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©Blackwell Publishing Ltd, 2008

GLOBAL ENERGY REVIEW

Central Asia/Trans-Caucasus: Outlook for Exports

A Report by Dr Paul McDonald

Consulting Editor, Oil and Energy Trends

A survey of the oil and gas reserves, production and exports of:

o Azerbaijan

o Kazakhstan and

o Turkmenistan

Together with a summary of the reserves of the remainder of the region

Plus forecasts for exports in 2015

28 April, 2008


2

Contents

Introduction 4

Oil 5 The International Context 5 Caspian Reserves 8 Kazakhstan 10

Kashagan 10 Other Fields 12 Oil Exports 13 Rival routes 14 Production Outlook 16 Production Forecast 16

Azerbaijan 16 Developing ACG 17 Oil Exports 19 Production Outlook 22 Production Forecast 22

Other Countries 22 Net Exports 22 Export Outlook 23

Natural Gas 24 The International Context 24 New Pipelines 25

Caspian Gas 26 No Nabucco? 27

Sourcing the Gas 27 Export Outlook 30 Production Outlook 31 Export Forecast 33


3

List of Tables

Table 1 World’s Ten-largest Oil Producers, 2007 5

Table 2 World’s Ten-largest Gas Producers, 2007 6

Table 3 World Proven Oil Reserves, 2008 7

Table 4 World Proven Gas Reserves, 2008 8

Table 5 Russia/Central Asia/Trans-Caucasus: Proven Oil Reserves, 2008 9

Table 6 Russia/Central Asia/Trans-Caucasus: Oil Production, 2007 9

Table 7 Kazakhstan: Oil Profile, 2007 10

Table 8 Kashagan: Field Profile 11

Table 9 Kazakhstan: Principal Oilfields 12

Table 10 Kazakhstan: Oil Export Routes 15

Table 11 Azerbaijan: Reserves & Production 19

Table 12 Azerbaijan: Oil Profile, 2007 20

Table 13 Azerbaijan: Oil Export Routes 20

Table 14 Azerbaijan: Proposed Pipeline Projects 21

Table 15 Russia/Central Asia/Trans-Caucasus: Net Oil Trade, 2007 23

Table 16 EU Dependence on Russia, 2007 24

Table 17 Proposed Gas Pipeline Links 26

Table 18 Russia/Central Asia/Trans-Caucasus: Net Gas Trade, 2007 28

Table 19 Russia/Central Asia/Trans-Caucasus: Proven Gas Reserves, 2008 28

Table 20 Russia/Central Asia/Trans-Caucasus: Gas Production, 2007 29

Table 21 Azerbaijan: Proposed New Gas Export Pipelines 30


4

Introduction

The Central Asia/Trans-Caucasus region consists of the following countries:

Armenia

Azerbaijan

Georgia

Kazakhstan

Kyrgyzstan

Tajikistan

Turkmenistan

Uzbekistan

all of which were republics of the Soviet Union until they gained their independence in 1991.

Of the eight countries listed above, four–Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan–

are significant producers of oil or gas, or both. The first three of these are regarded as important

potential energy suppliers to Western Europe which–along with the US–has supported the

development of new oil and gas industries there in an attempt to develop an important new

source of energy imports that is independent of both Russia and the Middle East.

In this they have been only partly successful. Russia is beginning to reassert political and

economic control over much of Central Asia and the Trans-Caucasus and is likely to control a

large proportion of the region’s future exports of oil and gas: either by direct purchases of oil and

gas or by providing the principal export route for the region’s main producers. In a further blow

to European hopes of receiving a substantial share of the region’s oil and gas exports, China is

now emerging as an important competitor for oil and gas from countries lying east of the

Caspian.

Forecasts are provided for production, consumption and exports for Central Asia and the Trans-

Caucasus for 2015.


5

Oil

The International Context

Since the early 1990s, the EU and the US have encouraged the development of the oil and gas

industries of Central Asia and the Trans-Caucasus as an alternative to Russia and the Middle

East. Western oil companies have successfully developed new fields and–rather less

successfully–new export routes to Europe. High hopes have nevertheless been expressed

concerning future levels of production from the region and a growing volume of exports has

been predicted.

Western hopes have centred principally on Azerbaijan, Kazakhstan and Turkmenistan; but

production gains have only been modest during the past one-and-a-half decades. In 2007, none

of the Caspian countries appeared in the list of the world’s ten-largest oil producers (see Table 1)

and only one–Turkmenistan–made it into the list of top-ten gas producers (see Table 2).

Table 1

World’s Ten-largest Oil Producers, 2007

(mn bpd)

Saudi Arabia 10.4

Russia 9.9

United States 7.4

Iran 4.0

China 3.8

Mexico 3.5

Canada 3.4

United Arab Emirates 3.0

Venezuela 2.6

Norway 2.5

Others 31.8

Total 82.3

Includes NGL; Excludes Biofuels & Processing Gains

Source: Pearl Oil estimate

The situation is similar in respect of proven reserves. Only Kazakhstan makes it into the top-ten

list, being the tenth-largest in terms of its proven oil reserves (see Table 3).


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Table 2

World’s Ten-largest Gas Producers, 2007

(bn cfd)

Russia 59.0

United States 51.7

Canada 18.3

Iran 10.5

Norway 8.9

Algeria 8.2

United Kingdom 7.7

Indonesia 7.2

Saudi Arabia 7.2

Turkmenistan 6.5

Others 99.8

Total 285.0

Source: GER estimate

In the case of both reserves and production, Russia and the Middle East remain the dominant

countries, suggesting that there is little chance of dislodging them from their position amongst

the leading suppliers of oil and gas to the EU in particular and, to a lesser extent, the US.


