Enough Azeri Gas For Multiple Lines?

EU policy makers and some company officials have begun speaking more seriously about the Nabucco gas pipeline project cooperating with other European pipelines, according to a story in the Wall Street Journal. "Nabucco doesn't exclude being combined with other projects," according to the EU's energy chief Guenther Oettinger. "We will do our best to make the projects work together." ("Sale of Azeri Gas Field Will Test EU's Pipeline Strategy," December 24, 2010)

It is hard to imagine how such sharing of a limited natural resource will be possible. Azerbaijan has committed 10 bcm annually of gas to Nabucco (if it is ever built), but that leaves the pipeline capacity 2/3 empty. The Transcaspian Pipeline is still under negotiation, with no conclusion in sight. If other demands are placed on the Shah Deniz gas fields, such as South Stream, AGRI, TAP, etc., as well as agreements to sell gas to Iran and to Russia, there is little chance that the State Oil Company of Azerbaijan (SOCAR)could meet all the demands upon it. The only way that the European Union can guarantee access to this gas is to lock in now financing for Nabucco.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Azerbaijan: Central Player in Eurasian Energy

While the oil and gas world continues to focus on the Nabucco v. South Stream drama, the government of Azerbaijan continues to place itself in the center of the energy map. Whether the discussion be petroleum or natural gas, Europe or China, the Azerbaijanis are always in the mix.

In October, BP signed a contract with the State Oil Company of the Azerbaijan Republic (SOCAR) to be 50% owners in the exploration and development of the deepwater Shafag-Asiman gas field. Should gas be found, Azerbaijan's importance as a source of natural gas will continue to grow.

Currently, Azerbaijan ships 1.2 million cubic meters of gas to its southern neighbor of Iran in swap deals,but it is prepared to double the supply if a pricing agreement could be reached (http://www.hurriyetdailynews.com/n.php?n=azerbaijan-seeks-price-agreement-with-iran-to-boost-gas-supply-2010-09-16, 16 September 2010).

Despite Wikileaks' inaccurate reports about Azerbaijan's reluctance to see Turkey become an energy hub, Azerbaijan and Turkey's energy ties are closer than ever. In June, President Ilham Aliyev signed an agreement that allowed Turkey to buy 6 billion cubic meters of gas a year from the Shah Deniz field, and that authorized the eventual transit of Turkey for gas destined for Europe.

This blog has reported previously on the development of the AGRI project (Azerbaijan-Greece-Romania interconnector) that would ship liquified natural gas across the Black Sea. Less well known is that the Bulgarians have expressed interest in participating in the project (www.oilandgaseurasia.com/news/p/0/news/9022, 07 October 2010).

The Czech Republic is also interested in Azerbaijani gas, according to their Ambassador in Baku. Currently, the Czech's consume 8-8.5 billion cubic meters of gas annually, mostly from Russia and Norway (www.oilandgaseurasia.com/news/p/0/news/9311, 28 October 2010). Azerbaijan, however, covers 25% of the Czech Republic's energy needs (www.today.az/print/news/business/75789.html, 29 October 2010).

In the Ukraine, Azerbaijan has signed an intergovernmental memorandum to establish cooperation in supplying that country with liquified natural gas (www.today.az/print/nes/business/77760.html, 07 December 2010). Separately, Azerbaijan has proposed supplying the Odessa-Brody Pipeline to ship North 8 million tons of oil per year. If this is combined with 5 million tons a year from Venezuela, it would fill the pipeline and allow another independent supply route to Europe (www.today.az/print/news/business/77939, 09 December 2010). It would also benefit Azerbaijan, since it currently has an oil production capacity that is 10 to 12 million tons per year above the country's transportation capacity (www.oilandgaseurasia.com/articles/p/130/article/1367, November 2010).

Syria plans to build a pipeline connecting it to Turkey, and wants to start importing Azerbaijani natural gas commencing in 2011. This is important because, while Syria has oil reserves, it has a limited amount of natural gas (www.today.az/print/news/business/77736.html, 06 December 2010). Meanwhile, on the other side of the world, SOCAR has signed a memorandum of understanding with China to supply that country with Azerbaijani crude (www.oilandgaseurasia.com/news/p/0/news/9972, 14 December 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Kazakhstan Increasing Ties to Europe

Kazakhstan President Nursultan Nazarbayev pledged in October to increase energy exports to the European Union. Kazakhstan already meets 20 percent of the EU's energy needs, and its 3.3 trillion cubic meters of gas reserves ("The EU and Kazakhstan Aim for Enhanced Partnership," Eurasia Daily Monitor 7/211, 19 November 2010) would be a welcome addition to Europe's energy hope chest.

The first step in increasing energy deliveries was announced on December 15, but it concerned oil instead of gas. The Caspian Pipeline Consortium agreed to invest $5.4 billion to double the pipeline's capacity from 35 million tons to 70 million tons. This is more than double the original 2005 estimate that the project would cost $2 billion. Investors should not be concerned, however, since expected annual revenues after completion in 2014 is $2.3 billion ("CPC in $5.4Bln Bid to Double Capacity," The Moscow Times, 16 December 2010).

The project is scheduled in three phases, and it includes the refurbishment of the existing five pump stations and the replacement of 88 kilometers of pipeline. New construction will include 10 additional pump stations, six new storage tanks, and a third offshore mooring point at Novorossiysk. (www.oilandgaseurasia.com/news/p/0/news/10012).

The Caspian Pipeline is 1,511 kilometers long, running from the Tengiz oil field to the Black Sea port of Novorossiisk. (Moscow Times, ibid.) The pipeline does not transverse the Caspian Sea, but runs along the northern rim. As a result, the pipeline crosses Russian territory and is not part of a solution for Europe to develop energy independence.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Leaders Sign Agreement for TAPI Pipeline

Like the phoenix bird who rises from its own ashes, the mythical Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline is back in the news. This proposed energy corridor was first researched by Unocal in 1996, but plans had to be shelved because of the violence along the route. Since that time, the United States has invaded Afghanistan, there is an unconventional war taking place between Taliban supporters and the Americans, Pakistan has become a safehaven for al-Qaeda, etc. The pipeline route goes through the heart of the fighting: the southern Afghan city of Kandahar (birthplace of the Taliban) and the Pakistani city of Quetta ("Afghanistan's President Karzai signs deal on gas pipeline project," Los Angeles Times, 12 December 2010). Even the former leader of the Taliban, Mullah Omar, has been reported openly walking the streets of that city.

To protect the pipeline as it travels through Afghanistan, Minister of Mines Wahidullah Shahrani said the government would commit 7,000 of its troops to guard the route once construction begins in 2012 ("Afghans to defend TAPI pipeline," UPI.com, 15 December 2010). Grad Hewad, a political researcher with the Afghan Analysts Network, made light of the security challenge. "The route through Herat and Kandahar is not so difficult for the Afghan National Security Forces to control. US military progress will likely improve along the route, it's a very strategic interest, and support from the local population can also increase," he said. (www.eurasianet.org/print/62565)

Leaders of the countries through which the pipeline would flow met in Ashgabat on December 11 and signed a preliminary accord to build the pipeline. Afghan President Hamid Karzai, Turkmen President Gurbanguly Berdymukhammedov, Pakistan President Asif Ali Zardari and Indian Oil Minister Murli Deora placed their signature on a document that requires the backing of the Asia Development Bank, in the opinion of the Turkmen president. The ADB has said it will consider, as the project develops, how it can assist in the financing ("Turkmen push trans-Afghan pipeline to India with government accord," Hurriyet Daily News, 14 December 2010.)

The pipeline is planned to be 1,043 miles long, stretching from the Dauletabad gas field in Turkmenistan, to its eventual terminus in India. The pipeline has a capacity to carry 1.9 billion cubic feet of gas per year. Of that amount, 1.2 billion is scheduled for delivery to India, with the remaining 700 million cubic feet going to Afghanistan.

According to the Economic Times of India, Turkmenistan will sell the gas for $272 per thousand cubic meters, a markup of approximately one third from what the Turkmen are selling to China. After adding in time charges and transit fees to Afghanistan and Pakistan, the actual price to India will be approximately $362 per tcm. At this price, Afghanistan would earn $1.4 billion in transit fees. (www.eurasianet.org/node/62583) President Berdmukhammedov believes that the pipeline will act as a stabilizing influence on the region. ("Afghan Pipeline Garners Support," The St. Petersburg Times, 14 December 2010).

