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China Russia Pipeline

In: Historical Events

Submitted By loveleen
Words 2050
Pages 9
Just 20 years ago, Russia and the energy-rich countries of Central Asia, such as Kazakhstan and Turkmenistan, and Azerbaijan in the South Caucasus, were all united, as parts of the Soviet Union.
Moscow would have had unfettered access to their oil and gas reserves.

But the Central Asian states realise one of their greatest strategic strengths as independent countries is playing off the big global powers now scrambling to buy their precious energy supplies.

So, Moscow now finds itself in fierce competition with the big players: China, the US and Europe.

"Russia's overall position in Central Asia is shrinking," says Mikhail Kroutikhin, editor-in-chief of the Russian Energy Weekly.

"Russia is in retreat and the Chinese are jumping on the big opportunities."

New 'Great Game'?
Rivalry in the region is often compared with the 19th Century British-Russian imperial rivalry nicknamed the "Great Game".

China's president officially opened the Turkmenistan-China gas pipeline
The past year has seen some key moments in the new energy "Great Game" in Central Asia, with the first pipelines being commissioned that take oil and gas east to China, instead of north and west.

From Kazakhstan, 200,000 barrels of oil are now being pumped every day across the border into the western Chinese province of Xinjiang, and there are plans to double this pipeline's capacity.

From Turkmenistan, a pipeline carrying gas to China via Uzbekistan and Kazakhstan was opened last December by the Chinese President Hu Jintao. It could satisfy around half of China's current demand by the time it reaches full capacity in 2013.

Turkmenistan's President Kurbanguly Berdymukhamedov called the deal "political" as well as commercial and heaped praise on China's "wise policy", saying it had become "one of the key guarantors of global security".

Turkmen tensions
With this agreement, Russia's stranglehold on supplies from Turkmenistan, which has the fourth-largest reserves of gas in the world, was broken.

And while China and its new Central Asian energy partners were locking themselves in an ever-warmer embrace, Moscow found itself at loggerheads with its erstwhile client state.

Having agreed two years ago to pay a much higher price for Turkmen gas, to ensure it remained a loyal supplier, the Russians suddenly shut the taps 12 months ago, causing the pipeline to explode.

Analysts believe Moscow had decided it did not need the gas because of the downturn in global demand and prices during the economic crisis.

Even now it is only taking a third of what it was expected to buy, angering the Turkmen government and pushing it further into the arms of the Chinese.

As regards Russia's role in the region, it has taken a step back in energy," says Chris Weafer, chief strategist at Uralsib Bank in Moscow.

He believes it was not just the global economic crisis that prompted this.

It was also, he says, because Europeans searching for gas supplies for their planned Nabucco pipeline were offering much higher prices for Central Asian gas.

"The game changed because of Nabucco. Up to 2006, Russia could buy cheap gas from Turkmenistan, Uzbekistan and Kazakhstan - $50 for 1,000 cubic metres and then sell it to Europe for $250.

"But from the start of 2008, Russia had to agree to pay European prices - $300 per 1,000 cubic metres."

"Gazprom was not making any money out of it. So the political will to be involved has abated. Russia has let the Chinese into Central Asia."

And that is something Moscow may ultimately come to regret, because it also wants to be a major supplier of oil and gas to China.

[pic]
With China already heavily investing in the two most important Central Asian energy suppliers, Turkmenistan and Kazakhstan, Russia may struggle to compete.

China flexes its muscles
Moscow has had agreements with Beijing to build a gas pipeline into China since 2002, but the two sides have been haggling ever since over the price of the gas supplies.

Analysts say a deal may finally have been done - on the condition that the gas comes from a field and pipeline that are exclusively for Chinese use.

Officials also hope the first oil pipeline between the two countries will be completed by the end of this year.

But some analysts question whether Russia will have sufficient reserves to supply the gas pipeline, given the expected decline in its production over the next 20 years and the lack of investment in new fields since the collapse of the Soviet Union in 1991.

"It [the pipeline to China] will have to tap reserves already going to Europe," says Mikhail Kroutikhin.

"It is not economic, but Prime Minister Putin wants it to be built."

South Stream
Another project which Mr Putin is determined should go ahead is Russia's South Stream gas pipeline, across the Black Sea and into the heart of the European Union.

The rivalry between this and Europe's alternative plan - the Nabucco pipeline - is one of the most intense in the Caspian Sea region.

The Europeans, who want to break free from their growing dependence on Russian energy supplies, desperately need supplies from the region to make the Nabucco pipeline viable.

And the Russians are trying to thwart this.

One key battleground is Azerbaijan, which has yet to declare whether it will feed Nabucco with its gas. Its decision is critical.

Right now there's major pipeline battle going on – one that will have a profound impact on the future of American energy production. And I'm not talking about the Keystone Pipeline. In fact, this underreported story is happening in a place that few Americans energy investors would be able to locate on a world map. But what happens there will have a real impact on their investment portfolios – for the better.

You see, recent moves by Russia, Iran, and especially China have just improved U.S.-based energy prospects. That's why today we're going to focus on one country many people haven't heard much about before: Turkmenistan. And we're ready to capture some profits from it.

