Russian Energy Flows Move East

In a move with major geopolitical ramifications, Russia is diverting increasing amounts of energy from the European market to the Asian.  Economically, it makes sense that Russia would want to be less dependent on the stagnating European economies, and the growing economies of Asia are a strong alternative.  "Russia has been losing its interest in Europe where oil consumption is stagnant.  It's looking increasingly to the East," said energy analyst Valery Nesterov.

The East Siberia-Pacific Ocean (ESPO) pipeline, originally opened with a branch line to Daqing (15 million tons delivered in 2012) has now expanded.  In January 2013 ESPO 2 opened to the Pacific Ocean.  ESPO oil flows are scheduled to increase from 30 million tons in 2012 to 80 million tons.   Bloomsberg estimates that in February 2013, Russia sent 1.1 million tons (22 percent of total oil exports)  in an easterly direction, up from 18 percent in October 2012.  By 2015, when ESPO reaches full capacity, Russia is scheduled to send 25 percent of its crude exports to eastern markets.

In addition to ESPO, which traverses only Russian territory, there is the possibility that Russia could sell additional oil to China via Kazakhstan.  Kazakh Energy Minister Sauat Mynbayev reported he was in negotiation with Russia to begin the sales as early as 2014.  The oil would reach China via the Kazakh Atasu-Alashankou pipeline. (Russia shipped oil to China through this pipeline until 2010.)   Kazakhstan would deliver 7 million tons of oil to China, and Russia would give Kazakhstan an equal amount in a "swap operation."  Such a move would be opposed by the Russian pipeline operator Transneft, who believes they would lose $1.5 billion in transshipment revenue.  Transneft CEO Nikolay Tokarev opined that the deliveries could proceed if the the lost revenue was compensated in the budget.

In March 2013, Rosneft and the China National Petroleum Corporation (CNPC) signed an agreement to increase oil exports to China.  In return for the agreement, China reportedly agreed to make an advance payment of $8-10 billion.  In addition, China Development Bank agreed to extend an additional credit line of $2 billion to Rosneft for the duration of the contract.  Russian Energy Minister Aleksandr Novak implied the delivery would be via the Kazakh swap mechanism.  No date was given for the signing of the contract.

As for natural gas, the situation is more complicated.  Russia already has agreements to send China 68 billion cubic meters (bcm) annually.  Deliveries have not begun, however, because of an inability to agree on price.  In March 2013, Gazprom and CNPC signed another memorandum of understanding in which the Russian company agreed to supply 38 bcm per year for 30 years, beginning in 2018. Price remains an issue.  Gazprom chairman of the board Viktor Zubkov was optimistic that an agreement could be reached by June, and hoped the price could be pegged to the cost of oil.  He admitted, however, that "the Chinese side probably believed there were other parameters that prices could be pegged to."  

Russia China Gas Talks Stymied

Russia and China ended 2012 no closer to a gas deal than when they began it.  The two countries continue to squabble over the construction of two natural gas pipelines designed to bring 68 billion cubic meters (bcm)    
to the Middle Kingdom.  The pipelines have been on the drawing boards for over 3 years, and Russian President Vladimir Putin believes that Eastern markets will be a focal point of Russian natural gas development.  Talks fell apart in 2011, however, when China increased its purchases from Turkmenistan.

In late April 2012, Chinese officials signaled optimism that the talks might resume.  Liu Tienan, head of China's National Energy Administration, told reporters China had  a new model for gas cooperation.  He did not specify what the new model was.  "Now all that remains is the question of prices," he said.  Tienan said Chinese Vice Premier Li Keqiang had presented Moscow with "a completely new model of development of cooperation...and received a positive assessment from the Russian side."  Tienan said both sides were interested in having private corporations from the two countries begin consultations.  Jiang Jiemin, the chairman of China National Petroleum Corporation, sounded upbeat as he explained that most of the key points to a gas deal had been agreed upon.  Putin also sounded conciliatory, "We are looking for compromises and are finding them," he said.  In an op-ed piece he wrote in June for a Chinese newspaper, Putin declared cooperation to be a Russian strategic goal:  "The energy-sector dialogue between our two countries also has a strategic dimension.  Our joint projects have a big impact in shaping the global energy market's entire configuration.  They offer China more reliable and diversified energy supplies for its domestic needs, and offer Russia the chance to open up new export routes to the fast-growing Asia-Pacific region."

According to Li Lifan of the Shanghai Academy of Social Sciences, however, when Germany renounced nuclear energy following the Japanese nuclear accident at Fukushima, Russia believed European demand for its hydrocarbons would increase.  The Russians refused to make compromises on the price question with the Chinese because Russia felt no need.

