BP Commits to Russia

British Petroleum has been pursuing a long-term strategy of expanding its operations in Russia. Beginning in 1997, BP acquired a 10% stake in the Russian oil company, Sidanco. This company was created by the privatization of some of Rossneft's assets. After a number of lawsuits and other maneuvers, in 2003 BP merged its Russian and Ukrainian assets with another Russian firm, TNK. The result, TNK-BP, was led by BP's current chair, Robert Dudley, until he was forced to flee the country in 2008 in a power struggle for control of the company. BP still owns 50% of the joint venture, but the company now has stronger Russian management. http://www.themoscowtimes.com/opinion/article/twice-burned-BP-not-shy/428953.html

In 2008, the BP Group Vice President for Russia and Kazakhstan, David Peattie, told US Ambassador John R. Beyrle that BP was in Russia for the long haul, and that the company was actively pursuing options with Gazprom and Rosneft for the future. Peattie said BP plans to be in Russia "for the next 50 years." He considered BP's one percent stake in Rosneft as the potential long-term foundation of BP's involvement in Russia. To pursue this strategy, the company planned to sell its share of the Caspian Pipeline Consortium and divest its interests in Kazakhstan. http://www.guardian.co.uk/world/us-embassy-cables-documents/179810.html.

This month, the long-term strategy of cooperation with Rosneft took a major step forward. BP is giving Rosneft 5 percent of its shares, in return for 9.5% of Rosneft--a company that is 75% owned by the Russian government.

BP and Rosneft both gain tremendously. The two companies have agreed to jointly develop three licensed block in the southern Kara Sea, an area of approximately 125,000 square kilometers (over 48,000 square miles). The area has a forbidding, Artic climate covered most of the year by ice and snow. BP is able to add to its reserves, and Rosneft gains access to BP's artic technology. Russian experts estimate the Kara Sea blocks may hold up to 36 billion barrels of oil and 10 trillion cubic meters of gas. Rosneft Vice President Peter O'Brien said exploration of the tracts will begin soon, and the company plans to begin drilling in 2016. http://www.oilandgaseurasia.com/news/p/0/news/10352.

Critics of the deal include Congressman Edward Markey, the Democratic minority leader of the House Natural Resources Committee. He raised concerns that Russian control of BP shares might compromise US economic security (as a reminder to readers on the West Coast, BP owns Arco). He scoffed that "BP once stood for British Petroleum. With this deal, it now stands for Bolshoi Petroleum." http://themoscowtimes.com/business/article/bp-rosneft-in-landmark-swap/428957.html. Other critics are concerned about the rule of law. Rosneft obtained many of its assets from Yukos Oil, which the Kremlin broke up and sold when it threw Putin rival Mikhail Khodorkovsy into prison. The legality of the breakup is under question. Recently, a court in Sweden ordered the Russian government to pay compensation to a Yukos shareholder who had brought suit over these actions. Kremlin critic and former Russian deputy prime minister Boris Nemtsov said that Russian Prime Minister Vladimir Putin was hopeful that BP's ownership of Rosneft shares would blunt western criticism of Moscow's treatment of the former oligarch Khodorkovsky. He said that the deal ignored human rights and property rights. BP spokesman Jeremy Huck tried to duck the issue in an interview with Radio Ekho Moskvy by pointing out the proposed projects were sanctioned by the Russian government: "The question about where those assets are from, that's better asked of Rosneft or the government." http://oilprice.com/Energy/Energy-General/Does-BPs-Deal-with-Rosneft-Legitimze-the-Kremlins-Takeover-of-the-Countrys-Oil-Industry.html.

BP has cast its lot with the Russian bear, for better or for worse.

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

Will Azerbaijan Control Natural Gas to Armenia?

Rumors continue to swirl around the possibilitity that Azerbaijan will purchase the Georgian pipeline that provides Armenia with Russian natural gas. This blog has previously reported on Georgian efforts to privatize the pipeline, the State Oil Company of the Azerbaijan Republic (SOCAR)'s interest in buying the pipeline, and Georgia's efforts to maintain peace with its neighbors by stating it would only sell 10% of the pipeline--thereby depriving a buyer of the ability to choke off Armenian fuel supplies.