Despite all the posturing, the future for this pipeline looks dubious at best. There are now 100,000 American soldiers in Afghanistan, the same number that the Soviet Union deployed to that country in the 1980s. Neither superpower has been able to bring peace to the area--so it is doubtful that a handful of Afghan soldiers could protect such a beckoning target from terrorist attack.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Morningstar Abandons Nabucco

In a surprise development, it appears that the United States is abandoning its support for the Nabucco gas pipeline. In an interview with Kommersant newspaper, Morningstar stated that the United States supports a South Energy Corridor, but that did not necessarily mean the Nabucco project. "We would have preferred Nabucco, but that does not mean it will be implemented first," he said. "It could be Nabucco, ITGO or another project. The main thing is to have the ability to expand the pipe." (www.today.az/print/news/business/77920.html, 09 December 2010) Given that Nabucco is designed to carry 31 bcm annually of gas, and South Stream is projected to carry 63 bcm annually, Morningstar would appear to be signalling surrender to Russia and to Gazprom.

Morningstar has been hedging his support of Nabucco since at least September, when he told a group of journalists, "There will be a Southern Corridor. As for initial gas coming from the Caspian through the Southern Corridor, I think it will be likely that there will be only one pipeline, whether it be Nabucco or ITGI (Interconnector Turkey-Greece-Italy) or TAP (Trans-Adriatic Pipeline)." Morningstar said that sometime in the future when more gas was available multiple pipelines would become complementary ("Nabucco moves a step ahead in pipeline wars," Hurriyet Daily News, 1 October 2010).

Projects such as ITGI, TAP or AGRI (Azerbaijan-Greece-Romania Interconnector) are all designed to provide small, alternative routes for delivery of Caspian gas to Europe. None are scheduled to take the place of Nabucco, however; only South Stream would have that capability. If South Stream were to become the backbone of the South Energy Corridor, then Gazprom would continue to hold a monopoly on gas deliveries from the East.

Nabucco's problem stems from a lack of feedstock for the pipeline. Azerbaijan has pledged 10 bcm annually to the project, meaning the pipeline would only be 1/3 full. The Vice President of Azerbaijan's national energy company Socar said "We are not willing to pay for the empty capacity of Nabucco. Azerbaijan wants to keep all doors open to alternative sources of transportation. We will not put all our eggs in one basket, however attractive and beautiful it may seem." (www.today.az/print/news/business/77676.html, 04 December 2010)

The project initially hoped to fill the remainder of the pipeline capacity with gas from Turkmenistan, but the Trans-Caspian pipeline remains mired in legal disputes over the status of the Caspian itself. Without Turkmen oil, Nabucco backers have proposed various alternatives such as, Iranian natural gas (stymied by sanctions), or Northern Iraqi natural gas (supplies unsure because of physical security issues and ownership of the gas itself).

Left with a limited amount of gas, Nabucco is having difficulty raising the money to build the pipeline. Turkish Prime Minister Recep Tayyip Erdogan complained about this at the Black Sea Energy and Economic Forum in in September. "We say we are ready for everything, but those playing the coordination role have not yet come up with serious action," he said. ("Turkish PM complains about delay in Nabucco project," Hurriyet Daily News, 29 September 2010). The European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD) and the World Bank's International Finance Corporation (IFC) have begun a due diligence investigation with the aim of providing up to 4 billion euros for the project, but that is only 50% of the money that is needed to complete the pipeline. ("Massive Funding in Prospect for Nabucco Pipeline Construction," Eurasia Daily Monitor 7/164, 14 September 2010)

South Stream, by contrast, is growing by leaps and bounds. Bulgaria had previously opted out of South Stream, but after a November visit by Russian Prime Minister Vladimir Putin, Bulgaria' Energy Holding signed an agreement with Gazprom establishing a 50-50 partnership to build the pipeline. Construction is scheduled to begin in 2013, and may cost Bulgaria up to a half billion euros. Estimates are that the money would be recovered in approximately 2 years, as Bulgaria would earn 200-250 million euros annually in transit fees ("Bulgarian part of South Stream to cost 500 mln euros," Hurriyet Daily News, 15 November 2010). Putin returned home with both an agreement and a puppy!

The German energy company Wintershall denies any interest in joining Suoth Stream but Putin told Italian Prime Minister Silvio Berlusconi that German companies were showing great interest in joining South Stream ("Putin Hints at German Entry in South Stream Project," The St. Petersburg Times, 12 October 2010). Serbia and Macedonia have also expressed interest in the project.

Unless Ambassador Morningstar and his team can find additional funding, it looks like Nabucco might founder on the drawing board.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

What is Happening at Transneft?

Russian oil pipeline monopoly "Transneft" has had some rocky moments over the last few months, despite some impressive feats. The company that pumps 93 percent of Russia's crude oil and controls 60,000 kilometers of pipeline is 78% owned by the Russian government--who owns 100% of voting shares. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, 26 October 2010)

In early September, Transneft President Nikolay Tokarev complained that Turkey was trying to attain unilateral dominance of the Trans-Anatolian pipeline, a planned 555 kilometer pipeline being developed with the partial participation of Transneft. Tokarev said that Turkey was proposing "inefficient conditions" to Russia that would push that country into a "strict and economically unacceptable frame." This caused Prime Minister Putin to jump into the fray, defending the project as both economically rational and profitable. While Putin's close ally Tokarev said that he would not accept Turkish conditions, Putin rebuked him and said that Russia had given its promise to Turkey and that Russian companies would continue working throughout all phases of the project. ("Putin stands by promises on pipeline project," Hurriyet Daily News, 8 September 2010).

In mid September Tokarev announced that Transneft and Summa Capital were purchasing controlling interest in the Novorossilisk Commercial Sea Port (NCSB), with plans to merge it with the port they already own, Primorsk. According to an analyst at VTB Capital, this will give the NCSP and its owners a monopoly on crude exports to Europe. NCSP will buy 100% of the Primorsk Oil Terminal, and then Transneft and Summa will purchase 50.1% in the newly-expanded NCSP. Each partner will control half of the the shares. Once the purchases are complete, Transneft will be able to set its own rates for loading crude at the terminals ("Transneft, Summa Capital to Buy Novorossiisk," The Moscow Times, 16 September 2010).

Oil companies, however, have been unhappy with Transneft's pricing policies. The company has borrowed heavily to fund new projects, and there is considerable uncertainty as to how the money will be repaid. Fears are that Transneft will raise tariffs on Russian oil to make the payments. ("Putin Orders Transparency at Transneft," The St. Petersburg Times, October 26, 2010)

The company is also spending time responding to complaints from minority shareholder Alexei Navalny. In May 2010, he won a court order forcing police to investigate Transneft's charitable contributions over the years 2005 and 2008. The amount paid out was almost a half billion dollars, and the recipients are unknown. ("Putin Orders Transparency...") In fact, in 2007 Transneft chief Semyon Vainshtok was removed from his post after it was revealed he paid more in charity than he paid to shareholders. ("Transneft Accused of $4 Bln Theft," The Moscow Times, 18 November 2010).

Then, Navalny released an official report stating the Russian Audit Chamber was investigating the loss of $4 billion in the construction of the East Siberian-Pacific Ocean pipeline. "They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents," said Navalny. Transneft confirmed that the report was an initiative of the company's leadership. ("Transneft Accused...") Whether this report is approved by Transneft chief Tokarev as a way of distancing his leadership from that of Vainshtok is unknown; what is certain, however, is that there is a fair amount of discord among the allies of the Prime Minister.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Ukraine Moving to New Energy Sources

The Ukraine is moving to find new energy sources. The October 27 visit of Russian Prime Minister Vladimir Putin to the nation's capital, Kyiv, failed to result in any new agreements (except a protocol of intention). The warming in relations from the election of pro-Moscow Ukrainian president Viktor Yanukovych has not extended to the energy field.