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Table 3

World Proven Oil Reserves, 2008

Country Reserves Share of Total

(bn bbl) (%)

Saudi Arabia* 266.8 23.1

Iran 138.4 12.0

Iraq 115.0 9.9

Kuwait* 104.0 9.0

UAE 97.8 8.5

Venezuela 87.0 7.5

Russia 60.0 5.2

Libya 41.5 3.6

Nigeria 36.2 3.1

Kazakhstan 30.0 2.6

Others 180.2 15.6

Total† 1,156.9 100.0

Totals rounded

* Including half Neutral Zone † Excluding Canadian oil sands

Source: Oil & Gas Journal


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Table 4

World Proven Gas Reserves, 2008

Country Reserves Share of Total

(tcf) (%)

Russia 1,680 27.2

Iran 948 15.3

Qatar 905 14.6

Saudi Arabia* 253 4.1

UAE 214 3.5

US 211 3.4

Nigeria 184 3.0

Venezuela 166 2.7

Algeria 159 2.6

Iraq 112 1.8

Others 1,354 21.9

Total 6,186 100.0

Totals rounded

* Including half Neutral Zone

Source: Oil & Gas Journal

Caspian Reserves

The proven oil reserves of Central Asia and the Trans-Caucasus are modest by world standards

(see Table 5) and are mainly concentrated in Kazakhstan, which has 30.0 bn bbl, or 78.3%, of the

region’s total of 38.3 bn bbl. Reserves:production ratios are also moderate, except, again, in the

case of Kazakhstan, where the ratio is 59:1. Azerbaijan comes second, with 27:1.


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Table 5

Russia/Central Asia/Trans-Caucasus: Proven Oil Reserves, 2008

Country Reserves Years remaining

(bn bbl)

Russia 60.0 16.6

Kazakhstan 30.0 58.7

Azerbaijan 7.0 27.4

Turkmenistan 0.6 8.2

Uzbekistan 0.6 16.4

Others 0.1 2.0

Total 98.2 21.8

(Saudi Arabia 259.8 68.4)

Totals rounded

Source: (Reserves) Oil & Gas Journal; (Other) Pearl Oil estimate

The region’s oil production amounted to 2.6 mn bpd in 2007: just 26.3% of the total produced by

Russia (see Table 6). Kazakhstan was the largest regional producer, with 1.4 mn bpd, followed

by Azerbaijan, with 0.8 mn bpd. Between them, these two countries accounted for 84.6% of the

region’s output.

Table 6

Russia/Central Asia/Trans-Caucasus: Oil Production, 2007

Country Volume

(mn bpd)

Russia 9.9

Kazakhstan 1.4

Azerbaijan 0.8

Turkmenistan 0.2

Uzbekistan 0.1

Others 0.1

Total 12.5

(Saudi Arabia 10.4)

Source: Pearl Oil


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Kazakhstan

Kazakhstan produces 1.4 mn bpd of oil, of which some 1.2 mn bpd is exported (see Table 7).

There are plans to increase output to more than 3.0 mn bpd, but these depend critically on the

development of the Kashagan field and the whole project is mired in a dispute between the

government and the oil companies that are proposing to develop the field.

Kashagan was originally due to come into production in 2005. Since then, the start-up date has

been postponed a number of times. At the beginning of 2007 the plan was for the

commissioning of the field to take place in 2008. In February 2007, Kazakh officials began to

refer to a starting date sometime in 2009. The following month, Kashagan’s operator, ENI, said

that first oil would not appear until the third quarter of 2010. Since then, dates as late as 2011

and 2012 have been privately mentioned by companies involved in the project.

Table 7

Kazakhstan: Oil Profile, 2007

Proven Reserves 30 bn bbl

Reserves remaining 59 years

(mn bpd)

Production 1.4

Consumption 0.2

Exports 1.2

Source: (Reserves) Oil & Gas Journal

(Other) Pearl Oil estimate

Kashagan

Kashagan is a major oilfield in world terms, with proven reserves estimated between 13 bn and

15 bn barrels, giving it roughly half Kazakhstan’s total reserves of oil. It is being developed by

an international consortium of seven companies, led by ENI, which is the field’s operator.

The field’s development, however, has encountered a number of problems: some geological and

some political. The result has been a series of increases in the estimated cost of developing the

field. Costs of developing the initial phase of the field were estimated in 2004 at just over

$10 bn. By early 2007 that figure had risen to $19 bn. It is probably now nearer $20 bn.

The above costs represent sums required to begin producing oil at around 300,000 bpd. Output

is then supposed to increase in stages to 1.5 mn bpd somewhere around 2019 (see Table 8). The


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cost of the additional development stages is put at $11 bn, but some unofficial company

estimates exceed $30 bn, putting the total cost of the field as high as $50 bn. Government

sources claim the true figure is more than twice this amount.

Kashagan lies offshore in the Caspian Sea at a depth of around 15,000 feet. This makes it one of

the world’s deeper reservoirs. It is also structurally complicated and lies in waters that are liable

to freeze in winter. There are further problems with high reservoir pressures, which require

stringent safety precautions to be taken in drilling and operating oilwells, and with the high

sulphur content of the field. All this makes the field costly to develop and every delay to the

field means that costs rise further.

Table 8

Kashagan: Field Profile

Discovered 2000

Proven Reserves 13-15 bn bbl

Development Profile

Date* Volume

(kbd)

2010 75

2011 300

2012 450

2019 1,500†

* Dates approximate † Peak production

Source: ENI; oil press

The delays have not only been for technical reasons. There have been a number of disputes

between the government and members of the development of the consortium. Many of the

disputes have been about revenue-sharing from the field. Part of the government’s strategy has

been to threaten to increase tax rates on foreign oil investments. Much of the government’s case,

however, hinges on the size of its holding in the field-consortium.