With Georgian Foreign Minister Grigol Vashadze (left) visiting Baku, speculation about the proposed sale have again arisen. SOCAR President Rovnag Abdullayev stated on January 14 that his company remained interested in using the pipeline to export Azerbaijani gas to the shores of the Black Sea. http://news.am/eng/news/44602.html SOCAR spokesman Nizammedin Guliyev confirmed that talks with Georgia on the subject were continuing, but there was no timeline to the talks. Guliyev's remarks were confirmed by Georgian energy minister Aleko Khetaguri http://www.bloomberg.com/news/2011-01-15/azerbaijan-and-georgia-in-talks-over-privatization-of-pipeline.html.

Despite the reports, Georgian Deputy Foreign Minister Nino Kalandadze sought to distance the Foreign Minister from the subject. In an official briefing on 17 January, he stated that Vashadze would not be discussing the proposed takeover during his visit. "At the moment the issue is not on the agenda," said Kalandadze. "It is not discussed at a state level." http://news.am/eng/news/44777.html

The contradiction may be less than it appears. The Georgian parliament has already done its job by declaring that the pipeline was not a strategic asset. This opens the possibility of a sale of the pipeline. If there were any discussions taking place, they would would be with SOCAR, not with the government of Azerbaijan. So the deputy foreign minister's hedged denial may be on the mark: while discussions are not taking place at the state level, it would appear the discussions with SOCAR that the Georgian energy minister confirmed are ongoing.

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

EU Says Political Will for Trans Caspian Pipeline

In meetings this week between EU Commission chief Jose Manuel Barroso and Turkmenistan President Gurbanguly Berdymukhamedov, both sides pledged cooperation to build a Trans Caspian Pipeline. This project, long on the drawing boards but still unfunded, would bring gas under the Caspian Sea from Turkmenistan (with the fourth largest gas reserves in the world) to Azerbaijan. It would provide the crucially needed volume to fill the proposed Nabucco pipeline.

Berdymukhamedov pledged that partnership with Europe in the gas sphere was a priority. In return, Barroso said the European Union suppored his intention to build a pipeline. He said that Europe was ready to purchase gas from Turkmenistan, and that there was "political will" to build the pipeline.http://www.google.com/hostednews/afp/article/ALeqM5iXghI-2HeHbNy6V1V4s6iBXao4hA?docId=CNG.1013bcd54f88cdb52e0ba01db945fb52.e91 ITAR/TASS reported that Barroso called the construction of a pipeline at the bottom of the sea a necessity. http://www.itar-tass.com/eng/level2.html?NewsID=15859572&PageNum=0

Supporters of the Nabucco pipeline should be pleased at the expression of political will. They now await the funding that should accompany it.

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

No Green Light for NABUCCO

On January 13, 2011 the President of the European Commission, Jose Manuel Barroso, and the President of the Republic of Azerbaijan, Ilham Aliyev, signed the "Joint Declaration on the Establishment of the Southern Corridor." In it, Azerbaijan committed to supplying "substantial volumes" of natural gas to the European Union once the Southern Corridor is built. It is the first time that Azerbaijan has committed in writing to supply natural gas to Europe.

The declaration is being hailed as a major step toward the construction of the Nabucco pipeline. Commission President Barroso declared "This is a major breakthrough. This agreement confirms Europe's direct access to gas from the Caspian Basin, thus enabling the realization of the Southern Corridor. This new supply route will enhance the energy security of European consumers and businesses."http://europa.eu/rapid/pressReleasesAction.do?reference=IP/11/30 Separately, he said "From a political perspective, it's clear that the European Commission supports Nabucco and from the discussions with the President of Azerbaijan, I understood that Azerbaijan also supports the project." http://www.google.com/hostednews/afp/article/ALeqM5grhOEEWBY8lkzY5BsKck3_uxLc0Q?docId=CNG.cf47aa2fba1edb73982e4c0e962bed14.721

Alexander Rahr, the director of the German Council on Foreign Relations' Russia-Eurasia Center, commented "Despite all the risks, today we can say that Nabucco has passed from the stage of mythical conversations to the stage of realization. This is a clear signal to investors that the project will be realized." http://en.trend.az/1811752.html

Reinhard Mitschek, managing director of the Nabucco pipeline consortium, issued a statement from his office in Vienna, calling the agreement a milestone for his project. The declaration "serves to pave the way to the full implementation of Nabucco by providing a firm political basis for gas supply from Azerbaijan." http://www.upi.com/Science_News/Resource-Wars/2011/01/14/Nabucco-welcomes-EU-Azeri-gas-declaration/UPI-66251295023380/