In October, Ukrainian Deputy Prime Minister Andrey Klyuyev reported he was negotiating with Azerbaijan to increase supplies of Azeri crude to be delivered to their Kremechuk refinery. (www.oilandgaseurasia.com/news/p/0/news/9049. Ukraine is interested not only in Azeri oil, but natural gas, as well. Ukrainian First Deputy Minister of Fuel and Energy Sergiy Chekh announced the cabinet had approved a memorandum that will authorize Azerbaijan to send 5 bcm per year of natural gas. This will be an important source of feedstock after Ukraine's planned SPG Terminal begins operations. The ultimate capacity of this terminal will be 10 bcm per year, so Azerbaijan can provide 50% of capacity. (www.today.az/print/news/business/77519.html)

We reported earlier that Ukraine is trying to maximize use of the Odessa-Brody oil transit line by reversing flow and accepting Venezuelan oil for delivery to Belarus. The Russian oil company "Transneft" plans to send observers to monitor the pumping (www.oilandgaseurasia.com/news/p/0/news/9542). This is the same company being investigated by the Russian Audit Chamber, after a minority stock holder said it had stolen up to $4 billion in another project. ("Transneft Accused of Stealing $4 billion", The St. Petersburg Times, November 19, 2010)

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Fischer Accuses Russia of Energy Politics against Ukraine

Former German Foreign Minister took on the Russians at the European Autumn Gas Conference. Fischer said that South Stream is not based on energy reasons, but was a political move. The former Foreign Minister and current Nabucco advisor, leveled the charge that the goal of South Stream is to pressure the Ukraine into returning to Russia's sphere of interest. Fischer also predicted that South Stream would have difficulty obtaining financing, since the cost of the project would be approaching 30 billion euros rather than the 10 billion that South Stream spokesman Marcel Kramer predicts ("Europe's gas industry deeply divided over the future," European Energy Review, 22 November 2010)

In taking such a hard-line position, Fischer has placed himself in clear opposition to his former boss, former chancellor Gerhard Schroeder, who is chairman of a group supporting Nord Stream. Both Nord Stream and South Stream have the same owner, the Russian government-controlled Gazprom.

Despite Fischer's efforts, it would appear that Schroeder's side is winning. In October, Gazprom signed a long term contract with Poland that both Moscow and Warsaw know violates EU energy legislation. In November, they made an agreement with Bulgaria to run South Stream through the country. Separately, but equally alarming for those who would like to see Europe with some wiggle room in the energy sector, Russian-owned Rosneft recently took control of 50 percent of Germany's larget oil refiner, Ruhr Oel ("Russia's Pipeline Deal with Bulgaria Concerns Europe," www.the trumpet.com, November 18, 2010.)

Nabucco supporters have an uphill struggle.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Putin Lambasts EU for Robbery

Russian Premier Vladimir Putin is flexing his muscles during his current visit to Germany for talks with Chancellor Angela Merkel. Speaking to a group of investors in Berlin, Putin reacted sharply to EU laws that are aimed to liberalize the European energy market. In March 2009, the EU agreed that companies from outside of the European bloc would not be able to purchase strategic distribution networks without approval of the host governments.

Putin said such laws deprived Russian investors of getting a return on their investment, and said the laws deprived Gazprom the right to use its own property. He asked rhetorically, "What is this? What is this robbery?" He continued that the laws were already creating difficulties for Nordstream, and he confidently asserted that Russia was the source of Europe's energy: whether it be oil, gas...or firewood. "I don't understand: how will you heat your houses? You do not want gas, you do not want to develop nuclear energy. Where will you get your heat from, then?" ("Putin says EU energy laws are uncivilized "Robbery"; Today's Zaman, 28 November 2010)

The Premier is noted for such rhetorical flourishes; but, given Russia's track record of cutting oil supplies to Europe in the dark of winter during its disputes with Ukraine, questions about where Europe will obtain its heat need to be taken seriously. Putin's rhetoric is a direct threat to the energy security of the continent.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Baku Summit Sends Message to the United States

With the Caspian region remaining a distant thought for Washington insiders, and the appointment of a US Ambassador to Azerbaijan a captive to ethnic politics in the United States, President Ilham Aliyev has delivered a message to the United States that his country has alternatives to its Western orientation. One can only hope that someone in our nation's capital is listening.

The day before the November 18 summit, Iranian President Mahmud Ahmadinejad arrived in Baku for a formal state visit. President Aliyev met with Ahmadinejad and discussed future cooperation. The positive results of this meeting for the two parties were almost immediate: Iran's Deputy Oil Minister Jawad Oji announced that experts were considering increasing gas imports from Azerbaijan to 2-5 million cubic meters per day. Oji said that a special committe had been established to look at the issue. The minister's concerns were not political, but technical: "we must be sure that Azerbaijan has completed the construction of necessary supply pipelines and has installed compressor stations of high pressure," he said (www.today.az/print/news/business/76954.html, 22 November 2010).

The following day, the two presidents were joined by the Presidents of Kazakhstan, Turkmenistan and Russia. Demitri Medvedyev's inclusion at the meeting was a second indicator that Azerbaijan's oil and gas was not always promised to the West. In a formal press conference, the heads of state concurred that progress had been made in establishing the legal status of the Caspian (is it a sea or a lake?) and the distribution of the minerals beneath it. At the commencement of the meeting, President Aliyev pointed out that the countries of Azerbaijan, Kazakhstan and Russia had already reached an agreement on the division of the Caspian. (www.today.az/print/news/politics/76810.html, 19 November 2010)

In a not-so-subtle warning to the United States, President Medvedyev warned outside powers not to involve themselves in Caspian affairs. "If at any moment we relax in our mutual cooperation, there is no doubt that other states will want to interfere with our concerns--states that lack a know-how of or a relationship with the Caspian but whose interest stems from economic interests and political goals," he said. The five presidents then signed a joint cooperation agreement on security issues. ("Pledges but no Breakthrough at Caspian Talks", The Moscow Times, 19 November 2010).

To maintain a semblance of balance, simultaneous with the summit the Azerbaijani Center for Strategic Studies and the TransCaspian Policy Platform cosponsored a roundtable to discuss the European direction of Caspian energy. The discussion included the Romanian Special Advisor, the head of the European Union's delegation to Azerbaijan, the Managing Editor of the Journal of Energy Security, current and former gas and oil executives. (www.today.az/print/news/business/76817.html, 19 November 2009) While such a gathering would appear impressive in ordinary times, its importance pales before the meeting of the heads of state. Caspian energy resources are slipping from the West's grasp, and no one seems to be watching.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Turkmen Gas Leaving Russian Orbit

While Russian economic diplomacy continues to concentrate on maintaining a monopoly on the delivery of Central Asian gas, Turkmenistan has begun shipping its resources to the East, West and South. In 2008, Turkmenistan and Russia were involved in a dispute over gas deliveries and pricing. Russia halted its import of gas in April 2009, and a mysterious pipeline explosion further interrupted Turkmen gas deliveries to that country. When the deliveries resumed, it was at a significantly lower level (from 40 bcm to 10 bcm per year.)

Things have changed, and Turkmenistan doesn't need the Russian market the way they did two years ago. In December 2009, Chinese President Hu Jintao turned a wheel that opened a 1,100 mile pipeline that will link the Middle Kingdom to Turkmen gas supplies. The pipeline is supposed to be at full capacity by 2013, and will be delivering 40 bcm a year to China. This represents half the current Chinese demand for natural gas. The BBC notes that "The new pipeline also breaks Russia's long-standing stranglehold on Turkmenistan's vast gas supplies." (BBC News, "Turmkenistan-China gas link opens", 14 December 2009) The effect has been almost instantaneous: even though there is an agreement for China to begin purchases of Russian gas in 2015, the two sides have been unable to agree upon a price.

America's Central Asian energy czar, Richard Morningstar, acknowledged that the gas will probably not be flowing west. "Turkmenistan...is unlikely in the short term...Turkmenistan, for its own political reasons, is going to be very slow in making a determination to ship gas across the Caspian." The gas is destined for China, however, and not for the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, because of the political and security risks to the route. Morningstar doubted that any international oil company would be interested in investing in such a route. (www.eurasianet.org/print/62188, 19 October 2010) Russia Deputy Prime Minister Igor Sechin, nevertheless, said that Moscow is prepared to participate in the development in the pipeline as developer, financier, or as member of a consortium of construction contractors. (www.eurasianet.org/print/62237, 25 October 2010).