State-owned KazMunaiGaz has an 8.33% share. The government has indicated that it wants a

40% share. It has further muddied the waters by suggesting that KazMunaiGaz should take over

the operatorship of Kashagan despite the state company’s lack of experience in developing large


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and difficult offshore fields. There have even been suggestions that the government should

receive some revenues from the field before it comes into production.

Negotiations have been further complicated by the raising of a number of environmental issues

by the government, which claims that the current development plans contravene environmental

legislation, and suggesting that this could form grounds for the removal of ENI as operator of the

field. It is claimed in particular that marine life–including the Caspian’s sturgeons–could be

poisoned by releases of hydrogen sulphide and other toxic wastes from the field.

Other Fields

Kazakhstan has some other important developments under way. These include the Tengiz,

Karachaganak and Kumkol fields. The largest of these is the Tengiz field in western

Kazakhstan. Reserves here are an estimated 9 bn bbl (see Table 9) and production is close to

300,000 bpd. The development of the Tengiz field has been adversely affected by the presence

of large quantities of hydrogen sulphide. This has been processed into solid sulphur pellets, but

the production of sulphur has often exceeded the market for the product. Large mounds of the

material have accumulated and Chevron–the field’s operator–has frequently been in trouble with

the Kazakh authorities over the accumulation of its ‘sulphur mountain’.

Table 9

Kazakhstan: Principal Oilfields

Field Proven Reserves

(bn bbl)

Kashagan 15.0

Tengiz 9.0

Karachaganak 2.4

Aktobe 1.0

Uzen 1.0

Kumkol 0.6

Others 1.0

Total 30.0



Karachaganak is a British Gas-operated gas condensate field in the north-west of the country. As

well as producing some 200,000 bpd of gas liquids it is also an important producer of natural


13

gas, which is exported to Russia. There are plans to raise the output of liquids to 350,000 bpd

and to double gas production to 1.6 bn cfd.

Kumkol is one of a number of fields in central Kazakhstan that the Chinese have interested

themselves in. In 2005, China’s state-owned China National Petroleum Corporation (CNPC)

bought the Canadian independent oil company PetroKazakhstan for $4.2 bn in order to gain

access to the 150,000 bpd that was produced by Kumkol and nearby fields. The following year,

it built a 200,000 bpd pipeline to carry the crude oil to the western Chinese refining centre of

Dushanzi.

Oil Exports

Kazakhstan has no direct link to the world’s oceans and is therefore forced to rely on third

countries to export its oil. Because of its land-locked situation it has sought to avoid dependence

on any single export corridor. Its main export routes go through Russia, but it is now developing

routes via China.

The routes through Russia date partly from the days when Kazakhstan was part of the USSR.

The main oil route via Russia is the comparatively recent Caspian Pipeline Consortium (CPC)

pipeline that was built to take crude oil from Tengiz to the Russian Black Sea port of

Novorossiisk. It is owned by a consortium representing the interests of Kazakhstan, Russia and

the Tengiz field’s shareholders.

The line was opened in 2001, with a capacity of 560,000 bpd. It can now handle about

700,000 bpd, but the Tengiz partners and Kazakhstan want to increase capacity to 1.3 mn bpd.

Russia, however, opposes this for economic and political reasons.

Russia’s opposition to the expansion of CPC is based partly on the cost of doing so when another

line exists allowing the export of Kazakh crude and condensate via Russia, using the pipeline

from Atyrau to Samara (see Table 10). The Russians have nevertheless indicated that they might

drop their objection if the CPC partners were to help finance a 700,000 bpd pipeline from Burgas

in Bulgaria to the Greek port of Alexandroupolis. Moscow is promoting this line as a by-pass to

the congested Bosphorus, which is approaching saturation in terms of the number of oil tankers it

can safely handle. The oil would be shipped from Novorossiisk across the Black Sea to Burgas

and thence to the Adriatic. The Russians have proposed an initial capacity for the route of

700,000 bpd.


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Rival routes

Russia is not the only country bidding to transport Kazakh oil to the rest of the world. Ukraine,

Azerbaijan and Iran all have schemes of their own to handle its exports for part of their journey.

Ukraine’s proposal is for a pipeline link from the Black Sea to the Baltic. It is designed to make

use of a pipeline opened in 2002 between the Ukranian Black Sea port of Odessa and the town of

Brody, some 420 miles inland. The 180,000 bpd line was designed to allow the export of oil

from Kazakhstan and Azerbaijan to Central Europe, but failed to attract any business. It

remained idle until 2004, when Ukraine agreed to allow Russia to transport some of its oil

southwards through Odessa to the Mediterranean.

Last October, Ukraine and Poland agreed to extend the line from Brody to Plock in Poland and

from there to the Baltic port of Gdansk. An initial capacity of 240,000 bpd has been proposed.

KazMunaiGaz is reported to have expressed interest in the scheme.

Another proposal being studied by the Kazakh state company is for a tanker shuttle to operate

across the Caspian to transport up to 500,000 bpd of oil to the Azeri port of Baku, from where

the oil could be transported by pipeline either to Ceyhan in the Mediterranean or Supsa, on the

Black Sea coast of Georgia.

