucco project.
In 2007 Russia, Kazakhstan, and Turkmenistan signed an agreement to build a gas pipeline along the Caspian Sea coast that would further strengthen Moscow's domination over energy exports from Central Asia. Moscow and Astana also endorsed plans to double capacity of the CPC oil pipeline through additions of pump stations and storage.
In another push toward solidifying its role as Europe's dominant energy supplier, Gazprom, in a joint venture with ENI, plans to lay a 30 billion cu m/year gas pipeline called South Stream under the Black Sea to Bulgaria. The pipeline would branch northward to Austria and southward to Italy. South Stream is largely seen as a setback to Europe's efforts to reduce its dependence on Russia and as a rival to Nabucco pipeline.
Emerging competitor
China recently has solidified its status as a major competitor for hydrocarbon supplies from Central Asia and the Caucasus. Beijing enjoys several advantages. It has strong historical trade and cultural ties with several nations in the region. It shares a border with three Central Asian states (Kazakhstan, Kyrgyzstan, and Tajikistan). And for the last 3 decades the Chinese economy has been one of the fastest growing in the world. As a result, more than many other economic powers, Beijing has the financial resources and the management efficiency to undertake business opportunities with foreign partners.
A brief review of China's energy outlook can explain the growing role Beijing is likely to play in Central Asia and the Caucasus.
In 2008 China accounted for 1.3% of global oil reserves, 4.8% of oil production, and 9.3% of oil consumption. Its gas shares were 1.1% of global reserves, 2.4% of production, and 2.3% of consumption. China's oil consumption will grow by an average rate of 3.4%/year between 2005 to 2030, the highest in the world. Its gas consumption will grow by a world-leading 5.5%/year in that period. China has become the world's biggest contributor to greenhouse gas emissions.
The Chinese government is seeking to diversify the country's energy mix and rely more on renewable sources, nuclear power, and natural gas. The projected large and growing gap between the nation's oil and gas consumption and production has been filled by foreign supplies.
Currently, China depends heavily on the Middle East. Like other major consumers, China is seeking to improve its energy security by diversifying its energy sources. Central Asia thus represents an opportunity. China has built a pipeline to import oil from Kazakhstan, and negotiations to import natural gas from Turkmenistan are in advanced stages.
Chinese oil companies are also involved in developing oil and gas fields in a number of Central Asian states.
The way forward
The increase in global energy demand that accompanies the eventual easing of economic recession will intensify competition for oil and gas from the Central Asia and Caucasus region.
Three dynamics are likely to shape the way forward:
- Since the demise of the Soviet Union, Azerbaijan, Kazakhstan, and Turkmenistan have been among countries introducing economic and political reform. They still have a long way to go in terms of transparency, accountability, and good governance. There is a great deal of uncertainty and ambiguity regarding how much oil and gas reserves these countries hold. Indeed, there is concern that some of them, particularly Turkmenistan, have overcommitted themselves and promised more than they can deliver.
- The rivalry between Brussels, Moscow, and Beijing has strengthened the bargaining power of the Central Asian and Caucasus states. For the first time, Russia has offered to pay "European prices" for their gas. It seems that some of the regional leaders are trying to play off one of these external powers against the others. This political game has been played out in the process of choosing which pipeline to build. The decision about which one to pursue will be better made if it is driven more by an economic cost-benefit analysis and less by strategic considerations.
- It is true that if Central Asian and Caucasus oil and gas go to one consumer, it would be at the expense of other consumers. But it is also true that the full utilization of the region's hydrocarbon resources would contribute to the overall global energy security. Instead of dividing the region into spheres of influence, Europe, Russia, China, and the US would benefit more by promoting political stability and economic prosperity. Energy should not be seen as a zero-sum game.
The author