With a delivery system in place, the Chinese National Petroleum Corporation discovered a large gas field on the right bank of the Amu Darya river in Turkmenistan, which increases the amount of gas available for export to China. (www.oilandgaseurasia.com/news/p/0/news/8887, 28 September 2010). President Berdymukhamedov of Turkmenistan took note of the development and commented that Turkmenisan could quadruple its natural gas exports over the next 20 years, and was prepared to meet demand from Europe. Turkmenistan believes its reserves are estimated at 24.6 trillion cubic meters, triple the previous estimate. (oilprice.com/energy/natural-gas/turkmenistans-major-natural-gas-find, 8 October 2010)

Such activities were bound to cause a reaction. On October 21-22, Russian President Demitry Medvedyev paid a state visit to Ashgabat. The results were dismal from the Russian viewpoint. On the sidelines of the talks, Deputy Prime Minister Sechin commented it was unlikely Turkmenistan could sell gas without crossing Russian territory. In reaction, the Turkmen foreign ministry said they viewed such comments as interference in the normal course of international energy relations. (OilPrice.com, "Turkmenistan Takes Sides in Pipeline Supply Competition," 28 October 2010)

When the Russian press tried to put a good face on the summit meeting, the Turkmen MFA said the Russian spin was unsubstantiated, completely groundless and counterproductive. It said that Turkmenistan valued European companies because they were reliable partners whose actions were governed by economic and commercial logic (an obvious reply to the 2008-2009 disputes with Gazprom). It also rejected Russian overtures to be involved in the TAPI pipeline project. ("Russia's Message to Turkmenistan: Export Your Gas Anywhere Except Europe," Eurasia Daily Moniotr 7/196, 29 October 2010)

Despite the frigid reaction to Russia, President Berdymukhamedov still refuses to commit to the Nabucco pipeline. It has been hard for Western companies to work in the country, and ExxonMobil pulled out in 2002 (although they have recently reopened their offices there).

While countries in the Caucasus are moving to appease Russia for their own reasons, it seems obvious that Turkmenistan is continuing to pull away from Moscow's orbit. The pipeline to China gives Turkmenistan some breathing room to explore other energy export options.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Ukrainian Tightrope

The Ukraine is engaged in an extremely difficult high wire act: balancing a desire to remain on friendly terms with its neighbor, Russia, while trying to maintain energy independence by developing alternative sources for its natural gas.

Our story begins in January 2009 when the Russian government-owned company, Gazprom, cut off all gas supplies to Ukraine. Gazprom claimed there was a price dispute; Ukrainian nationalists claimed it was an attempt to influence upcoming presidential elections. Regardless of the reasons, Ukraine's then-Prime Minister, Yulia Tymoshenko, ordered the seizure of Russian gas that was in the pipeline traversing the country. In June 2010, an arbitration commission in Sweden ruled that the seizure had been illegal, and ordered Ukraine to pay $192 million, and return 12.1 bcm of gas to the Russians. The Ukrainian government is negotiating how to pay back the money and gas, without running short this heating season ("Ukraine Returns Disputed Gas to RosUkrEnergo", Eurasia Daily Monitor 7/156, August 12, 2010).

Ukraine feels embattled between the court case, and the possibility that the Russians will launch the South Stream pipeline project, which would bypass Ukrainian territory. If South Stream were completed, then Ukrainian Energy Minister Yuriy Boyko believes Russia might halve the amount of gas transiting the Ukraine. (www.oilandgaseurasia.com/news/p/0/news/8545, 02 September 2009). Ukrainian President Yanukovych promised that price disputes with Russia would never result in cutting off supplies to Europe (www.oilandgaseurasia.com/news/p/0/news/8699, 14 September 2009), an assertion clearly not true given the events of January 2009.

To keep South Stream from becoming a reality, the government in Kyiv has begun a public relations campaign against the project. They argue that the cost of the project ($20-30 billion) will be passed on to Europe through higher gas prices, that the source of the gas would remain Gazprom and is therefore not a diversification, that the acidity of the Black Sea could eat through the pipeline and cause explosions, and that the Ukraine can be a better route if the current pipeline were upgraded with European support. ("Ukrainian Government Can Call the Bluff On Gazporm's South Stream Project," Eurasia Daily Monitor 7/169, 21 September 2010).

In late October, Russian President Vladimir Putin visited Ukraine for discussions about a possible merger of Ukrainian pipeline company Naftogaz with Gazprom. The Ukraine had previously ruled out such a merger, but had left open the possibility of a joint venture. ("Kiev to Talk Gas Venture During Putin Visit", The Moscow Times, 26 October 2010). The two sides failed to reach an agreement.

In the event of another Russian gas shutdown, Ukraine is looking for alternative sources of energy. First Deputy Prime Minister Andrey Klyuyev issued a press release stating that the country would construct a regasification terminal over the next 12-18 months. The price tag would be $1 billion (www.oilandgaseurasia.com/news/p/0/news/8958, 04 October 2010). Construction will begin in 2015,and the terminal will have a capacity of 5 billion cubmic meters, rising to 10 bcm in late 2016. This would represent 20% of Ukraine's gas imports. Project head Petro Moroshnikov said construction was designed to reduce dependence on Russian gas imports. Moroshnikov added that the most attractive source for the gas appeared to be Azerbaijan. In addition, the Russian-US consortium, TNK-BP, will invest another $1-2 billion over 25 years to discover gas trapped in Ukrainian shale, according to German Khan. (Reuters: "Ukraine Plans LNG Terminal to Diversify," The Moscow Times, 03 November 2010).

Ukraine is also trying to solidify its position as a reliable transportation link for Central Asian oil. Kazakhstan had been pumping 6 million tons of oil a year through Ukraine, but they discontinued using the country in January 2010 over a tariff dispute. In September, however, President Yanukovych announced a new agreement whereby Kazakhstan would pump 8 million tons a year to Europe (www.oilandgaseurasia.com/news/p/0/news/8728, 16 September 2010). The government has also approved a test-pumping of Venezuelan oil through the Odessa-Brody pipeline. If Venezuela were to become a steady supplier, it would mean reversing the flow of the pipeline to the original South-North orientation--contrary to the wishes of the Russians.

Venezuela's supplies would be mingled with Central Asian. President Ilham Aliyev said that in the future, oil from states situated on the eastern coast of the Caspian Sea could be supplied to Ukraine, via Azerbaijan. Aliyev said this would create another reliable energy corridor connecting the Caspian with Europe. Aliyev added that Azerbaijan was already providing the Ukraine with a million tons of oil per year ("Azerbaijan to increase Oil Supplies to Ukraine," Hurriyet Daily News, 28 October 2010).

The threat of Venezuelan and Azeri oil deliveries appears to be having an effect on Russia. During Prime Minister Vladimir Putin's late October 2010 visit to Kyiv, the two sides initialed an agreement in which Russia would ship 25 million tons of oil over 5 years. ("Moscow, Kiev in Oil Deal," The Moscow times, 28 October 2010). In addition, Iran is interested in becoming an oil supplier to Ukraine (www.oilandgaseurasia.com/news/p/0/news/9379).

Ukraine remains vulnerable to Russian manipulation, and will become even more so with the construction of South Stream. Independent suppliers, such as Azerbaijan and the countries of the eastern Caspian, offers Ukraine the best hope of remaining energy neutral in the years to come.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Future of Caspian Energy

The International Energy Agency (IEA) is preparing to publish a report touting the Caspian region as ready for a sizeable increase in production and export of energy, according to the Financial Times (November 2, 2010). The FT has seen an advance copy of the annual World Energy Outlook, which forecasts oil production will peak at about 5.4 million barrels per day between 2025 and 2030, almost double current production. The main driver will be Kazakhstan's Kashagan and Tengiz fields. As for natural gas, the IEA says that Turkmenistan will become one of the 10 largest gas producers in the world.

The IEA warns there are a number of barriers to the countries' achieving these lofty goals. For example, getting the oil to market needs a pipeline network that will require massive investments. As for gas, the IEA warns that Russia could stifle development of Caspian exports, because such a flow to international markets would be direct competition to their own natural gas industry.

The International Monetary Fund, in their April 2010 World Economic Outlook, also discuss economic growth in the CIS region. They say that the current economic recovery is underpinned by higher commodity prices in oil, gas and metals. The IMF predicts that higher volume of investments and gas exports will mean a projected 12% growth rate this year. The IMF warns, however, that Kazakhstan faces problems in its banking sector that calls for an independent assessment of its largest banks' balance sheets.

In the meantime, Azerbaijan continues to expand its energy export business. The US Army War College's top analyst on CIS countries, Stephen Blank, writes that in the past three months alone, Azerbaijan has agreed to ship a small amount of Turkmen oil via the Baku to Ceyhan pipeline; is increasing its exports of natural gas to Russia, and is estblishing AGRI (Azerbaijan-Georgia-Romania Interconnector) as a route in addition to Nabucco to get its gas to market. (www.eurasianet.org/node/62288)

Free and unfettered access to Caspian oil supplies is clearly in the interest of the United States and the entire Western World. As the IEA will point out in its study, the area has the ability to "meet almost all the projected import requirements of North America in 2035."