The tanker shuttle proposal is being studied by KazMunaiGaz in conjunction with Azerbaijan’s

national oil company, Socar. A separate proposal is being studied by Total–one of the partners

in the Kashagan field–for a pipeline of a similar size to the Caspian, from where oil would also

be shipped to Baku by tanker (see Table 10). The idea would be to make use of the existing

Baku-Tbilisi-Ceyhan (BTC) pipeline to take the Kashagan crude to the Mediterranean. BTC is

currently used for the export of oil from Azerbaijan but there are plans to increase capacity in the

future. It now handles about 700,000 bpd, but capacity is to be raised to 1.0-1.2 mn bpd in 2008

and there are further proposals for an increase to 1.6 mn bpd beyond that.


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Table 10

Kazakhstan: Oil Export Routes

Route Destinations Length Capacity* On-stream

(miles) (kbd)

Existing Routes

Pipelines

Tengiz-Novorossiisk

(CPC)

Russia/Black Sea/

Mediterranean

945 700 2001

Atyrau-Samara Russia/Central Europe 450 340 Soviet era

Atyrau-Aktau Azerbaijan/Georgia/Iran/

Mediterranean

450 100 Soviet era

Atasu-Dushanzi China 900 200 2006

Railways

Kumkol-Alataw-Shankou 1 China 600 25 Soviet era

Total 1,365

Proposed Pipelines

Tengiz-Novorossiisk

(CPC)

See above Expansion 640 TBD

Kashagan-Aktau-Baku Azerbaijan/

Mediterranean

500 500 TBD

Atyrau-Dushanzi China 1,875 400 2 TBD

Kumkol-Dushanzi China Expansion 200 2010

Total 1,340

* Capacities approximate TBD: to be decided 1 Largely replaced by pipeline to Dushanzi 2 Extension of Kumkol-Dushanzi pipeline to western Kazakhstan (hence figure not included in

total)

Source: Pearl Oil

Iran too is studying the idea of shipping crude oil from Kazakhstan across the Caspian. In the

Iranian case, the proposal is to run tankers to the port of Neka on the southern shore of the

Caspian and from there to build a pipeline across Iran to the Persian Gulf at Jask.

The Neka-Jask route would allow better access to markets in Asia than the BTC pipeline, and

Iran’s proposal is thought to be favoured by Kashagan’s operator, ENI, but it suffers from the

uncertainty brought about by the EU’s opposition to Iran’s nuclear programme.


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Production Outlook

Kazakhstan has ambitious plans for its oil industry. For some years there has been talk of raising

output from the current level of 1.4 mn bpd to more than 3 mn bpd. In 2002, the Ministry of

Energy set targets of 2 mn bpd for 2010 and 3 mn bpd for 2015. In the light of the delays at

Kashagan this now looks wholly unrealistic.

Kashagan looks unlikely to produce large volumes of oil before late 2010, and may not even

exceed 100,000 bpd until some time in 2011. Peak production of 1.5 mn bpd is not expected

before 2019, which is probably the earliest date at which Kazakhstan could be producing

3 mn bpd. The government now forecasts 2015’s output at 2.5 mn bpd rather than the earlier

target of 3.0 mn bpd.

There may be further new production–mainly of condensate–from gasfields such as

Karachaganak. Output from Tengiz is also slated to rise by 150,000 bpd by about 2009. There

may even be oil from new fields such as Kurmanagazy and Tub-Karagan, all of which should

help Kazakhstan to realise its goal of 3 mn bpd by about 2020. Beyond that, though, there may

not be much scope for further additions to output. Kazakhstan’s production, however, will not

reach any of its targets unless it is able to agree with its neighbours’ ways of finding its oil.

Production Forecast

(mn bpd)

2007 1.4

2015 2.5

Azerbaijan

For many years, Azerbaijan was an important supplier of oil to Western Europe. It has some of

the world’s oldest oilfields which are, in consequence, way past their peak levels of output. Its

prospects for future production do not depend on these mature fields but on those recently

discovered in the Caspian Sea. Whilst these relatively new discoveries appear promising in

terms of both reserves and production, they are few in number and unlikely to provide the oil

bonanza that was once predicted.

Modern commercial oil production in Azerbaijan began in about 1806, when oil was produced

from shallow pits. The earliest pits were dug around 3000 BC and wells as deep as 100 ft were


17

reported by the late 16th century AD. The first of the current oilfields dates from 1871, when

output was recorded at 660 bpd (see Box).

An early problem for the oil producers was to transport their oil to the world’s major oceans.

The earliest exports went by river, road and railway to the main cities of Russia. In 1877, a

railway from Azerbaijan to Batumi on the Black Sea allowed the first exports directly by sea,

though these were limited by the fact that the oil could only be shipped in individual barrels.

The large scale international trade in oil was finally permitted when a London merchant, Marcus

Samuel, successfully shipped the first cargo of oil by ocean-going oil tanker in 1892: from

Batumi to Singapore and Bangkok. By 1895, Azerbaijan was the world’s largest producer of oil,

having overtaken the US; but war and revolution caused its output to decline sharply after 1913.

There was a recovery in the 1940s prompted by the need to supply oil to the Red Army, but

output again declined subsequently as the USSR developed newer, larger fields in Siberia and

elsewhere. By 1997, production hit a post-Soviet low of 182,000 bpd.

Developing ACG

In that year, BP brought a new offshore oilfield on-stream, called Chirag. This was the first of a

number of developments to be made by the British oil major in conjunction with its partners for

the newly-independent Azerbaijan. BP became the operator and principal shareholder in a

consortium known as the Azerbaijan International Operating Company (AIOC), of which the

other members were the Azeri state oil company, Socar, plus Chevron, Devon Energy,

ExxonMobil, Hess, Inpex, Itochu, Statoil and TPAO.

