The Caspian energy conundrum.

• Author: Cutler, Robert M.

The region as a whole has a series of tense and complicated connections with bordering states and an unstable and shifting role in global politics and economics. All of these factors contribute to making the energy trade in Central Asia a dangerous game.

**********

Since 1991, Central Asia's vast oil and gas deposits have promised economic development for the impoverished region and have attracted the attention of major powers interested in accessing those resources for themselves. Nonetheless, these promises have not been realized: the energy situation is extremely complicated, leaving the region's natural resources as inaccessible as ever. Each Central Asian republic has complex domestic political problems and difficult relationships with its neighbors. The region as a whole has a series of tense and complicated connections with bordering states and an unstable and shifting role in global politics and economics. All of these factors contribute to making the energy trade in Central Asia a dangerous game. The political vacuum left by the fall of the Soviet Union has led to greater instability throughout the region, further compounding the difficulty of access to Central Asia's natural resources.

Arguments abound about how this instability may develop. Many worry that the Central Asian republics will succumb to so-called "Dutch disease," whereby energy exports cause the domestic currency to appreciate, making domestic agriculture less competitive at home. As a result, farm unemployment increases, triggering mass internal migration to cities and the potential for political instability. (1) Others criticize the "enclave" style of Central Asian development, as the energy sector is developing within the national economy but without the linkages to other sectors that are necessary to drive development. Finally, some argue that political disorder will arise from the disparity between a country's new and wealthy super-elite and the vast majority of its poverty-stricken population. (2)

The dynamic of the "Dutch disease" is well studied and documented; warnings about imbalances in development arising from the emphasis on a single commodity and the absence of spillover effects to the rest of the national economy are not unfounded. Likewise, the human suffering caused by income inequalities and the sub-optimization of social and economic opportunity should not be minimized. The misery and lost opportunities experienced by individuals can result in economy-wide impoverishment, often encouraging criminal activities as a means of compensation. Such are the lessons from existing economic development studies that are transferred to Turkmenistan and Kazakhstan. (3) From them, it follows that the energy sector may be developing in such a manner as to unbalance national economies, putting the security of all of Central Asia in peril. (4)

To see this in proper perspective, it is useful to bear in mind the interaction of energy networks, economic development and political sustainability in Central Asia. For ease of presentation, this article reduces the inherent complexity of these themes to three levels: the national, the subnational and the international. I will first detail the national level, focusing on economic development in Kazakhstan, Turkmenistan and Uzbekistan. Second, at the subnational level, I examine how domestic political change alters energy economics in each of the three states. On the third level, I address the impact of the European Union (EU) and United States and then look at the Eurasian scale, where I examine the influence of Turkey, Russia, Iran, and other players. (5) In sum, I argue that Central Asia's energy trade could still bring prosperity to the region, but its domestic political volatility and complicated regional and global relationships may spoil such efforts.

THE NATIONAL CONTEXTS OF ENERGY GEO-ECONOMICS IN CENTRAL ASIA (6)

Kazakhstan

Kazakhstan's vast energy resources, and the Tengiz oil field in particular, drew significant Western attention to Central Asia following the disintegration of the Soviet Union. The Tengiz field, in the northwest of the country, is estimated to contain between six and nine billion barrels of reserves and is now under development by the TengizChevrOil joint venture (half-owned by ChevronTexaco with a quarter share to ExxonMobil, both American companies).

Although the international petroleum industry has shifted its attention over the past year from Central Asia to West Africa and Southwest Asia, Kazakhstan is guaranteed continued investment because of the large quantities of oil already discovered. The biggest find was the offshore Kashagan field, the largest discovery anywhere in the world since Prudhoe Bay three decades ago. At present, Kashagan is estimated to contain between six and eight billion barrels of proven reserves and up to 40 billion of probable reserves. In addition, Russia and Kazakhstan recently resolved their differences concerning the division of Caspian resources, and additional offshore fields, notably Kurmangazy, are now slated for development in joint ventures with Russian companies. The country has several other oil and gas fields that produce for domestic and regional markets, while further exploration of numerous smaller fields continues. (7)

The Karachaganak natural gas field, also in the northwest, contains over two billion barrels of oil-and-gas condensate and 16 trillion cubic feet of natural gas. The fate of the Karachaganak gas field illustrates some of the subtleties of post-Soviet energy economics in the region. Originally developed during the Soviet era, Karachaganak gas was slated for processing across the Russian border in Orenburg. After 1991, however, the deposit began competing with Russian natural gas for the Russian market. As a result, Orenburg significantly limited the quantities it would accept from Karachaganak. Kazakhstan is therefore planning to build a new plant at the site itself to process the associated oil-and-gas condensate. (8)

The three principal fields--Tengiz, Kashagan, and Karachaganak--continue to be the most important for foreign investors and for those concerned with managing Kazakhstan's economy. After a couple of false starts early in the 1990s, prompting a change in leadership and organizational and financial restructuring, the Caspian Pipeline Consortium (CPC) was finally able to construct a pipeline for Tengiz oil crossing southern Russia to Novorossiisk, a Russian port on the Black Sea. The CPC pipeline began operations in 2001. At present, the oil reaches world markets through the Turkish Straits, and there are currently plans for additional quantities to reach European markets both via Ukraine after being shipped across the Black Sea and via a Bulgaria-Greece pipeline yet to be constructed that would end on the Mediterranean. Other than the CPC route, Kazakhstan's export options currently include the Atyrau-Samara pipeline (also through Russia) and a combined rail-and-barge route across the Caspian Sea into the South Caucasus.

Turkmenistan

Although it has yet to live up to its real potential, Turkmenistan is the other energy export giant of Central Asia. National planning in the country is based on a "Strategy for Social and Economic Transformation" that covers the first decade of the twenty-first century. Much of its implementation, including projected state-led investment, is predicated upon unrealistic assumptions of foreign loan inflows and hard-currency revenues from energy exports. Nevertheless, official performance is in line with government intent, and the correlation of outcomes with policy projections is astoundingly close. (9)

Moscow competes with Turkmenistan in energy production. In 1993, Gazprom barred Ashgabat's gas from gaining export access to the West. Ukraine picked up much of the slack, becoming the main consumer, with Armenia and Azerbaijan accounting for most of the rest. Although it is historically the largest consumer of Turkmenistan's gas, Ukraine has endemic cash-flow problems. Turkmenistan cut off exports to Ukraine several times in the 1990s for nonpayment. Thus, in contrast to a 1991 production level of nearly 85 billion cubic meters (bcm) of gas, in 1998 Turkmenistan produced only 13.2 bcm. Its production has since rebounded, with yet another settlement of the payments question.

The former Soviet republics generally pay about half in cash and half in barter. The recent agreement for Ukraine, for example, provides for 40 percent of the cost of the gas to be worked off through Ukrainian participation in industrial construction projects in Turkmenistan. (10) Also, Turkmenistan's gas has become more important to Russia. Plans are underway for increased Russian export commitments to Europe. With a relative lack of domestic investment, Russia will need Turkmenistan's gas to make up the difference for its domestic consumption.

Until a small pipeline was built for exports to Iran in the late 1990s, Russia monopolized Turkmenistan's pipeline outlets on the world market. Having wasted a chance to agree on the construction of a Trans-Caspian Gas Pipeline (TCGP), which would have sent its production under the Caspian Sea and then to Turkey via Azerbaijan and Georgia, Turkmenistan is condemned for the foreseeable future to use the Russian pipeline system, even with small exports to Iran. If the plan had materialized, Turkey would have subsequently consumed or re-exported the TCGP gas. Another failed attempt at pipeline construction was a...