In June, Gazprom produced a new idea of its own: swapping production fields.  Russian Energy Minister Alexander Novak said, "Gazprom offered to let the Chinese participate in development of fields on Russian territory on the condition that Gazprom could participate in the development of fields on Chinese territory."  The asset swaps would be factored into the price of Russian gas shipments.  Gazprom CEO Alexander Medvedev said chances for an agreement in 2012 were very good.  "The talks are going on uneasily, but we have an understanding," he said.

In September 2012, Novak again reported progress.  He said Russia was requesting China pay in advance for natural gas from the proposed $14 billion Altai pipeline, up to 40% of the construction costs.  Matthew Hulbert commented that Russia remained unwilling to offer the price discounts the Chinese wanted.  Russia wanted $350-$400 per thousand cubic meters (tcm), while China wants to pay only $200-$250 tcm.

Putin ended the gas year making the same call for Eastern exports that he did at the beginning.  "The priorities should be supplies to the domestic market, our own economy and our enterprises, as well as diversification of markets to account for the prospective Asian segment and means of delivery," he said.

With cooperation between the two countries  uncertain, in September 2011 China signed an agreement with Kazakhstan increasing the capacity of the China Kazakh pipeline by 80% to 25 bcm.  They also signed an agreement to double pipeline capacity with Turkmenistan.  The Turkmen agreement will bring an additional 60 bcm to China by 2015, almost the same amount as the proposed Russian pipelines.  Beijing is also awaiting the completion of the trans-Burma pipeline for another 14 bcm.  Even Uzbekistan's tiny gas production is headed for China.  In May 2012, Tulagan Zhurayev, head of Uzbektransgas, said they were ready to start shipping gas immediately, as soon as some legal issues were settled.  "We haven't started shipping gas yet," he said.  "We pan this year to supply between 2 bcm and 4 bcm.  We have the gas and everything is ready."  The Uzbeks began their gas flows in August.  In short, while the talks stall Russia is losing market share to its competition.

Will Russia Attack in the Caspian?

With the future delivery route of Turkmenistan's supplies of natural gas at stake, some analysts are predicting that Russia is turning up the heat. Using language not heard since the Russia-Georgia conflict of 2008, a number of influential Russian spokesman are calling for force to prevent the construction of the Trans Caspian Pipeline (TCP).

The TCP has been in discussion for years. It would connect the eastern and western coasts of the Caspian Sea, thereby allowing Turkmen gas to feed the Nabucco pipeline.

The European Union has declared the TCP to be a matter of community interest. In September, the 27 members of the European Commission adopted a mandate to negotiate a legally-binding treaty among the EU, Azerbaijan and Turmenistan to build the pipeline. "Europe is now speaking with one voice," said EU Energy Commissioner Oettinger. "The trans-Caspian pipeline is a major project in the Southern Corridor to bring new sources of gas to Europe. We have the intention of achieving this as soon as possible," according to the Associated Press.

Russian reaction was immediate. Foreign Ministry spokesman Alexander Lukashevich said that only the five countries bordering on the Caspian had the right to settle isues regarding use of the inland body of water. He said any accidents on the proposed pipeline would impact all five littoral nations. "It is evident that laying down the trans-Caspian pipeline in a confined basin with high seismic activity and a tectonic seabed is exactly one of those questions," he said according to the same AP article. The ministry issued an official statement stating the European decision "ignores the current international, legal and geopolitical situation in the Caspian Basin," and warned that attempts to intervene would complicate the situation and negatively affect talks on the status of the Caspian Sea.

Azerbaijan, who would be the recipient of the gas piped through the TCP, decided to refrain from comment on the European initiative. Rovnag Abdullayev, president of the State Oil Company of the Azerbaijan Republic, said "The Trans-Caspian Gas Pipeline Project is not ours. This is a project designed by Turkmenistan and the European Union. Based on the European Energy Charter, we are an open transit country and infrastructure, which they (the EU and Turkmenistan) are going to build, is a matter for the two parties."

Lately, what should be considered a diplomatic tussle over whether the Caspian is a small inland sea or a large lake has the smell of gunpowder about it. The head of the Russian "Fund for National Energy Security," Konstantin Simonov, hints at war when he said, "Only the experience of the August war in Georgia is deterring Ashgabat today," according to EurasiaNet. According to noted commentator on the Caspian, Vladimir Socor, Siminov was quite explicit: "Ashgabat understands that the situation would be the same as it was in Georgia in August 2008. Back then they promised to protect Georgia, some kind of guarantees. And how did that end...Does Turkmenistan want the same thing to happen in the Caspian?" Simonov also said that "using force is the only possible response if diplomacy fails to stop the trans-Caspian project." EurasiaNet also quotes Siminov: "the reaction can be very hard up to some sort of military conflict in the Caspian Sea. Is Turkmenistan ready for this? I have great doubts in this regard."