Chirag was the first of a series of fields, known collectively as Azeri-Chirag-Gunashli (ACG),

which are now being developed in stages. Chirag was followed by the Central, West and East

Azeri fields in 2005 and 2006, which helped to raise Azerbaijan’s oil production from

182,000 bpd in 1997 to 810,000 bpd in 2007 (see Box). This year, Guneshli is due to be

commissioned, which should push Azerbaijan’s production above 1 mn bpd (see Box).

Early output forecasts showed the ACG fields reaching a peak in 2009 or 2010 then declining

quite quickly. A prediction made in 2005 showed a fall in output to 800,000 bpd by about 2015.

The latest forecasts from AIOC suggest that the peak will be prolonged for two or three years, at

1.2 or 1.3 mn bpd. In the best case, these levels could be sustained from about 2010 to 2015.


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Azerbaijan: Oil Production History and Prospects

Year Output Remarks

(bpd)

1871 660 First oilfield drilled

1873 3,000 Second oilfield drilled

1895 115,000 Output exceeds that of US

1901 165,000 Output equals half world total

1913 206,000 Peak output in Tsarist times

1921 81,000 Output collapse following Revolution

1943 260,000 Post-revolutionary recovery

1991 240,000 Last year under USSR

1997 182,000 First year of Chirag production

2005 452,000 Central Azeri field on-stream

2006 654,000 West Azeri field on-stream

2007 810,000 East Azeri field on-stream

2008 900,000 Gunashli field on-stream

2009 1,000,000

2010 1,200,000

2013 1,300,000 Forecast plateau

2015 1,200,000

2020 800,000 Production in long term decline

Source of figures:

(Before 1991) Pearl Oil based on Russian/Soviet sources

(1991-2006) BP Statistical Reviews of World Energy

(2007-onwards) Country data/Azeri forecasts


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Table 11

Azerbaijan: Reserves & Production

Reserves (2008)

Proven Reserves* 7.0 bn bbl

Reserves Remaining† 27.4 years

Production (2007)

(kbd)

AIOC 630

Socar 155

Others 25

Total 810

* As at 1.1.08 † Based on 2007’s production

Totals rounded



The level of proven reserves has been stated in the last nine months between 5.4 bn and

7.0 bn bbl, with oil-in-place estimated at 16.0 bn bbl. Most of the oil is in the Azeri field-

complex.

Oil Exports

Nearly all of Azerbaijan’s oil is exported, and what is exported is primarily sold in the form of

crude oil. Output of 810,000 bpd and domestic consumption of 150,000 bpd gives the country

net exports of some 660,000 bpd (see Table 12).


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Table 12

Azerbaijan: Oil Profile, 2007

(kbd)

Production 810

Consumption 150

Net Exports 660

Refinery Capacity

Baku 240

New Baku 160

Total 400

Totals rounded

Source: (Refineries) Oil & Gas Journal; (Other) Pearl Oil estimate

Given its geographical position, Azerbaijan is obliged to export its crude via other countries. In

Tsarist times, this involved railways or pipelines through either Georgia or Russia (see Table 13).

From an early stage following independence from the Soviet Union, Azerbaijan wanted to find a

third route. In this, it was strongly supported by the US, which wanted to try and detach as many

of the countries of the Trans-Caucasus and Central Asia from Russia following the break-up of

the Soviet Union.

Washington strongly promoted the idea of a new pipeline from Baku to Ceyhan on the

Mediterranean coast of Turkey. It was also thought a good idea to route the line through

Georgia, which would help to tie that newly-independent country into the western orbit by

allowing it to receive oil from Azeri fields that were being developed by western oil companies.

Table 13

Azerbaijan: Oil Export Routes

Route Type Capacity

(kbd)

Baku-Novorossiisk Pipeline 20

Baku-Supsa Pipeline 155

Baku-Tbilisi-Ceyhan Pipeline 1,000

Baku-Batumi Railway 25*

* Figure represents most recent shipment levels

Source: Country data


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The idea was to develop the pipeline in conjunction with the ACG fields. Such a line would

allow the AIOC partners to export their oil directly to the world’s oceans without having to go

through the congested Bosphorus Straits at Istanbul, where the narrowness of the waterway

causes congestion, lengthening voyage times, and also restricts the size of vessels that can be

used, thereby increasing shipping costs further. Ceyhan is able to handle very large crude

carriers (VLCCs).

Thus was born the 1,100-mile Baku-Tbilisi-Ceyhan (BTC) pipeline, which opened in 2006 with

a capacity of 1 mn bpd. There are plans to increase the size of the line: by 200,000 bpd in 2008

or 2009; and by a further 200,000 bpd or 400,000 bpd in about 2013, giving it a capacity of up to

1.6 mn bpd (see Table 14).

Table 14

Azerbaijan: Proposed Pipeline Projects

Route Proposed

Expansion

Completion

(kbd)

Baku-Odessa 100 TBD

Brody-Plock-Gdansk

Baku-Supsa * 2008/9

Baku-Kashagan 500† 2011

Baku-Tbilisi-Ceyhan 200 2008/9

Baku-Tbilisi-Ceyhan 200-400 2013

* Refurbishment of Soviet-era pipeline † Link to BTC pipeline. Caspian Sea section initially by tanker pending agreement over seabed

Figures refer to capacities to be added at each stage

TBD = to be decided

Source: BP; Total; Country data

Some of this additional capacity is designed to be used by other ex-Soviet republics, notably

Kazakhstan. Total wants to export some of the Kashagan field’s output via BTC once the new

Kazakh field is brought on-stream, probably around 2010. Total–which is one of Kashagan’s

main shareholders–plans a trans-Caspian link by tanker capable of handling 500,000 bpd (see

Table 14); but delays to the development of Kashagan may mean that there is not sufficient oil to

make such a link worthwhile until sometime after 2012.