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

US Ignores Russian Overture

Despite a personal lobbying effort to President Obama by acting Kyrgyz President Roza Otunbayeva, the Pentagon has granted a $315 million contract to supply jet fuel to Manas air base to the Mina corporation. (www.eurasianet.org/node/62300). Previously the Russian government-owned company, Gazprom, had said they would consider bidding on the contract and the Kyrgyz government had recommended the establishment of a joint, Kyrgyz-Russian company to supply the jet fuel. With a single contract, the Pentagon has thumbed its nose at both the expressed desire of the country hosting their air base, and to a Russian overture to support the war in Afghanistan.

The Pentagon had expressed reservations about giving the Russians a "hand on the spigot," which is understandable given the Russian-US tension over the existence of the only American military base on former Soviet soil. In this case, however, there was a common enemy in the form of al-Qaida and the Afghan Taliban. The award of the contract indicates that the American "reset" of its relations with Russia still have a long way to go.

The Mina corporation itself is under Congressional investigation as to how it got the first $3 billion fuel supply contract. The investigation centers on whether Mina and a Russian partner company, Red Star, bribed former Kyrgyz President Kurmanbek Bakiyev. According to the Washington Post, both companies are controlled by the same individual, Douglas Edelman, who entered business in Central Asia with a "bar and hamburger joint." The Post tried to contact both companies, and uncovered a series of mailing addresses--all of them outside of the United States and Kyrgyzstan, and all of them "mail drops."

Of course, Mina director of operations Chuck Squires denied any accusations of impropriety. Squires' remarks are supported by Congress' inability to find evidence of corruption, despite having reviewed over 250,000 pages of documents and e-mails.(Washington Post, October 30, 2010)

One has to ask why the Pentagon would want to alienate an ally and Russia in favor of a bar owner without any known address.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Fuel for Manas Transit Center

Manas Transit Center can be a lonely base. Opened with Russian approval after the terrorist attacks of September 11, 2001 to help the United States in its war against al-Qaida in Afghanistan, it has become a bone of contention in the great power rivalry in Central Asia. It is only 40 miles from Manas to the nearest Russian base; at one point, the base commanders had monthly dinners together. More recently, however, the Kyrgyz ordered the base closed after the Kremlin offered it a sweetheart energy deal. But Moscow failed to deliver, and the US upped the base rent, and so Manas remains open - the only American outpost within the territory of the former Soviet Union.

Russia's opposition to an American presence in its sphere of influence, the "Near Abroad" as the Russians refer to it, is well known. Less well-known, however, is Russia's willingness to cooperate with the United States if the stakes are high enough. In September, EurasiaNet ran a story that the fuel supply contract for the transit center was expiring--and that the current supplier (Mina Corporation) was under congressional investigation. Washington wanted a competitive tender plan to find a new supplier.

The government of provisional president Roza Otunbayeva put forward an alternative plan, calling for the creation of a joint venture involving a Kyrgyz state-run entity and Gazprom, owned by the Russian government. Pentagon officials rejected the plan, arguing that "a Russian hand on the fuel spigot needlessly compromises the US mission and US forces." (Washington Backing Manas Tender Plan, Shuns Gazprom JV," www.eurasianet.org/node/62036)

More recently, EurasiaNet has reported that Gazprom has confirmed that the company could participate in the Kyrgyz state venture. A spokeswoman said one of the company's subsidiaries was "ready to consider proposals from the Kyrgyz Republic for aviation fuel supply at Manas airport." ("Kyrgyzstan: Gazprom Ready to Fill Manas Fuel-Supply Role," www.eurasianet.org/node/62224 ) This is a striking turnaround that could not have been offered without approval from the highest levels of the Russian government. Whether the reason is to gain control of the fuel supply (doubtful, since most of the fuel was already Russian-origin), or an attempt to curry favor with either the Krygyz or the American governments, the symbolic value of Russia actively supporting the American war on terrorism is tremendous--and should not be overlooked.

Washington appears to be reacting well to the latest development. They have developed a compromise plan that would allow the joint enterprise to provide 50% of the Manas fuel. The Defense Logistics Agency has amended the competitive bid solicitation so that 20 percent of the contract could go to a state-owned Kyrgyz enterprise in February, with that share rising to 50% by July. The amendment does not mention Gazprom by name, but is fashioned in such a way that would allow the joint enterprise to enter the process. Many observers believe that Mina Corporation will win the bidding, regardless; but Gazprom has another asset at its command: the new general manger of the Kyrgyz state owned Manas Refueling Complex is Marat Malataev, the deputy director of wholesale fuel sales for Gazprom Neft Asia in Kyrgyzstan ("Washington Hopes Kyrgyzstan Bites on Compromise Manas Fuel-Supply Offer," www.eurasianet.org/node/62134).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Caspian Energy Going to Moscow and Tehran

Western powers are pushing Azerbaijan into the arms of Russia and Iran, according to an analysis published in April 2010. According to Murad Ismayilov, program manager for research and publications at the Azerbaijan Diplomatic Academy, Baku has changed its national security strategy based on a variety of disappointments in the West.

Specifically, Ismayilov notes that following independence in the 1990s, Baku's pipeline diplomacy was guided by a desire to retain its independence, restore its territorial integrity, and secure economic self sufficiency. Support for western-oriented energy pipelines such as the Baku to Supsa and Baku to Ceyhan oil pipelines, as well as the Baku-Tblisi-Erzerum gas pipeline, were designed to secure Western help in achieving these three objectives. From Baku's viewpoint, however, the West has failed on all three counts.

The United States' failure to protect its Georgian ally from Russian dismemberment demonstrated that Baku could not count on America to protect its independence. When the US and France voted against the UN Resolution demanding Armenian withdrawal from Azerbaijani territory it was occupying, and other European countries abstained, it demonstrated that the West would not help with territorial integrity. When the US and the EU refused to support a rail link with Turkey, it demonstrated the West would not assist with economic self sufficiency. The West's failure to help Baku meet any of its goals is compounded by the West's emphasis on the promotion of democracy and human rights--something that Baku interprets as interference in its internal affairs.

According to Ismayilov, Baku has now changed its energy policy. Instead of favoring a western orientation, Azerbaijan wants multiple distribution lines so that it is not dependent on anyone. That means selling its products to Moscow and to Tehran. Further, whereas energy policy in the past was based on the political considerations previously mentioned, the new energy policies are based on economic considerations. To read Ismayilov's complete article, see http://www.res.ethz.ch/analysis/cad/details.cfm?lng=en&id=115530.

What all this means is that a Russian higher price, or a shorter route to the market through Iran, will dictate the direction in which Azerbaijani fuel will flow. This is a tremendous loss for America's policy of the past two decades. Starting with Bill Clinton and continuing through both Democratic and Republic administrations, the United States has been committed to providing outlets for Caucasus energy products that neither strengthened Russia nor enriched Iran. The United States' support for the Baku to Ceyhan pipeline (which was not the best export route from an economic perspective) was based precisely on these two points. Whether Ismayilov is describing reality is beside the point. He is describing the perceptions of the Azerbaijani leadership, and the policy turns that leadership is making in the face of the West's ignoring of its needs.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Iran Demands Increased Fees for Oil Swaps

Iranian Oil Minister Massoud Aghazadeh Mir-Kazemi has announced that Iran would continue oil swaps with the its Caspian neighbors if the transit fee is quintupled, according to IWPR author Ebrahim Gilani (pseudonym for an Iranian journalist and foreign policy analyst in London.) Mir-Kazemi said the oil swaps were costing Iran money since it had to reduce its own oil production by the amount it shipped for the Caspian states, to keep Iranian production under the targets established by the Organization of Petroleum Exports (OPEC.) Mir-Kazemi counted Iran as losing almost $70 a barrel (the cost of a barrel of oil on the open market) for the foregone oil production, rather than gaining $1 a barrel in transit fees. He indicated, however, that swaps could continue if the oil companies raised their fees to $5 per barrel. (Clouds on Iran's Caspian Horizon, IRN Issue 55, 30 September 2010)

In the oil swaps that Mir-Kazemi is discussing, Iran receives a certain amount of oil from the Caspian littoral states of Kazakhstan, Turkmenistan and Azerbaijan. In return, Iran ships the same quantity of oil from its southern ports on behalf of its neighbors. All three source countries have a limited ability to market their crude on the international market because they are no direct routes to the world's oceans. These countries are forced to rely on sending their product via third countries: Russia, China or Turkey via pipeline; or, Iran via oil swaps.