Land-Locked and Loaded With Fuel
These developments center on the Caspian Sea basin and the Central Asian country of Turkmenistan, in particular. The Caspian Sea is one of the two last major new sources of oil and gas on the globe. The other (the Arctic Circle) is less accessible and much costlier to develop. So this is an important oil and gas center. As you can see on the map below, the hub of the activity is just north of Iran.

Five countries land-lock the sea (the so-called "littoral," or shore, states): Iran, Russia, Azerbaijan, Kazakhstan, and Turkmenistan.

[pic]

When access to the Caspian was last the subject of a treaty in the 1940s, only two countries took part in the process – the first four current states were then all part of the Soviet Union. Much has changed. Aside from politics, the discovery of huge hydrocarbon reserves has fueled new international interest in this part of the world.
A New King in Natural Gas
Located on the eastern coast of the Caspian Sea, Turkmenistan has one of the top four reserves of conventional (i.e., free standing, not shale) natural gas in the world. Of course, if it is going to sell all this natural gas, the country needs pipeline access to the major consumer markets. And that brings the intense political nature of these matters into view.

Throughout the Soviet period, and until very recently, Russia provided that access, with a bit of creative accounting on their part. What actually happened was that Gazprom, Russia's dominant company and the largest gas outfit in the world, bought Turkmen production at a discount for local use. This would free up Russian-produced gas for export (mainly to Europe), which they sold at a higher price than the gas they had purchased. Clever, huh?

Now, the Turkmen government in Ashgabat (led by a president with an unpronounceable name – Gurbanguly Berdymukhammedov) has sought to diversify its export corridors, making the country less dependent on Moscow for its entry into the world market. Matters reached a head almost two years ago – on April 9, 2009.

On that day, an explosion rocked the major pipeline crossing Turkmenistan. This was the primary gas conduit in the entire region, and despite being inside the country, it was run by Russian Gazprom. Turkmenistan accused Gazprom and Russian engineers of purposefully creating this pipeline explosion in order to disrupt gas exports. Russian experts, in turn, blamed Turkmen negligence and the country's worn-down infrastructure. Tensions only escalated from there.

In response, Turkmenistan suspended all sales to Russia and then immediately began making earnest moves to send its gas elsewhere. The result was a huge pipeline project stretching from major fields in the eastern part of the country, across Kazakhstan and Uzbekistan, to China.

The Turkmens have also committed additional exports to neighboring Iran (despite having huge natural gas reserves of its own, the northern portion of Iran is not connected to the main fields in the south), to source a new pipeline moving through Afghanistan and Pakistan to India, while also saying they will provide volume directly to Europe.

This last ingredient has stoked the fires of politics in the region. To supply the highly desired European market, Turkmen gas must connect to pipelines in Azerbaijan, and then on to Turkey. And to do this, a new pipeline must be laid on the Caspian seabed (the Trans-Caspian Gas Pipeline, or TCGP).

Now the legal status of the Caspian, along with how the individual states can access its open waters and raw materials, has been the single biggest disagreement among the five littoral states. The proposed pipeline would connect Turkmenistan and Azerbaijan, and it has the approval of both countries, as well as support from the U.S. and the European Union.

These two countries claim they need only their own approval for a project involving only them. Yet Russia, Iran, and, now, Kazakhstan adamantly oppose the TCGP. These three argue that no pipelines should be allowed under the Caspian without the consent of all five countries that border the sea. And matters have heated up even more now that China is involved.
China Opposes the Caspian Pipeline

Late last year, Ashgabat and Beijing signed a new agreement to increase the flow of Turkmen gas to China. The new amount, to be phased in after pipeline upgrades, would reach 65 billion cubic meters a year, only slightly less than what Turkmenistan has agreed to sell Russia (68 billion annually).

The last thing China wants is for Turkmenistan to sell its gas independently to Europe. The price there is considerably higher, and that would allow Ashgabat to claim a prevailing higher rate in negotiations over prices with China. China, therefore, is now supporting the Russian-Iranian-Kazakh position on TCGP. This puts the E.U. in a difficult spot. It cannot simply entice the Turkmens with higher prices because it may well cost Ashgabat strained relations with a rising dominant trading partner (China).

Turkmenistan must also concern itself with a possible Russian naval response. The other four Caspian littoral states have the all-too-recent example of Russia's military move into neighboring Georgia on August 8, 2008, to remind them of the country's strength. For them, it is an all too recent example that could be repeated in their backyard. Turkmenistan, therefore, needs to tread carefully. This means a likely delay in supplying the European markets. It means something else, too…

A Boon for American Investors
As I noted on Friday, the prospects of exporting U.S. shale gas to the European market as liquefied natural gas is extremely promising. Europe requires new sources of natural gas in order to offset its primary energy security concern – over reliance on Russian pipeline gas. Europe had hoped to acquire some of that Caspian production. Now, the alliance between China and Russia against the TCGP makes this more difficult.

It also furthers the likelihood that Europe will be accepting accelerating steams of LNG from the U.S. as a ready alternative. This is great news here in the United States. So, thank you, Moscow and Beijing! Your gracious assistance has improved the bottom line prospects of U.S. shale gas producers, and their happy investors.

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