22

Azerbaijan meanwhile plans to export at least 100,000 bpd via the Ukrainian Black Sea port of

Odessa, where Ukraine proposes to build a pipeline link to the main Western European pipeline

system at Plock in Poland, and subsequently to the Baltic at Gdansk. The Azeris also want to

export more crude oil to neighbouring Georgia, which wants to reduce its reliance on Russia for

oil exports.

Production Outlook

The ACG field-complex will continue to provide the key to Azerbaijan’s production between

now and 2015. Whilst the fields may not peak as sharply as once predicted (see above) there is

unlikely to be a prolonged plateau. Output is therefore likely to be in decline by 2015, having

peaked around 2013 (see Box).

Production Forecast

(mn bpd)

2007 0.8

2015 1.2

Other Countries

Oil production in the remaining six countries of Central Asia and the Trans-Caucasus amounts to

only 0.4 mn bpd (see Table 6). Moreover, with the exception of Turkmenistan, all the remaining

countries are net importers of oil (see Table 15). No increase is expected in the total production

of these six countries and net imports are likely to increase.

Net Exports

The Central Asia/Trans-Caucasus region had net exports of 1.7 mn bpd in 2007. There were

three net exporters–Kazakhstan, Azerbaijan and Turkmenistan–of which the first two accounted

for all but 0.1 mn bpd of the region’s net exports (see Table 15).


23

Table 15

Russia/Central Asia/Trans-Caucasus: Net Oil Trade, 2007

Country Volume

(mn bpd)

Russia 7.0

Kazakhstan 1.2

Azerbaijan 0.7

Turkmenistan 0.1

Uzbekistan (0.1)

Others (0.2)

Total 8.6

(Saudi Arabia 8.2)

Source: Pearl Oil

Export Outlook

Net exports are likely to rise from Kazakhstan and Azerbaijan thanks to increases in production

there. Output is expected to be little changed in the remaining countries whilst consumption

rises, leading to a growth in net imports. The outlook for net exports is summarized below:

(mn bpd)

2007

Kazakhstan 1.2

Azerbaijan 0.7

Others (0.2)

Total 1.7

2015

Kazakhstan 2.1

Azerbaijan 1.0

Others (0.2)

Total 2.7


24

Natural Gas

The International Context

Worried about its increasing reliance on Russia for oil and gas (see Table 16), the EU has sought

to procure as much gas as possible from Central Asia and the Trans-Caucasus. To this end, it has

promoted a number of pipeline schemes to bring gas directly from the Caspian to Europe by

routes that avoid Russia (see Table 17). The principal of these routes is one known as Nabucco.

Table 16

EU Dependence on Russia, 2007

Oil

Volume Russian Share

(mn bpd) (%)

Production 2.3

Consumption 15.1

Net Imports 12.8

(Russia 5.7 44.5)

Natural Gas

Volume Russian Share

(bn cfd) (%)

Production 18.0

Consumption 47.0

Net Imports 29.0

(Russia 12.5 43.1)


However, whilst the European Union (EU) tries to find new sources of gas imports outside

Russia, Moscow is pre-empting any such moves to lessen the EU’s dependence on Russia by

announcing new plans to bring gas to Central and Western Europe. A major new gas export line

has been brought nearer by an agreement to route the South Stream gas pipeline via Serbia,

whilst another export project has just been agreed under which Russia will provide a conduit to

Europe for gas from Kazakhstan and Turkmenistan.


25

New Pipelines

The South Stream pipeline is designed to deliver up to 3 bn cfd of natural gas from Russia to

Central and Western Europe. It will extend some 2,000 miles from Russia, across the Black Sea,

through Bulgaria and Serbia, then westwards to various parts of the EU. The line is being

promoted by state gas company Gazprom and Italy’s ENI. Its cost has been put in excess of

$13 bn.

Two routes had originally been under consideration: one via Romania, Hungary and Slovakia to

Northern Europe and one passing through Bulgaria and Serbia en route to places further west and

south. The Serbian route appears to have been chosen partly in order to strengthen Russian ties

with a key ally in Eastern Europe. For its part, Serbia has been anxious to obtain a direct supply

link with Russia for its gas rather than rely on the present pipeline that passes through Ukraine.

On previous occasions during disputes between Russia and Ukraine over prices, Serbia has

experienced interruptions to its supplies. Serbia has to import nearly all of the 250 mn cfd it

consumes.

Another incentive for Moscow to proceed with the Serbian route was an agreement that Russia

could take a stake in Serbia’s national oil company, Naftna Industrija Srbije (NIS). This is likely

to involve a 25% shareholding in NIS and the stake is expected to go to Gazprom. NIS owns

Serbia’s two oil refineries: the 98,000 bpd Pancevo unit and the 117,000 bpd Novi Sad refinery.

Gazprom is also likely to build gas storage facilities in Serbia.


26

Table 17

Proposed Gas Pipeline Links

Route Pipeline Capacity Source of Gas On-stream

(bn cfd)

Russia-Serbia-Europe South Stream 3.0 Russia 2013

Russia-Germany Nord Stream 2.7 Russia 2010

Turkey-Austria Nabucco 3.0 Iran; Caspian 2012

Turkey-Greece-Italy TAP 1.0 Iran 2010

Turkey-Greece-Italy ITGI 1.0 Caspian 2012

Greece-Austria West Balkan 1.0 Caspian TBD

Egypt-Levant-Europe AGP 1.0 Middle East TBD

Nigeria-Algeria-Spain TSGP 2.0-3.0 Nigeria; Algeria 2015

Total 14.7-15.7

Volumes and dates subject to change TBD: to be decided

TAP: Trans-Adriatic Pipeline

ITGI: Interconnector Turkey Greece Italy

AGP: Arab Gas Pipeline

TSGP: Trans-Sahara Gas Pipeline

Caspian Gas

Some nine days after agreeing the Serbian deal, on 20th December, the Russians signed an

agreement with Kazakhstan and Turkmenistan to build a 2 bn cfd pipeline between the two

Caspian countries and Russia. The line would transit a further gas producer: Uzbekistan. The

new pipeline is supposed to be in operation by late-2010 and could be increased in capacity after

that date.