Socor also quotes Mikhail Aleksandrov, department chief at the Russian government-sponsored "Institute on the CIS Countries." Aleksandrov also drew upon the Georgian analogy: "Russia would have to act in the manner of its operation to compel Georgia to peace...It may even be through air strikes, if they do not understand any other way." The vice-chairman of the Duma, Russian Gas Society president Valery Yazev, noted that Turkmenistan has no military protection in the Caspian, and that it risks a "Libyan scenario" by joining the trans-Caspian project.

Turkmenistan has condemned such bellicose talk from its northern neighbor. The foreign ministry released a statement that said, "A normal, civilized process of collaboration between sovereign and equal parties on the energy market is taking place...This, however, causes an inappropriate response from certain officials and mass media in Russia." Turkmen President Berdymukhamedov said European-directed pipelines are "among the most important goals of Turkemnstan's energy policy," that such pipelines would be actively developed, and that he supported the building of the TCP, in principle.

What is at stake? Petro-wealth. In November 2011 the firm of Gaffney, Cline and Associates released the results of the second phase of its audit of Turkmen gas reserves. Turkmen Vice Premier Baymyrat Hojamuhammedov released the results: the country owns 71.21 billion tons of natural gas, 50% more than previously expected. The firm stated that the South Yolotan gas field is the world's second-largest, with an estimated total of 26.2 trillion cubic meters. The estimates were immediately disputed by Gazprom deputy CEO Medvedev, who said there was no serious study or research report to back up the audit results.

There are two sides to the dispute: Russia and Iran claim that the Caspian is actually a very large lake (a body of water from which there is no egress). If they are correct, then all the states around the lake have equal rights to the use of the water. By contrast, Azerbaijan and Turkmenistan believe the water is an inland sea--in which case each state would control the waters off its coast. If the Russian/Iranian view is correct, then they have a veto over the construction of the TCP; if the Azerbaijani/Turkmen view is correct, then any two states can do what they want within their own territorial waters. The fifth littoral state, Kazakhstan, has stayed away from the conflict, but officials there say that Kazakhstan will not cooperate with the TCP until the Caspian legal status is resolved.

To strengthen their hand in the dispute, Iran and Russia agreed in September to set up a joint energy committee to expand cooperation between the two states, according to the Tehran Times. At the same time, they announced their opposition to the TCP due to environmental concerns, protection of marine resources and preventing pollution.

Such claims are considered ludicrous by people who have observed Russia's own practices. It has built its own pipelines in the Black Sea (Blue Stream) and the Baltic Sea (Nordstream) with little comment on the environment. In fact, all five littoral states have undertaken offshore exploration and development without seeking permission from the others, according to Robert M. Cutler.

Some legal experts believe that a pipeline can be constructed while the final status of the Caspian is still being negotiated. Jerome Pons, the Charge d'Affaires of the EU Delegation to Azerbaijan, told Today.Az that "The on-going negotiation on the legal status of the Caspian has not precluded the construction and operation of (other) oil and gas pipelines...In the Caspian Sea, the on-going negotiation between the littoral states over the last years on the legal status of the Caspian has in fact not precluded the construction and operation of oil and gas pipelines." Brigitte Bichler, senior project manager for Nabucco at the Austrian energy group OMV said the TCP was "legally feasible." This view was supported by US State Department advisor for Eurasian energy Daniel Stein, who said no country had "veto power" over a Turkmen-Azeri pipeline agreement, according to Reuters.

The country that may influence this dispute the most may be "none of the above." As China buys more gas from Turkmenistan, their influence over Turkmen pipeline planning will continue to grow. According to a Chinese diplomat, "Beijing does not want Turkmenistan to build a pipeline to the European Union, get a different gas price on the European market and then increase it for China...Beijing will do its best to make sure the Transcaspian pipeline project is not developed," according to Rianovosti.

China's Growing Energy Appetite and Strategy

Analysts who follow the energy "Great Game" being played between Russia and the Rest are turning their attention away from the European front, toward the growth of China. Asia Times' correspondent Pepe Escobar explains the dynamics of Chinese energy growth in the magazine The Nation. China is the world's fifth largest oil producer, at 3.7 million barrels per day, just below Iran and slightly above Mexico. China consumes 10% of the world's production, second only to the United States' 27% share and triple its consumption of 30 years ago. The International Energy Agency estimates that Chinese oil consumption will reach 11.3 million barrels a day by 2015.