Mir-Kazemi's mathematics are flawed, in that Iran would need to produce the same amount of oil in any case. Caspian oil that Iran receives from its northern neighbors is used by Iran domestically, freeing the Iranian production for export. Under the new arrangement, Iran loses the transit fees and still has to produce the same amount of oil--only it has to sell the oil previously used in the oil swaps at domestic prices instead of international prices. The pricing dispute is both an inconvenience to Iran's neighbors, and a net revenue loss to the Islamic Republic.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

LUKOIL Considering Joining BTC Consortium

The Russian oil company LUKOIL may be interested in joining the consortium that runs the Baku to Ceyhan pipeline (BTC), according to the Russian language website 1news.az. The company, whose name is familiar to drivers in the eastern United States, would be taking advantage of excess capacity in the pipeline, according to RusEnergy consultant Mikhail Krutikhin. LUKOIL is reportedly in discussion on whether it should join the consortium and pay the member tariff, or pay the non-member tariff to use the pipeline. (Oil&Gas Eurasia, 06 October 2010).

The pipeline's current capacity is currently 1.2 million barrels per day, and the consortium is considering using chemical reagents to increase capacity in 2011 to 1.6 million barrels a day, according to SOCAR's Vagif Aliyev. The consortium is only pumping 900,000 barrels per day, however. (Oil&Gas Eurasia, 03 June 2010). This means there is an estimated excess capacity of 300,000-600,000 barrels per day that would be available for LUKOIL.

If LUKOIL joins the consortium it would be ironic, as one of the Clinton-era goals for the pipeline's tortuous route was to give Azerbaijan an export route independent of Russia (see map above.) LUKOIL's use of the pipeline would mean Russian oil flowing through Central Asian-controlled infrastructure, reversing the longstanding practice of Central Asian countries using Russian-controlled infrastructure to market its energy resources.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

AGRI Jeopardizes Nabucco

Seeking to maintain its economic independence from Russia, while giving Europe an independent source of natural gas, the government of Azerbaijan has agreed to a feasibility study to send liquified natural gas (LNG) to Europe via ship. The new agreement establishes the Azerbaijan-Georgia-Romania Interconnector (AGRI.)

The signing of the Baku agreement on September 14, 2010 does not promise the launch of this new LNG route, however. Despite voluminous press coverage marking the agreement, the three leaders (Ilham Aliyev of Azerbaijan, Mikheil Saakashvili of Georgia, and Traian Basecu of Romania) have only agreed to the creation of a joint working group and a series of feasibility studies. Should the project be approved, the equity share for each country will be 33 percent (www.today.az/news/business/73413.html)

The project, as envisioned, will ship 7 to 20 billion cubic meters of gas annually to Romania. Once in Central Europe, Romania can then use its existing pipeline structure to either use the gas itself or sending it on to the rest of Europe. What is unique about AGRI is that the proposal does not rely on pipelines through Russia or Turkey: rather, the gas will be piped to Kulevi in Georgia, where it will be converted to LNG at the oil export terminal there (owned by the State Oil Company of the Azerbaijan Republic, or SOCAR). It will then be shipped across the Black sea by boat, and offloaded at a planned re-gasification plant in Constanta, Romania. The preliminary cost estimates for the project range from 1.2 to 4.5 billion Euros. (Oil and Gas Eurasia No. 9, September 2010, Baku Summit Launches Breakthrough LNG Project) Romanian President Basescu believes that with these costs, AGRI is more cost effective than the Nabucco project (Eurasia Daily Monitor 7167, September 17, 2010, Black Sea LNG Project: A Spoke in Nabucco's Wheels?) to which Romania is already committed. Azerbaijani President Aliyev predicts the project will take approximately 20 months to complete (www.today.az/news/business/73558.html)

Others have also expressed interest in cooperating, such as Hungary and Ukraine. Yuriy Boyko, the Ukrainian Fuel and Energy Minister, said their country would be interested in building an LNG terminal near Odessa for the importation of 10 billion cubic meters of gas per year. The cost of the Odessa terminal would be $3 billion, but Boyko believes that AGRI could save Kiev at least $60 per thousand cubic meters over the cost of imported Russian gas (ibid).

The new project is in direct competition with Nabucco for Azerbaijani gas. As Vladir Socor points out, Nabucco "The AGRI project, if pursued seriously, can undermine Nabucco by reducing the volumes of Azserbaijani gas available to that pipeline project. Azerbaijan's existing output level (reported at 23.5 bcm in 2009, anticipated at 28 bcm in 2010), its internal consumption (10 to 11 bcm per year in 2009-2010), and its export commitments (some 8 bcm to Turkey and Georgia combined), do not seem to leave sufficient gas volumes to support both Nabucco's first state (at 8 to 10 bcm per year) and the LNG project at the same time." (Eurasia Daily Monitor 7/165, September 15, 2010, Black Sea LNG Project Draws on Gas from Azerbaijan).

Despite problems for Nabucco, AGRI appears to meet the needs of everyone involved. For Azerbaijan's part, the construction of AGRI represents further diversification of delivery systems to ensure the country can continue to service its markets. Azerbaijani President Ilham Aliyev said diversifying transportation routes was a key priority in Azerbaijan's energy policy, and he noted that there were already seven pipelines in Azerbaijan which transport the country's oil and gas in different directions. Georgian President Saakasvili stressed the importance of EU countries such as Hungary joining the project. Romanian President Basecu is pleased with the planned investments in infrastructure in his country (www.today.az/news/politics/73465.html ).

Europe also benefits by the new pipeline, in that it meets previously stated goals to diversity their gas suppliers away from Gazprom; at the same time, it also diversifies its source of natural gas away from Turkey. As the AK Party solidifies its hold on that country through constitutional changes, secular Europe might now have a way to access Central Asian gas without depending on pipeline routes through a potentially hostile country.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Pessimism in Russian Energy Industry

Sixty one percent of participants in a session of the St. Petersburg International Economic Forum predicted Russian economic stagnation in the next 2-5 years. In another session, 55% predicted stagnation in the next ten years. ("Russia's Resource Curse," Oil & Gas Eurasia, No. 7, July-August 2010.) The Russian economy is highly dependent on the sale of oil and natural gas, and recent events in the energy sector would appear to support this pessimism.

According to oilru.com, production of natural gas in the first half of 2010 was 19% higher than the first half of 2009, but most of the production was consumed domestically. While exports increased 27% over the previous year, most of the exports went to countries of the former Soviet Union instead of to the hard currency markets of the European Union. The increase in sales to the EU was only about 4%, not an ambitious feat since sales in 2009 had dropped 11.5% from the year before. The 2010 increases may also be transient, as oil.ru reports that sales to the EU in June dropped over 40% (Oil and Gas Eurasia, 27 August 2010).

Gas volumes only tell half the story: the natural gas being sold is being discounted. European gas purchasers demanded price reductions in 2009, and Gazprom gave at least five clients discounts amounting to $2 billion annually. Now, one of Gazprom's biggest customers, the German company E.On, is demanding further reductions. This Spring, E-On convinced Gazprom to allow it to buy at least some of its contracted gas purchases at the lower spot price until 2012. E-On has asked for a further price reduction, claiming it will be in the red by October unless suppliers reduce their price (The St. Petersburg Times, 24 August 2010).

Problems are not limited to natural gas. According to LUKOIL Vice President Leonid Fedu, Russian crude production will begin to fall in 2015-2016. (Oil & Gas Eurasia, 8September 2009).

It is difficult to interpret what a long-term reduction in energy revenues would mean to the Russian state. On the one hand, a reduction in economic rents could force the government to become more dependent on the good will of the people. Under this theory, reduced rents leads to increased responsiveness to the people, and eventually to democracy. On the other hand, a reduction in economic rents could lead to a reduction in services to the people, creating social unrest, and a strengthening of totalitarian tendencies.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Ukraine Denies Naftogaz-Gazprom Merger

Gazprom CEO Alexei Miller and Ukrainian Energy and Fuel Minister Yuriy Boyko have held talks on creating a joint venture between the ailing Ukrainian natural gas company Naftogaz and Gazprom. At the end of August, a Gazprom spokesman said talks were at an advanced stage, and CEO Miller told the press that the merger would lead to a fall in the price of gas for the average Ukrainian household (The St. Petersburg Times, 31 August 2010). Minister Boyko subsequently ruled out a merger, stating that Ukrainian President Viktor Yanukovych would only authorize a merger on an equal footing and in light of the country's national interests (Oil and Gas Eurasia, 08 September 2010).

