The Central Asia-Caucasus region is one of the oldest hydrocarbon producing areas in the world. Since the collapse of the Soviet Union in 1991 the region has attracted special attention from oil and gas consuming nations and international companies.
Azerbaijan, Kazakhstan, and Turkmenistan, in particular, enjoy several advantages. They hold oil and gas proved reserves sufficient to represent the main sources of future production increases outside the Organization of Petroleum Exporting Countries (OPEC). Equally important, they are strategically sandwiched between two major energy-consuming regions—China to the east and Europe to the west, both of which depend heavily on foreign supplies of oil and gas. And, unlike most oil and gas producing nations in the Middle East, Latin America, and Russia, the three Caspian states other than Russia and Iran have welcomed foreign investment to consolidate their political independence and to attract capital with which to build and modernize their energy industries.
These advantages aside, Azerbaijan, Kazakhstan, and Turkmenistan all lack direct access to the high seas and major shipping routes. As a result, the only way for their hydrocarbon exports to reach major global markets is shipping via other countries, largely by pipelines. Oil and gas pipelines are not merely economic schemes; they also reflect and contribute to changing strategic parameters. For most of the last 2 decades, Central Asia and the Caucasus region's three close neighbors—China, Europe, and Russia—have proposed and built several pipelines to serve their energy and political interests.
Together, Azerbaijan, Kazakhstan, and Turkmenistan hold 3.8% of the world's proved oil reserves and 3.3% of its gas reserves. In 2008 their combined share of global oil production was 3.2%, and that of gas was 3.5%. Recent discoveries strongly suggest that the region's oil and gas production will substantially increase.
The scope and timing of oil and gas development in these three Caspian Sea states depend on two dynamics. One is the availability of foreign investment and technology, which in turn depends on the approach authorities in Baku, Astana, and Ashgabat take toward international oil companies. The other is the yet-unclear ability of export capacity to keep pace with expected increases in oil and gas production in the region. The rivalry between regional and global powers will have a great impact on pipeline construction.
Reviews of recent energy developments in these countries follow:
Azerbaijan
Since independence, Azerbaijan has taken a more pro-Western, foreign investment-friendly approach than most other regional powers. This opening to international oil companies has contributed to the vast expansion of the country's hydrocarbon production. Most of the oil comes from the Azeri-Chirag-Guneshli structure, developed by Azerbaijan International Operating Co. The bulk of Azeri oil is exported via two major pipelines: Baku-Tbilisi-Ceyhan (BTC), with a terminal at the Turkish port on the Mediterranean, and Baku-Novorossiysk, with a terminal at the Russian port on the Black Sea.
Azerbaijan has a similarly successful story with natural gas. The country's production almost doubled in the last decade. Most of the gas comes from three fields—Azeri-Chirag-Guneshli, Bakhar, and Shah Deniz. The latest is considered one of the world's largest gas discoveries in the last few decades. In 2007 Azerbaijan became a net gas exporter. Azeri gas moves mainly to Turkey with small volumes to Georgia and Iran. The major gas pipeline is the South Caucasus, known also as Baku-Tbilisi-Erzurum, which runs parallel to the BTC for most of its route with a connection to the Turkish gas network.
Kazakhstan
Given its size and massive hydrocarbon reserves, Kazakhstan has the potential soon to become a major energy exporter. Astana's oil and gas production has more than tripled over the last decade. Most of the country's oil comes from Tengiz and Karachaganak fields. Kashagan field, discovered in 2000, is the largest oil field outside the Middle East and the fifth largest in the world in terms of reserves. ENI was the major operator of the international consortium developing Kashagan until early 2008, when the Kazakh government doubled its stake in the scheme and stripped ENI of its leading role. Kashagan is scheduled to come on stream in 2013; however, geological and environmental hurdles might delay production.
Kazakhstan exports most of its oil via three major pipelines. Traditionally, Kazakhstan used to export all its oil via the Atyrau-Samara pipeline, a northbound link to the Russian distribution system. In recent years, pumping and heating stations were added to the pipeline. Astana, however, has decided to diversify its oil shipment routes.
The Caspian Pipeline Consortium (CPC) connects Kazakhstan's oil fields in the Caspian Sea with Novorossiysk. It is the only export pipeline on Russian territory with partially private ownership. CPC was officially inaugurated in October 2001. Expansion of the CPC, including additional pump stations and storage facilities, is planned.
The Kazakhstan-China Pipeline represents an important diversification step. The pipeline connects oil fields in Atasu in northwest Kazakhstan with Alashankou in China's northwestern Xinjiang region. China started receiving Kazakh oil in 2006. Kazakhstan also agreed to swap arrangements with Iran. And Astana has endorsed a plan to build a link connecting oil fields to the Baku-Tbilisi-Ceyhan pipeline.
Almost all Kazakh gas is associated with oil production, with Karachaganak and Tengiz the largest sources. Kazakh gas, along with that of Turkmenistan and Uzbekistan, is shipped via the Central Asia Center connecting western Kazakhstan with Russia's gas system.
Turkmenistan
Unlike Azerbaijan and Kazakhstan, Turkmenistan has limited oil reserves but some of the richest gas endowments in Central Asia. Upon independence, Turkmen gas was seen as a competitor to that of Russia. All Turkmenistan gas was exported to Russia via the Central Asia Center pipeline, and the two countries became locked in a price dispute. As a result, Turkmen gas production stagnated for most of the 1990s.
The two nations have signed several agreements since the late 1990s, and Turkmen gas production has since skyrocketed. In addition to gas deals with Moscow, two other developments have boosted production and brightened the outlook: discoveries and a change in political leadership.
Most of Turkmenistan's gas comes from Dauletabad and Shatlyk fields. In the mid-2000s the supergiant South Yolotan-Osman was discovered in the southeastern part of the country. In October 2008 an independent audit confirmed that the field was among the world's biggest. In August 2008 another large field, South Gutlyayak, was discovered.
In addition to the Central Asia Center pipeline, a small proportion of Turkmen gas is exported to Iran via the Korpedzhe-Kurt Kai pipeline. Built in 1997, it was the first in Central Asia to bypass Russia.
Following the death of President Saparmurat Niyazov in December 2006, his successor, Gurbanguly Berdymukhammedov, promised a fresh start in domestic and foreign policies. The new president invited international oil companies to develop the country's hydrocarbon deposits. Though he declared the county "open for business," authorities say Turkmenistan will develop its vast onshore resources itself. International oil companies will be limited to exploration in the Caspian Sea and offered service contracts rather than production-sharing agreements.
Berdymukhammedov has sought to diversify gas exports. In addition to the links to Russia and Iran, his government is negotiating gas deals with Pakistan and India via the so-called Turkmenistan-Afghanistan-Pakistan-India (TAPI) or Trans-Afghanistan pipeline. In July 2007 Ashgabat and Beijing signed an agreement under which the former will supply the latter 30 billion cu m/year of gas for 30 years via the proposed Central Asia Gas pipeline. China will participate in development of Turkmen gas fields.
In April 2008 Berdymukhammedov signed an agreement with Germany's RWE to explore for and develop gas fields in Turkmenistan and agreed to supply the European Union with 10 billion cu m of natural gas.