A 'Great Game' is being played in the Central Asia republics of Azerbaijan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan. E&T takes a look at the region that holds five per cent of the world's energy supplies.
Today, the players in the great energy game are different to what they used to be. They include Russia, China, Iran and Turkey, the traditional regional powers, but they also include new players such as the EU, USA, India, drug smugglers and religious extremists. However, the strategies are traditional - economic, political, military, diplomatic and religious.
The disruptive disagreements Moscow has had with the EU, Ukraine and Georgia over gas supplies are an example of the current diplomatic campaigns being fought by the players for a piece of the action.
In 2008, BP's Statistical Review of World Energy estimated that the region had reserves of 48 billion barrels of oil, impressive but certainly no Kuwait with its reserves of 101.5 billion barrels of oil.
Unconfirmed estimates of natural gas have been put at 7.49 trillion cubic metres (tcm), certainly better than Saudi Arabia at 7.17tcm, but not as big as Iran with 27.8tcm.
The extent to which the gas reserves will be exploited will depend on the Asian regions' governments' geopolitical ability to attract the interest of foreign investors, political variables and the state of world demand.
However, given recent discoveries in Kazakhstan, for instance, some analysts suggest current estimates for natural gas reserves look conservative. Interestingly, BP suggests the region holds at least 3.7 per cent of the world's coal reserves, mostly in Kazakhstan, which is the world's tenth largest coal producer.
Central Asian energy development
A number of analysts have expressed considerable disappointment at the slow rate of development of Central Asia's energy resource since they gained independence from Moscow, particularly social, economic and political progress. Factors that have hindered progress can be divided into domestic and external.
Among the internal factors is the failure of the major stakeholders to agree a common energy policy for the planning, exploration and development of the region's energy resources in a clear, efficient and effective manner. An obvious example is the failure to agree maritime boundaries in the Caspian Sea, which has slowed development of offshore oil and gas fields. There is also a shortage of skilled engineers.
Many of the republics that produce oil and gas have failed to complete the reforms necessary to become a modern state. Oliver Descamps, managing director for Eurasia at the European Bank for Recon-struction and Development, observes that the investment climate and tax regime is not always favourable for foreign investors. Many of the ruling regimes are often corrupt, unpopular and authoritarian. States like Tajikistan and Kyrgyzstan have problems with ethnic minorities over succession combined with religious extremism, which raises potential security concerns over the protection of investments.
According to the International Energy Agency, many reserves are undeveloped due to the lack of infrastructure to connect fields to export pipelines. This means potential investors not only have to invest in developing potential fields, but have the added costs of constructing the required infrastructure.
There are a number of external factors that affect the speed of development of the region's resources including, of course, the current state of world demand and the economy. However, the most important factor is how geopolitical relationships between countries can affect access to the pipelines.
At present there are four actual or potential energy export corridors. These are to the Russian corridor, served mainly by the Russian-owned Central Asian pipeline network that delivers oil and gas; and RZhD (Russian Railways), which delivers Kazakhstan power station coal to customers in the EU and Russia.
The Chinese corridor that recently opened the west-east pipeline network from Kazakhstan - which links Central Asia - centres in China. There is also the western corridor, which uses a rail and pipeline network delivering oil and gas from Azerbaijan via Georgia and Turkey. Finally, there is the potential Iranian corridor for energy exports, which is increasingly seen as a viable option given Russia's recent intervention in Georgia and the potential for improved political relations between the West and Tehran.
Russia controls over 80 per cent of the energy exported from Central Asia and is experiencing a restricted energy supply market because of the internal business climate that has discouraged investment. It is largely dependent on the region's imports to maintain its domestic energy supplies.
This energy infrastructure is owned by Kremlin-controlled companies like Transneft, Gazprom and RZhD, which provide the Kremlin with significant tax revenues from the profits earned by Central Asian producers delivering energy via their transit networks. It is, therefore, not surprising that the Kremlin and its Russian transit operators are eager to protect the revenues derived from this aspect of power supply.
Proposals by other countries to by-pass Russia's transit network are a serious commercial threat to its interests. Russia has given top priority to undermining the possibility of alternate routes. The incident in Georgia is an example of this, as it closed the Western transit corridor for a number of days.
For the actual and potential users of the Russian-owned energy transit corridor, there are a number of specific issues. Except for RZhD, which operates rail services, the pipeline operators make it very difficult for new customers to gain access to their networks.
Jonathan Stern at the Oxford Institute of Energy Studies has expressed concern about the age and condition of the pipeline infrastructure as much of it has shown signs of neglect and pipeline capacity has not been upgraded to meet new traffic flow. Efforts to attract the interest of the Russian pipeline operators to improve capacity have failed. Ambitious plans by Russia to upgrade the network have been greeted with some scepticism due to past experience and reports that many Russian companies are in economic trouble.
Finally, there are Russia's strategic concerns over the region's neighbours. There is the Iranian problem, a potential nuclear state with a dysfunctional government which has long-standing political, cultural and historic claims on the region. There are also fears that religion-inspired terrorism might spill over from neighbouring Pakistan.
For Russia, the solution is complicated. For a start, the country needs to end its energy economic nationalism, which handicaps Western investment, and bring Russian energy usage in line with the EU Common Energy Policy.
China's alternative to coal
An important player, China is looking for alternative energy solutions to coal, which it sees as a major cause of urban pollution in its major cities.
This switch is forcing Beijing to search for international sources but, after decades of mistrust and failure, to come to an agreement with Moscow over development of nearby Siberian oil and gas reserves China has had to look elsewhere for energy to maintain its economic growth. One solution clearly lies in Central Asia, as it takes a growing interest in the exploration and development of the region.