The merger talks may have been scuttled in light of the appearance of a White Knight, German Chancellor Angela Merkel. Yanukovych had previously proposed the creation of an international consortium to modernize the pipeline system in the Ukraine, through which 80% of Russian gas sales to Europe has to pass. The European Union had signed an agreement to begin modernization, but there had been no follow-up. According to Korrespondent.net, however, Chancellor Merkel has stepped forward and stated that Germany is prepared to invest in the reconstruction of the Ukrainian gas transport system (Oil and Gas Eurasia, 31 August 2010).

Ukraine is not interested in being solely a transport country, however, Minister Boyko says the country is actively engaged in attracting partners to develop gas fields on the shelf of the Black and Azov seas. Boyko said he was seeking international partners in light of the expense and risk of the development projects (Oil and Gas Eurasia, 10 September 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Chinese Demand for Central Asian Energy

In December 2009, the Central Asia-China (Turkmenistan to China) natural gas pipeline opened. This gave China the ability to import natural gas from Turkmenistan, Uzbekistan and Kazakstan. The new natural gas pipline connects with the Chinese West-East pipeline, meaning Turkmen gas can reach Pacific coastal cities such as Shanghai and Hong Kong. To give the reader an idea of scale, the CA-C cost $7.3 billion to construct, and is 1,833 km (1100 miles) long. The West-East pipeline is over 4,500 km (2,800 miles) long, making the combined network the longest in the world. The CA-C line was partially financed by the China Development Bank, who invest $6.7 billion to build the portion of the line that transversed Kazakhstan (Hurriyet Daily News, 28 December 2009). Predictions are that the CA-C will reach its full capacity of 40 billion cubic meters by 2012-2013 (Reuters, March 11, 2010). Turkmen President Gurbanguly Berdymukhammedov is requesting that China increase its $3 billion loan for the development of the South Yolotan gas field (oilprice.com, 24 August 2010), which would favor the gas flowing East to China rather than to Europe.

This is part of a longterm Chinese strategy to lock up energy sources around the globe. As the second largest energy consumer behind the United States, China needs to be certain it will have the energy to continue its breakneck economic growth. This has led to deals with Angola, Sudan, Iran, Venezuela, etc. It has also led to some strange bedfellows: earlier in 2009 China loaned Russian oil firms $25 billion in return for a 20 year supply of crude oil (Hurriyet Daily News, 21 December 2009). Russia is also building a $25 billion link across East Siberia to bring oil to China (The St. Petersburg Times, 24 August 2010). Russian Premier Vladmir Putin has officially launched the Russian section of the Eastern Siberia-Pacific Ocean pipeline. "The implementation of this project is a crucial task for Russia and our Chinese friends," he said. "It means stabilization of supplies and energy balance for China, and for us it creats entry to new challenging markets, in this particular case, to the growing market of China." Putin promised to deliver 30 million tons of oil to China, and (in case of expansion to the Asia-Pacific region) 50 million tons. Despite Putin's optimistic projections, only 15 million tons of crude have been delivered through the pipeline this year. (Oil & Gas Eurasia No. 7, July-August 2010).

Over 100 Chinese state-owned companies operate in Iran, and many of the contracts are in the oil and gas sector. According to Christina Lin of the Jamestown Foundation, In 2008 the China National Petroleum Corporation (CNPC) and the National Iranian Oil Corporation (NIOC) signed a $1.76 billion deal to develop the North Azadegan oil field, $8.2 billion deals in 2009 to develop the South Pars Gas field, a $3 billion deal to expand refineries, and a $4 billion deal to expand Iranian oil production. China is also selling gasoline to Iran, despite US sanctions against the country ("The Caspian Sea: China's Silk Road Strategy Converges with Damascus," www.jamestown.org , 19 August 2010 =).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

ART: Azerbaijan-Russia-Turkey Energy Axis

Russian President Dmitry Medvedev made a state visit to Baku this week, and brought home with him signed contracts for the purchase of additional Azerbaijani natural gas. Russia can resell this gas to European customers.

Azerbaijan previously had been reluctant to sell its gas to Russia, and was an active participant in Washington's plans to develop an independent East West Energy Corridor. This strategy had been pursued by both Democratic and Republic administrations, with both Presidents Clinton and Bush as firm supporters of the concept. The American strategic vision had been to strengthen the sovereignty of the new nation states of the former Soviet Union by giving them multiple ways to ship their energy resources, while reducing European reliance on Gazprom as the monopoly supplier of natural gas.

While Washington claims to still be committed to this policy, strategic blunders and inattention to the region has led to the development of ART: the Azerbaijan-Russia-Turkey Natural Gas Axis. On October 14, 2009, Azerbaijan signed an agreement to sell Russia natural gas. This followed ten months in which President Obama did not appoint an Ambassador to Azerbaijan (after 18 months the position is still vacant), and corresponded with Washington's efforts to decouple the Turkish-Armenian border closing from the resolution of the Azerbaijan-Armenia conflict over Nagorno Karabagh.

Starting January 1, 2010, Azerbaijan began pumping 500 million cubic meters of gas annually to Russia. This quantity was later doubled to a billion cubic meters. The latest contract doubles the quantity again, to 2 billion cubic meters in 2011, with additional increases in 2012. As Russian natural gas supplies are depleted, Russia will use its access to Azerbaijani gas to continue its role as predominent supplier to Europe. Analysts estimate that by the year 2030, 80% of all natural gas imports into Europe will be via Gazprom.

Gazprom chief executive Alexi Miller was pleased with the new contract. "It's clear to everyone that the Russian direction is the most reliable and safe corridor to deliver Azerbaijani gas to the market," he said (Agence France-Presse, September 3, 2010). With the natural gas going North into the Russian pipeline system, it endangers the potential supply of natural gas for the Nabucco pipeline.

Turkey, a vital transit point for the Nabucco pipeline, is also becoming more dependent on Russia as its principle supplier of natural gas. Turkey was already reliant on Russia for 23 billion cubic meters of natural gas annually, but Gazprom has been able to demonstrate a much-needed surge potential. On August 24, 2010, terrorists exploded the Iran-Turkey natural gas pipeline. Turkey was forced to stop use of the pipeline while repairs were made. Over the next ten days, Gazprom made up the difference by more than doubling the amount of natural gas it shipped to Turkey via its Blue Stream pipeline. Gazprom usually sends 18 million cubic meters of gas per day, but during the ten days following the blast, it shipped 42 million cubic meters per day. (www.today.az/news/regions/73123.html, 07 September 2010.

Gazprom is seeking to expand its role in Turkey's domestic supply network. According to the Turkish newspaper Referans (3 September 2010) Gazprom has opened talks with two independent domestic supply companies, Calik and Aksa. With Calik, Gazprom hopes to build Turkey's first underground storage facility, under the Great Salt Lake south of Ankara. Aksa owns one-third of Turkey's domestic distribution network.

Iran would also like to be part of the energy axis. Currently, Iran imports one million cubic meters daily of natural gas from Azerbaijan, and pays for it by shipping the same quantity to the Azerbaijani-controlled Nakhchivan Autonomous Republic. According to a gas agreement between the two countries, however, Iran can increase its imports to 2.5 million cubic meters daily and eventually to 5 million cubic meter. According to Iranian ambassador to Azerbaijan, Mohammad Bagher Bahram, Iranian-Azerbaijani relations have entered into a new stage. The economic focus is to strengthen relations in the oil, gas and energy fields. "We want to buy 5 billion cubic meters of gas," he said. Specialists of the State Oil Company of Azerbaijan (SOCAR) have initiated a feasibility study for a new pipeline that might allow flows of up to 10 billion cubic meters (www.today.az/news/business/72975.html , 03 September 2010).

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Azerbaijan and Ukraine to attend Washington Energy Conference

Azerbaijan's Ambassador to the United States, Yashar Aliyev, and Ukraine's Foreign Minister, Konstantin Grishenko, will speak at the upcoming Washington Energy Summit 2010. According to the conference's website, "The Washington Energy Summit will examine the intersection between energy policies, resources and technologies from a global perspective...Conference participants will debate realistic expectations for energy supplies in the future and suggest policies that will assure global energy security.