Such optimism would appear warranted, as both European and Azerbaijani officials see the benefits of the project. Alexander Rahr said the EU considers the implementtion of Nabucco as its most important foreign-policy priority. Not only is it a new supply of gas for the continent, but Rahr cites a political context, as well. "This is a way to reduce Russia's influence in the South Caucasus and Central Asia, and weaken the influence of China in this region," he said. http://en.trend.az/1811752.html

Azerbaijani parliamentarian Ali Masimi, a member of the committee of economic policy, said that Nabucco is forming a new stage in political, economic and humantiarian cooperation between Azerbaijan, Turkey and Georgia, strengthening stability and a strategic alliance among the three countries. He said Nabucco must be built, and alluded to Caspian energy sources as a strategic asset: "Oil and gas are attributed not only to economy. These energy sources have no less geopolitical meaning...(C)old wars in the 21st century will differ from the cold wars of the 20th century. Cold wars in our century will be characterized with combat for oil and gas routes." http://www.news.az/articles/29741 Recognizing the strategic importance of Nabucco, Armenian political scientist Levon Shirinyan said his government must declare the Nabucco gas pipeline an Armenian priority, to overcome Armenia's estrangement from Europe. http://news.am/eng/44948.html

Despite all the hype, however, the Joint Declaration does NOT guarantee gas deliveries to Nabucco. Baku has the choice of any number of pipelines to use: Nabucco, South Stream, AGRI, TAP, and ITGI. All of them can be considered a part of the Southern Corridor, and all of them are counting on the gas coming from the Shah Deniz 2 project. The problem is that, as prolific as Shah Deniz is hoped to be, there are no estimates that there is enough gas to fill multiple pipelines. This is compounded by present Azerbaijani commitments, including a promise to the Russians to sell them two billion cubic meters of natural gas in 2011, and eventually doubling that amount thereafter.

Nabucco has a major problem: lack of financial commitments."Sluggishness is observed in the implementation of the Nabucco project. Therefore, Azerbaijan synchronizes its steps with these processes," said the otherwise hopeful Parliamentarian Masimli. http://www.news/az/articles/29741.

Russian Director of the National Energy Institute Sergei Pravosudov was dismissive of the Joint Declaration: "Mr. Barroso's visit did not actually add anything significant to the Nabucco project. Azerbaijan was initially prepared to supply gas to any consuming country for an adequate sum of money. The sides also did not sign any breakthrough agreements binding upon Azerbaijan in terms of prices and volumes of gas supplies. That visit resulted in just another memorandum of intent." http://english/ruvr.ru/39936848.html.

As reported in this blog earlier, the strength of support for Nabucco among Europeans and the US appears to be wavering. We previously reported on Ambassador Morningstar's comment that while a Southern Corridor was necessary, that did not necessarily mean Nabucco. These thoughts were echoed by Marlene Holzner, spokeswoman for the EU Energy Commissioner Guenther Oettinger: "For the EU it's decisive that a European project and a European firm gets awarded this contract," she said, omitting any mention of which pipeline would receive the business. http://www.today.az/news/business/79403.html

Azerbaijan promises to make its decision this year.

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

New Sino Energy Ties

Russian energy is rapidly gaining control of the entire Eurasian land mass.

On New Years day, an oil pipeline linking the Russian city of Skovorodino and the Chinese city of Daqing began commercial shipments. The pipeline is expected to transport 15 million tons of crude oil per year. As reported in Oil and Gas Eurasia, Prosperity Capital's Liam Halligan said, "Now, Russia's oil infrastructure is pointing east--and its gas infrastructure will soon be pointing east, as well as west. Russia can play one side off the other. Russia can command higher prices. Russia can expand its hydrocarbon exports." (Oil and Gas Eurasia No. 11 (November 2010, www.oilandgaseurasia.com/articles/p/130/article/1396).