China's top three oil suppliers are Saudi Arabia, Iran and Angola. China has invested $120 billion in Iran's energy sector over the past five years (so much for UN sanctions!), and purchases 14% of its imported oil from the Islamic Republic. The Chinese energy company Sinopec has agreed to invest an additional $6.5 billion to build oil refineries there. China is also the principle supplier of machinery and parts used in Iran's oil production.

Escobar reports that Saudi Arabia has tried to wean China away from its reliance on Iran, offering to supply the Chinese with the same amount of oil it buys from Iran--but at a discount. China's interest in a strategic relationship with Iran has trumped profit, however, and Beijing rejected the Saudi offer. Christina Lin, who follows Chinese military developments, reports that China views Iran as a means of counterbalancing U.S.-supported Arab monarchical states. This does not mean the Saudis are frozen out of the market, however; over half of Saudi oil exports are now to Asia, as opposed to 14% to the United States. Saudi Aramco owns refineries in both Qingdao and Fujian provinces, and is China's principal trading partner in the Middle East.

Most of this oil comes to China through two naval choke points: the Strait of Hormuz and the Strait of Malaccca. 20% of China's oil imports transits Hormuz, and a full 80% of its imports has to go through Malacca. To overcome this maritime vulnerability, the Chinese are trying to develop overland supply routes from Central Asia. As an example, the Kazakh oil fields lie close to the Chinese border and the Chinese company financed a pipeline to deliver its oil to the Middle Kingdom. The Chinese have become so close to the Kazakhs that there have been four heads-of-state summits in the past four years. President Hu Jintao has declared that the relations between the two countries are a "strategic partnership of long-term stability, good-neighborly friendship and win-win cooperation," according to Robert Cutler in the Asia Times.

Another source of petroleum was the strife-torn country of Libya. According to a report published in asahi.com, China has invested large sums of money in Libya. There had been 36,000 Chinese in the country before hostilities began, working on 75 joint venture projects with an additional 50 projects in the pipeline. Each year, China was importing 7.4 million tons of petroleum from Libya.

China has also begun receiving Russian oil via the Eastern Siberia-Pacific Ocean (ESPO) pipeline. China lent the Russian-state run company Rosneft $25 billion to build the line, and the plans are that it will bring 15 million tons of petroleum annually for the next 20 years. This is equivalent to 6% of China's 2010 petroleum consumption, according to asahi.com.

China's growing energy appetite, however, cannot be satiated by Russian and/or Central Asian pipelines. As much as they might fear the vulnerability, they will continue to be reliant on a maritime delivery route. To protect themselves, they are developing a "string of pearls," a series of Chinese naval bases stretching from the straits of Hormuz to the energy-hungry cities of China's east coast. According to Christina Lin, these pearls include upgraded military facilities on Hainan Island, an upgraded airstrip and oil drilling platforms in the contested islets of the South China Sea, a canal in Thailand, and intelligence-gathering facilities near the Strait of Malacca; ports in Burma, Bangladesh, and Sri Lanka; a naval base in Gwadar, Pakistan; and facilites in Port Sudan. The string of pearls gives the Chinese military an overseas presence for the first time in modern Chinese history.

Other Central Asian countries are jumping into the game: following the Kazakh example of getting the Chinese to finance oil projects, Turkmenistan has turned to China to finance natural gas projects. the Turkmen have the world's fourth largest gas reserves, and they sell their gas to China, Russia and Iran. Bloomberg Businessweek reports that Turkmenistan is doubling the amount of natural gas it had originally planned to sell China, and will be shipping 60 billion cubic meters per year by 2015. China is a welcome new market for Turkmenistan, who lost its previous main customer (Russia) after a pipeline explosion disrupted deliveries to that state.

Overall, China's natural gas consumption is expected to grow by 22.6% in 2011, according to a report released by the research arm of China National Petroleum Corporation (CNPC), as reported by the China Daily. Consumption will grow from 106 bcm in 2010, to 130 bcm in 2011,and to 230 bcm in 2015. Domestic output of the fuel will rise 58% in the same time period, reaching 150 bcm in 2015. The CNPC report verified that China imported 4.4 bcm from Central Asia in 2010, and has opened negotiations with Russia for an additional 70 bcm per year by 2015.

With such astronomical projections of increases in petroleum and natural gas consumption, China will be first in line for any production increases from anywhere throughout the world. The current relaxation in oil and gas prices will not be able to be sustained in the mid to long term in the face of Chinese energy demands.

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.

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.

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.

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.