Azerbaijani Ambassador Yashar Aliyev and US Secretary of State Hillary Clinton

Plenary Session II may be of interest to readers of Eurasian Energy Analysis. It is entitled "Diversifying world energy supplies through global distribution networks" and will seek to answer the questions of how relatively new producers of traditional fuels in Central Asia contribute to the diversification of global energy supplies? How can government policies most effectively support development of these countries' resources for the mutual benefit of both producers and consumers? How do cross-national, multi-regional pipelines contribute to energy security? How can these pipelines be insulated from disruptions caused by political and pricing disputes?

According to the website Today.Az, the agenda of the summit also includes the role of Azerbaijan as an energy supplier.


Ukrainian Foreign Minister Konstantin Grishenko

Other conference speakers include US Senators John Barrasso and Bryon Dorgan, and US Congressman Charles Boustany; Petroleum or Energy Ministers from Angola, Egypt, Kenya, United Arab Emirates, and Slovakia; industry and think tank representatives.

For additional information on the conference, see www.washingtonenergysummit.com .

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Can Europe learn from Minsk?

Russian Prime Minister Vladimir Putin (R) meets with Belarussian Prime Minister Sergei Sidorsky (L) in Minsk on May 28, 2009.

By 2030 eighty percent of Europe's natural gas will be delivered by Gazprom. Why should it worry? One need go no further to understand than to Belarus. After the collapse of the Soviet Union, this former Soviet satellite state became Moscow's closest ally. While other post-Soviet countries were distancing themselves from their former master, Belarus President Aleksander Lukashenko agreed to a political union.

The honeymoon days have ended. Over the past several years, Lukashenko has taken a number of steps to establish his independence, and the Russian bear has responded with fury. First, the history:

Despite the fact that Vladimir Putin forced Russian oligarch Boris Berezovsky to flee the country to avoid prison time, Lukashenko has maintained friendly relations with the Kremlin critic. Lukashenko is loyal to his old, Soviet-era pals, even when that loyalty is frowned upon by Moscow. In 2009 Moscow thought its Kyrgyz ally, President Kurmanbek Bakiev, had agreed to evict the American military from Manas airbase. The Americans doubled its financial contributions to Kyrgyzstan, and Bakiev renewed the lease. Possibly in retaliation, Moscow orchestrated the overthrow of the Bakiev regime in April 2010, and recognized the post-coup Otunbayeva government within hours (Guardian, April 21, 2010). Rather than shun the man whom the Kremlin had declared a pariah, Lukashenko gave Bakiev political asylum.

Lukashenko refused to recognize the Russian-created states of Abkhazia and Ossetia, and began to boycott Russian diplomatic initiatives. In June 2009 he missed the Collective Security Treaty Organization Summit in Moscow, and in May 2010 he absented himself from the customs union summit in St. Petersburg. Jamestown Foundation analyst Jiri Kominek posits that Lukashenko must have realized these strategic and economic organizations would have left Minsk economically isolated (Jamestown Foundation Blog, June 23, 2010). On July 5, Belarus refused to sign onto the Customs Union, in favor of a Kazakh-Belarus Common Economic Space.

The battle was political and economic. In 2008, 99.7% of all Belarussian meat exports were to Russia, as well as 91.6% of its footwear, 80.2% of its refrigerators, 92.3% of its milk, 77.7% of its furniture and 69.8% of its trucks. While Russia opened its markets to Belarus, the gesture was not reciprocated. Belarus maintained a regulation that 90% of all food and 80% of all manufactured goods sold in any Belarussian store had to be Belarussian-made. To maintain its economic independence from Russia, in 2009 Minsk borrowed $1 billion from China, $3 billion from the IMF, and $200 million from the World Bank (Vladimir Ryzkhov in The Moscow Times, 4 August 2010).

Russia was not pleased and decided to strike back. In June 2009, Russia banned the importation or sale of Belarussian dairy products. Then, kicking off its involvement in Belarus' 2011 Presidential election, on July 4, 2010 NTV broadcast a made-for-TV film called "The Godfather." It was a history of the Lukashenko presidency, include chronicles of the deaths and disappearances of opposition figures at the probable hands of government death squads. It discussed Lukashenko's extra-marital activities and featured his illegitimate son. It highlighted Lukashenko's comments in favor of Adolph Hitler. And, it underlined the main point of the slander: Russia had given millions in aid to Belarus and this support was not being appreciated. What is important about this documentary is that the television station on which it was aired is owned by Gazprom, whose principle shareholder is the Russian government.

The lesson for Europe is not Gazprom's use of the media, however, but Gazprom's use of gas supplies. Jamestown Foundation's Vladimir Socor documented that the balance of payments between Gazprom and Belarus were about equal in June 2010: Gazprom owed Minsk $228 million, and Minsk owned Gazprom $192 million. Despite the fact that Gazprom was the net debtor in the relationship, Gazprom suspended gas deliveries until Belarus made their payment. Lukashenko was forced to borrow $200 million from oil and gas rich Azerbaijan to settle the account. Turnabout being fair play, Belarus then demanded Gazprom settle its debts before Minsk would allow gas to flow onward to the EU (Jamestown Foundation, 25 June 2010).

Whether the gas flow is interrupted over a price dispute with Ukraine as it was in January 2009, or with Belarus as it was in June 2010, whether the dispute is economically or politically motivated, Gazprom has shown its willingness to sacrifice the goodwill of its European customers to further Moscow's goals. The only way to insure Europe remains energy independent is if it has multiple sources of oil and natural gas.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Will Gas End a War?

The Georgian main North-South gas pipeline--which is Armenia's primary source for natural gas--is on the bidding block. In 2006 Gazprom offered $250 million for the system. According to Vugar Bayramov, President of the Azerbaijani Center for Economic and Social Development, Georgia wanted a billion dollars and rejected the bid (Azerireport.com, August 23, 2010.)

Now a new bidder has surfaced. Bayramov said that the State Oil Company of the Azerbaijan Republic (SOCAR) is preparing to offer $500 million for the pipeline. Such a move would give the Azerbaijani government control over the Armenian economy, and enable it to pressure Armenia to surrender its hold over Nagorno-Karabakh.

According to Armenian Energy and Natural Resource Minister Armen Movsisian, however, Georgia won't sell the pipeline at any price; and, even if it does, it would not threaten Armenia's energy security (Oil and Gas Eurasia, July-August 2010).

Movsisian may have a point. As reported by this blog on July 8, 2010, Georgian Prime Minister Nika Gilauri promised that if Georgia sold shares of the pipeline, that the government would keep controlling interest. Since the Azerbaijani $500 million is approximately half of Georgia's asking price, Georgia might only be willing to sell 50% minus one share to Azerbaijan.

On the other hand, Georgia might have reason to surrender control of the pipeline to Azerbaijan. It might reason that giving Azerbaijan the means to force a Russian ally to surrounder territory it is occupying as revenge for Russian occupation of the Georgian territories of Abkhazia and Ossetia, could be a strategic stroke to weaken the Kremlin's position in the Caucasus.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Chinese Energy Options

In an effort to reign in China's double digit growth in energy demand, the government of China will close over 2,000 energy-intensive factories, according to the New York Times (10 August 2010). To make certain that the factories close, the Ministry of Industry and Information Technology has said the factories would be denied bank loans, export credits, business licenses, land --even electricity. Such closings will help China reach its 5 year plan of reducing the amount of energy used per economic output by 20%, it could also make China more competitive. The Times reports that the steel mills to be closed are the smaller, older units: leaving the producers of more sophisticated kinds of steel untouched.

Despite such efforts at conservation, China's needs continue to place a strain on world energy production. China is continuing its efforts to sign bilateral deals with countries that have problems with the United States. As an example, the Los Angeles Times reports a senior European official calling Chinese business activities in Iran as "amazing." State Department official Robert Einhorn said that China backfills when responsible countries distance themselves from a particular country. China has invested over $40 billion dollars in the Iranian petrochemical industry, and is engaged in all aspects of the industry. Most recently, according to Iranian deputy oil minister Hossein Noghrekar Shirazi, China has proposed to build seven new refineries in Iran. (LA Times, 09 August 2010).

Chinese energy purchases from pariah nations defeat the purposes of American sanctions against those regimes, but it has the advantage of freeing up energy supplies from other countries for use by the United States and its European allies. Turkmenistan was considering a natural gas swap arrangement with Iran in order to get its gas to market. (Iran sells its gas on the open market and uses the money to buy Turkmen gas, since the Turkmen have no way to get their gas to the world markets.) Because of the sanctions against Iran, however, Turkmenistan is looking more favorably at the possibility of a pipeline to send its gas to Europe via Azerbaijan.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.