China's has to create a market pricing structure to reduce the growth in demand for energy, and adopt the aims, ambitions and policies set out in Europe's Common Energy Policy.
Europe eyes Nabucco pipeline
Europe already receives a portion of its gas supplies through the existing Russian-owned pipeline network from Central Asia. The recent gas dispute between Russia and the Ukraine, which led to much of Eastern Europe's gas supplies being disrupted, has increased Brussels' concerns about the reliability of Russia to deliver Central Asian gas supplies.
The EU, working with the USA, has already developed the western corridor for oil and gas exports from Azerbaijan via Turkey. However, the failure of states to come to an agreement over maritime boundaries in the Caspian Sea means no pipeline can yet be built to cross the seabed and connect with the oil and gas fields to the east. The support that the Kremlin has given to Georgian secessionist forces has worried the West.
Europe is increasingly seeing the Nabucco pipeline as part of the solution. Dr Nazrin Mehdiyeva of Pöyry Energy Consulting explains: "The pipeline has received a new political momentum as a result of the Russian-Ukrainian gas crisis this winter, but serious divergences in approach to funding and routes have remained, as highlighted during the Budapest summit.
"The situation on the supply side has become more complicated, with Caspian producers still unwilling to give guarantees. The main expected supplier to Nabucco, Azerbaijan, would like to see greater pro-activeness on the part of the West, but in the absence of firm commitments as to the volumes, investment and production deadlines from producer states; the pipeline is unlikely to receive the necessary Western funding."
The Eastern EU states see Brussels' implementation of the proposed European-wide energy grid as more of a priority so that such states can quickly gain access to other sources of supply elsewhere. The EU must also implement the Common Energy Policy and the development of new nuclear and coal power stations to make the EU less dependent on oil and gas.
As Central Asia's neighbour, Iran has strong historical, political, ethnic and religious links with the region. Iran's economy, like its government, is dysfunctional. Due to Tehran's failure to charge market prices for energy, usage is wasteful, resulting in an ever smaller proportion of oil and gas resources available to export.
It even has to import petrol from refineries in Iraq. This, together with the economic and technological embargoes on the country, means much of the energy sector's production is in decline. Already, Tehran has expressed interest in relieving its tight energy market situations with supplies from Central Asia.
If the rate of progress in development of the significant energy resources of Central Asia is to improve, there has to be a more coordinated approach adopted in the planning and development of resources. Major customers like Russia and China need to adopt a domestic common energy policy, similar to that of the EU, which encourages more efficient use of energy. It is clear to see that there are many obstacles to be overcome before such a goal can be achieved.
In 2007, Azerbaijan produced 11 billion cubic metres (bcm) of gas, becoming a net exporter for the first time. The main sources were fields developed offshore in the Caspian Sea. It has gas reserves of 1.29 trillion cubic meters (tcm). Much of this comes from a newly-developed field called the Shah Deniz, which is projected to produce 8.6bcm of gas and is already supplying Turkish and Greek markets.
In 2007, Kazakhstan produced around 12.9bcm, up from 10.8 in 2000. Reserves are estimated at 1.90tcm. Much of it is associated gas from oil production and either pumped back into the oil wells to maintain pressure or wastefully flared. Turkmenistan has the largest reserves of gas at 1.03tcm. It is the region's largest producer of gas at 67.4bcm in 2007, well up from 43bcm in 2000. Today, Russia is its largest customer.
China could take over as Turkmenistan's leading customer. Since the start of 2009, China has started to import gas through the first phase of the west-east pipeline network, which will link up with other gas fields in the region, eventually supplying some 30bcm per year for 30 years.
Dr Nazrin Mehdiyeva of Pöyry Energy Consulting says: "Despite high hopes in the West, Turkmenistan has been slow opening up to the international community. Ashgabat has not committed to Western routes for exporting gas - notably Nabucco. Instead, it has promised to send the same volumes of gas to Russia and Europe. This strategy has paid off as Moscow has started buying Central Asian gas at prices close to European. But it raises questions as to Ashgabat's prospects for becoming an alternative and reliable supplier to Europe."
Uzbekistan is also a major gas producer, exporting 10.5bcm to Russia in 2007 out of a total production of 14.7bcm. It plans to increase production to 16bcm, with the additional gas exported to China.
Azerbaijan produced 42.5 million tonnes (mt) of oil in 2007, up from 14.1mt in 2000. The country is estimated, to have reserves of seven billion barrels, but this could be as high as nine billion. New offshore fields in the Caspian Sea have been developed by BP, which is expected to sustain production levels for some time. The real constraint on further production increases depends on improvements in the export infrastructure and the availability of investment.
In 2007, Kazakhstan produced 70mt of oil, double what it produced in 2000. It has estimated oil reserves of some 5.3 billion tonnes (bt). The International Energy Agency expects current production to increase to 92.5mt by 2013. China has already agreed to purchase ten million barrels, which is expected to increase to 20 million per annum.
The country's ambition to produce 100mt a year by 2015 is unlikely given the country's primitive business climate, unless major reforms take place in the regulatory, tax and legal environment of Kazakhstan.
Turkmenistan oil output in 2007 was 9.8mt, slightly up on 7.2mt in 2000. It has estimated reserves of 0.1bt but, if various foreign-backed projects in the western part of the country do get under way, the Turkmenistan government expects a substantial increase. Analysts expect the government will have to make significant changes in the business climate to encourage such foreign investment.
Uzbekistan has oil reserves of 0.6 billion barrels. In 2007 it produced 4.9mt, down from 7.5mt in 2000. Past government failures to adequately reform this country have made it difficult to attract investment, but given that the country shares similar geological conditions to its neighbours, together with a recent opening up to outside investors, there could be an increase in oil production in the next decade.
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