Other countries are following the Russian lead. In January, Turkmenistan President Gurbanguly Berdymukhamedov said his country was prepared to supply Europe with fuel "as well," citing the launching of the Turkmenistan-Uzbekistan-Kazakhstan-China (TUKC) and Turkmenistan-Iran pipelines (www.oilandgaseurasia.com/news/p/0/news/10272). In addition, in anticipation of a 2012 construction start Kazakhstan has begun developing a technical-economic assessment for the third segment of the TUKC (www.oilandgaseurasia.com/news/p/0/news/10271). China is even considering energy supplies on the Western shore of the Caspian: Li Talun, economic attache at the Chinese embassy in Baku, recently commented on a visit to his country from the State Oil Company of the Azerbaijan Republic (SOCAR). He said that if the necessary infrastructure were in place, China would be interested in buying Azerbaijani gas. "If, for example, Turkmenistan and Azerbaijan conclude an agreement on laying a trans-Caspian gas pipeline, this will make the job easier." (www.today.az/news/business/79081.html).

What does it all mean?

Analysts are divided about the impact of the new route for Russian oil to China. The pipeline has the possibility of doubling the amount of oil Russia ships to China (from about 6% of that country's imports to 12%), but that would mean China would continue to accept the same amount of oil in rail shipments while also receiving oil at full capacity from the pipeline. Steven Blank, of the US ArmyWar College, predicts the amount of oil imports will not double, but that the deliveries will be diverted from expensive rail transport to the less expensive pipeline. (www.rfa.org/english/energy_watch/oil-01102011133217.html)

Alexis Petersen, non-resident fellow at the Atlantic Council, believes that the energy cooperation will not lead to better strategic ties. "For both of them, energy policy is tied hip-to-hip with their foreign policy, and increasingly on their foreign policy, they view each other with immense suspicion. The big story of cooperation between Russia and China has been replaced by the story of their outright competition for resource control among the countries of Eurasia." (www.rfa.org/english/energy_watch/oil-01102011133217.html). Indeed, even though China increased its oil imports by 20% last year, it decreased the amount it was taking from Russia.

By contrast, according to Sergei Luzyanin, the Assistant Director of the Institute for Far Eastern Studies, Russian Academy of Sciences, the pipeline is one of many indicators of improvements in relations between the two countries. "This is not just about oil exports. Last year saw a quality breakthrough in bilateral energy ties...(There are) new projects in the nuclear and electric power industries, liquified gas supplies and gas pipeline construction. Several important contracts for the joint designing of energy machinery were signed along with agreements on huge Chinese investment in the joint development of oil and gas fields in Siberia and far-eastern Russia." (http://english.ruvr.ru/38898871.html).

Whether the new pipelines mean more energy or cheaper energy for China, it is clear that China continues to benefit from the development of Caspian and Central Asian energy resources--while Europe debates what route future pipelines should take. For Russia and China it is a win-win situation, while Europe waits on the sidelines.

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

Azerbaijan signs natural gas contract with Iran

Azerbaijan has again demonstrated to Europe and the United States that it has customers for its natural resources even if the Southern Energy Corridor is never built. On January 12, Iranian Minister of Oil Seyed Massoud Mir-Kazemi (left) led an energy delegation to Baku. He was received by President Ilham Aliyev who stressed the development of bilateral relations between the two countries, and the great history of ties in the energy sector (www.today.az/news/politics/79328.html).

The delegation included members of the National Iranian Gas Export Company (NIGEC), who signed a long term contract with the State Oil Company of the Azerbaijan Republic (SOCAR) in which SOCAR agreed to provide Tehran with natural gas for five years. Deliveries in 2011 will begin with a billion cubic meters, but the volume will increase in the future as SOCAR reconstructs the pipeline and improves compressor stations along the line. The signators hope the volumes will triple with these upgrades. (www.today.az/news/business/79321.html).

According to the Iranian oil minister, the agreement is a road map for future energy cooperation. He confirmed that the repairs envisioned in the contract are underway, and another contract was in the offing for the construction of gas storage facilities (www.today.az/news/business/79327.html).

The new contract with Iran was signed on the eve of a visit to Azerbaijan by European Commission President Jose Manuel Barroso. The EU chief has said that during the visit he will make the case for the realization of the Southern Gas Corridor, and the signing of a "Joint Declaration on the Establishment of the Southern Corridor" with President Aliyev is scheduled for January 13 (www.today.az/news/politics/79291.html). The signing of an agreement with Iran a day earlier is a shot across the Europeans' bow, reminding them that Europe needs Caspian energy more than Caspian countries need European markets.

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