This suggests a fairly tight timetable for the project, but Moscow’s aim appears fairly clear. It

wants to tie-up as much Caspian gas as possible in deals with its national gas company Gazprom

before other, rival schemes have time to act.

Three major pipeline deals designed to bring Caspian gas directly into Europe are under

discussion at present (see Table 17). All are being promoted as a way of reducing the EU’s

reliance on Russia. The EU Commission has been giving particular encouragement to a line

backed by Austria’s OMV and others to pipe gas from Azerbaijan and Turkmenistan to Central

Europe using the Nabucco pipeline.


27

Nabucco is the largest of the three lines proposed between the Caspian and Europe and if it were

to go ahead, the other two–the Interconnector Turkey Greece Italy and the West Balkan line–

would almost certainly not be built. The problem for the EU is that Nabucco may now not be

able to go ahead either. Russia’s recent agreement to take up to 2 bn cfd of gas from Kazakhstan

and Turkmenistan leaves little available for other export pipelines such as Nabucco. Moreover

any Caspian and Central Asian gas not tied-up by Moscow would probably be exported to China

rather than going westwards to Europe.

The Kazakh and Turkmen gas signed-up by Russia is almost certainly intended for the South

Stream pipeline. The line may also carry gas from Uzbekistan to Europe. Russia has for some

time been trying to encourage its Caspian and Central Asian neighbours to route more of their

gas exports via its territory. After years of paying low prices for their gas, Gazprom agreed in

2007 to a doubling of the price paid to Uzbekistan to about $2.85 per mn BTU. This year, the

Russian company will pay an extra 30% for Turkmen gas for the first six months and then an

extra 15% on top for deliveries in the second half of 2008, bringing the total to $4.25

per mn BTU.

No Nabucco?

Russia’s latest plans may still leave some spare Caspian and Central Asian gas available for the

Nabucco pipeline, but Moscow appears to have allowed for this by leaving open the idea that the

2 bn cfd pipeline to Kazakhstan and Turkmenistan might be increased in capacity. It is also

possible that Russia will consider building spur-lines off South Stream to enable it to serve more

countries in Europe. The EU may be beginning to realise this as well. The Energy Commission

is promoting new trade links with gas exporters in North Africa and is even considering pipeline

imports from as far away as the Middle East and Nigeria.

Sourcing the Gas

Only three countries in the Central Asia and the Trans-Caucasus are net exporters of gas at

present: Turkmenistan, Uzbekistan and Kazakhstan (see Table 18). The region’s entire net trade

amounts to 6.1 bn cfd, compared with a figure for Russia of 15.0 bn cfd in 2007.


28

Table 18

Russia/Central Asia/Trans-Caucasus: Net Gas Trade, 2007

Country Volume

(bn cfd)

Russia 15.0

Turkmenistan 4.5

Uzbekistan 1.2

Kazakhstan 0.8

Azerbaijan (0.2)

Others (0.2)

Total 21.1

Totals rounded


Russia similarly dwarfs the region in terms of reserves (see Table 19) and production (see Table

20). Russia’s proven reserves of 1,680 trillion cf are more than five-times those of Central

Asia/Trans-Caucasus. Its production is nearly four-times that of the region.

Table 19

Russia/Central Asia/Trans-Caucasus: Proven Gas Reserves, 2008

Country Reserves Years remaining

(trillion cf)

Russia 1,680 78.0

Turkmenistan 100 42.1

Uzbekistan 65 33.0

Kazakhstan 100 97.8

Azerbaijan 30 102.7

Others 1 27.4

Total 1,976 72.6

Totals rounded



29

Table 20

Russia/Central Asia/Trans-Caucasus: Gas Production, 2007

Country Volume

(bn cfd)

Russia 59.0

Turkmenistan 6.5

Uzbekistan 5.4

Kazakhstan 2.8

Azerbaijan 0.8

Others 0.1

Total 74.6

Totals rounded


The three-largest net exporters–Turkmenistan, Uzbekistan and Kazakhstan–can only export gas

via Russia, and the Russians intend to retain their stranglehold over these countries’ exports for

as long as possible. In pursuance of their aim, they have begun to show themselves as more

accommodating to requests for higher export prices than heretofore. There seems little

likelihood of European sales using pipeline systems other than those that traverse Russia.

Only Azerbaijan has a link to Europe that does not involve Russia. The South Caucasus Pipeline

(SCP) is a 1 bn cfd line, which runs from Baku via Tbilisi and connects with the Turkish

transmission system at Erzurum. SCP is designed to supply gas from the newly commissioned

Shah Deniz field in the Azeri part of the Caspian. The EU Commission hopes that additional gas

can be supplied to Nabucco via an expanded SCP.

Azerbaijan also supplies gas by pipeline to Georgia and Iran, whilst importing from Russia. The

trade with Iran is essentially a swap deal. Azerbaijan supplies gas to northern Iran whilst Iran

delivers a roughly similar volume to Nakhichevan in southern Azerbaijan, which lies just across

the border from Iran.

The problem for the supporters of Nabucco is that there are several other proposed pipeline links

to Western Europe which all depend on gas from Azerbaijan (see Table 21). Azerbaijan

meanwhile faces additional demands of its own.


30

Table 21

Azerbaijan: Proposed New Gas Export Pipelines

Route Pipeline New Capacity Completion

(bn cfd)

Azerbaijan-Georgia Soviet-era pipeline * 2008/9

Azerbaijan-Turkey South Caucasus Pipeline, Phase II 1.0 After 2013

Azerbaijan-Austria Nabucco 3.0 2012

Azerbaijan-Italy Interconnector Turkey Greece Italy 1.0 2012

Azerbaijan-Austria West Balkan 1.0 TBD

* Refurbishment of existing lines

TBD = to be decided

Volumes and dates subject to change

Source: Country data

In the first place, Azerbaijan’s domestic consumption is growing rapidly. Demand has doubled

since 1998 and the rate of increase shows signs of accelerating. Azerbaijan also has plans to

increase deliveries to Georgia, which wants to loosen its dependence on Russia for gas. Turkey

also wants more Azeri gas: in its case to re-export to Greece via a pipeline between the two

countries opened in 2007.

Azerbaijan also faces a reduction in deliveries from Russia, which objects to the way that the

Azeris are able to use Russian imports to free more of their own gas for export to countries also

supplied by Russia. There is unlikely to be any spare Azeri gas for Nabucco for the foreseeable

future.

Export Outlook

Azerbaijan is the only country likely to be able to supply gas to the EU in 2015 without transiting

Russia. Most of its gas exports, however, are likely to go to Georgia, Iran and Turkey. Small

volumes may be available for onward transmission via Turkey to Greece but the volumes

involved are unlikely to exceed 0.1 bn cfd.

Turkmenistan, Uzbekistan and Kazakhstan are almost certain to be exporting via Russia. The

only other serious contender for gas from these countries is China, which has proposed pipeline

links to all three countries. The Chinese have indicated that they would like to import up to

4 bn cfd. Kazakhstan has offered around 1 bn cfd. There may not be much more than this from


31

anywhere else in Central Asia. It is not clear when these deliveries might begin; but whatever

happens, there looks like being no extra gas for Nabucco.

Production Outlook

All four main producers propose to increase production. Some uncertainty, however, surrounds

the plans of Turkmenistan. Despite its seemingly large reserves, it has struggled to raise

production in recent years. It continues, however, to announce ambitious plans for new

production and export schemes. In 2007, it agreed in principle to supply China with up to

3 bn cfd via the proposed Trans-Asia Gas Pipeline: an ambitious scheme designed to take gas

from Turkmenistan, Kazakhstan and Uzbekistan to Peking, Shanghai and Canton from about

2012.

Some of the gas might be sourced from the South Iolotan field. The Turkmen authorities have

suggested peak volumes of 5 bn cfd, but have been vague about dates. There are also suspicions

that the field’s reserves are being exaggerated. There is considerable scepticism about the

government’s claim of gas reserves nationally of 870 trillion cf. Most external sources suggest a

figure around 100 trillion cf (see Table 19). Turkmenistan’s production plans, moreover, are

behind schedule. Output in 2007 was supposed to be 7.7 bn cfd rather than the 6.5 bn cfd

estimated in Table 20. The development of South Iolotan might enable it to reach 12 bn cfd in

2015, but this should be regarded as the likely best case.

Like Turkmenistan, Kazakhstan has ambitious targets for increased gas production. Like

Turkmenistan also, it is having trouble fulfilling these ambitious plans. Targets have been cut as

current production has turned out lower than expected. The target for 2010 has been cut by

almost a quarter to 3.9 bn cfd, and 2015’s planned total has been reduced by nearly 12%, to

6.8 bn cfd: and even this looks unlikely. Kazakhstan is struggling to attract the huge investment

needed for a planned 143% rise in output between 2007 and 2015; and the government has not

helped its case by trying to increase taxes on foreign companies whilst reducing their equity

stakes in major fields. If all goes well, it might just about double output by 2015 to 5.6 bn cfd.


32

Uzbekistan may not raise its output at all between now and 2015 unless there are major new

finds. Its best hope appears to lie with four fields being explored by Lukoil. The Khauzak,

Kandym, Kungrad and Shady fields are said to contain 11 trillion cf. Khauzak is due on-stream

in 2008, followed by Kandym in 2011, when their combined output is set to reach 0.8 bn cfd.

The two remaining fields are not likely to add much to this total. Meanwhile, output from

Uzbekistan’s mature fields is declining. The best the country can hope for appears to be a small

increase by 2015, to 5.6 bn cfd.

Output for the region is forecast as follows:

(bn cfd)

2007

Turkmenistan 6.5

Uzbekistan 5.4

Kazakhstan 2.8

Azerbaijan 0.8

Others 0.1

Total 15.6

2015

Turkmenistan 11.5

Uzbekistan 5.6

Kazakhstan 5.6

Azerbaijan 1.6

Others 0.1

Total 24.4


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Export Forecast

Part of the increases in production shown above will be absorbed domestically. The rest will go

mainly to Russia or–to a lesser extent–China, leaving little or none for the EU other than that

exported via Russia. Net exports are forecast as follows:

(bn cfd)

2007

Turkmenistan 4.5

Uzbekistan 1.2

Kazakhstan 0.8

Azerbaijan (0.2)

Others (0.2)

Total 6.1

2015

Turkmenistan 8.0

Uzbekistan 0.6

Kazakhstan 2.6

Azerbaijan 0.2

Others (0.4)

Total 11.0

Documents

Central Asia/Trans-Caucasus: Outlook for Exportsonlinelibrary.wiley.com/journal/10.1111/(ISSN)1744-7992/homepage/… · Table 15 Russia/Central Asia/Trans-Caucasus: Net Oil Trade,