Individual Democratic Institutions Research Fellowships 1994-1996

The research reports reproduced here are the responsibility of the individual authors. Their reproduction does not imply any form of official or unofficial endorsement by NATO. The reports are offered in unedited form, as presented by their authors, with a view to make their findings available to a wide audience. Kazakhstan: Development Trends and Security Implications Dmitri Vertkin [Back to Index] Kazakhstani Oil: the Fruits of Discontent. In discussions over the nation's future potential well-being, the problem of the management of huge oil and gas deposits around Tenghiz and Karachaganak in the Western part of Kazakhstan, and more recently in the Caspian Sea looms large. Nevertheless, the oil issue in Kazakhstan is also very important for security because, on the one hand, they are still acutely aware of the impact of the 1973 oil crisis on the world economy and, on the other, because much depends on the exploitation of these fossil fuel resources for the future of Kazakh economy and the government's capacity both to extricate the country from the current economic crisis and build a better life for future generations. If Kazakhstan exploits all its known oil and gas deposits, geologists have estimated that the aggregate output would be equal to that of Saudi Arabia, Kuwait or the United Arab Emirates. They have calculated that the amount of oil which could be extracted from the discovered oil fields alone comes to the figure of 2.7 bn tons (1). The reserves found by geologists near the Kazakh coast of the Caspian Sea amount to 25 million tons (2), making these reserves the equivalent of three times the reserves in Tenghize. The future prospects are almost limitless. Currently, the number of projects involved in oil exploitation has risen to a dozen. Some of these projects are both imaginative and immense, both in their capital cost and scale of engineering, as, for instance, in the building of pipe lines to the Indian Ocean or the Far East, bringing Kazakh oil closer to Japan and other Far East consumers. Within the Republic there are 14 prospective oil and gas deposits distributed throughout the country, making Kazakhstan second only to the Russian Federation in energy sources among the FSU Republics. (3) Yet, despite these huge reserves, it has still to become independent in energy supply. For example, during the last four years, the supply of extracted oil fell from 27 million tons in 1991 to 17 million in 1994 (4). At this volume of output, the Republic's requirements cannot currently be met from the production capacities of its three oil-refineries, let alone consider exports.

According to the government's future oil programme, by the end of 1995 the annual figure of oil extraction should get back to 27 million tons a year, increasing to 45 million tons annually by the year 2000 (5). The government hopes that the huge deal worth 20 billion US dollars signed with Chevron Oil, plus revived activity by Russian oilmen in the region who had become to realise that they were losing control over this important branch of their industry, would help to realise this plan. The political and technical difficulties of transporting oil from Kazakhstan to other parts of the world are manifestly the most important ones. The Russian Federation was, at first, very reluctant to let Kazakhstan use the existing pipeline that passed through its territory. Initially, the Russian government introduced special quotas on Kazakhstan oil passing through the pipeline, even though it had the technical capacity to accommodate Kazakhstan's oil exports requirements in the near term. Russia clearly views Kazakhstan as a competitor in the world's oil market, and although negotiations over the pipeline quotas continue, the Russian policy position remains unclear. The Russian Federation nowadays only manages to extract and, as a result, to export, a smaller volume of oil than before. Had Russia been unable to sell oil because of the market competition with Kazakhstan, the situation could have been more easily explained, but this is not the case. The Kazakhstani government and official representatives of the joint venture Tenghizchevroil asked the Russian Oil and Gas Ministry to enlarge the quota from 2 million to 6 million tons per year (6), but there is still no satisfactory response. The official explanation for the low quota is that the existing pipe line cannot cope with a greater amount of oil passing through it and that the quality of Tenghiz crude is so bad that it intensifies the corrosion of the equipment. Experts from Tenghizchevroil, after a thorough investigation, came to the conclusion, however, that the capacity of the pipe line could be extended, without any major problems, and well beyond the limits imposed by Russia. Some analysts say that Moscow's stance is largely political, and that Russia is just trying to make it clear to all the parties involved that it would never allow its traditional grip on the region to be lost, reserving the right to be at least primarily consulted on nearly all the issues concerning Caspian hydrocarbon projects. If this is the case, the Russian reaction to the consistent and carefully calculated demands of both the Kazakhstani government and Chevron officials, is far from understandable. It would seem both logical and in Russia's interests to assist the former republics of the USSR as much as possible as regards the Caspian projects, because of future competition with the Persian Gulf states at the time when, according to some estimates, the world demand for oil will be growing at the rate of 1 million barrels a day per year. The Russians have also tended to raise objections to the Central Asian governments' desire to exploit the Caspian sea resources independently, treating the Caspian like any other sea in the world where a number of rights are automatically accorded to the littoral states. Instead, the Russians have tried to challenge the legal status of the Caspian, basically arguing that it is not a proper sea, but a lake, and in the process resurrecting a long-forgotten debate among geographers, geologists and politicians. They also insist on invoking the Soviet-Iranian Treaty of March 25, 1940, according to which the Caspian Sea was regarded as an object of common use by the surrounding countries, open for their utilisation n an equal basis. (7) The emergence of a number of new countries in the region with their sovereign rights, according to the Russian position, does not change the legal status of the Caspian and should not prevent the countries involved from the strict observance of international law. The official Russian objections are, first of all, translated into environmental concerns, such as the preservation of sturgeon stocks, regulations governing the contamination of the sea waters and atmospheric pollution, etc. But in reality, Russia tries to continue to control all the major operations in the region, and insists on preserving the existing regime of the Caspian whereby no Caspian state has any exclusive rights for any resources and that all the states are free to undertake any activity in the whole of the Caspian, at least before the consensus on the change of the Caspian legal status has been reached. Both Kazakhstan and Turkmenistan are very far from happy with this position. In their opinion, it would be better to have a normal subdivision of the Caspian into exclusive economic zones and international boundaries because, in practical terms, if the joint-use arrangement continues, it could mean constant vetoes and effectively block any more or less radical development of the region, including the exploitation of oil deposits. This would happen at the time when both Kazakhstan and Turkmenistan are in a desperate need of hard currency which could have been earned from oil exports. The collapse of the USSR in December 1991, the declaration of sovereignty by Azerbaidjan, Kazakhstan, Turkmenistan and Russia created a totally new geopolitical situation in the region. Consequently, the need became obvious, at least to some of the states, to determine a new legal status of the Caspian sea in the light of interests of all the coastal states. The official position of Kazakhstan, as reported by Mr. V.Gizzatov, a Deputy Foreign Minister of Kazakhstan at 'The Caspian Oil and Caviar Conference' in London on 23-25 January, 1995, was that, in compliance with the norms of the international law, the Caspian sea should be divided into appropriate zones (territorial waters and exclusive economic zones), to which the sovereignty of the coastal states is applied. This would also govern their sovereign rights for the purpose of exploring and exploiting, conserving and managing the natural resources of the waters adjacent to the sea-bed and its subsoil. Taking into account that the maximum width of the Caspian does not exceed 200 nautical miles, the external borders of exclusive economic zones could pass through the middle line, equidistant from a coastal state's shoreline. The edges of the zones would set up from the point at the end of the land border in the straight line perpendicular to the above mentioned mid-line of the sea (8).

Apart from that, Kazakhstan came forward with a proposal for arrangements between the coastal states on the de-militarisation of the Caspian Sea region, taking into account the fact that in the past the countries of the region have repeatedly demonstrated their commitment to the principles of peace, good will and mutually beneficial co-operation. It would also be practical for the governments involved to reach full accord on the environmental issues, because the Caspian eco-system is so unique and fragile and it would most profitably be done on the basis of equal co-operation, without the intervention of the notorious 'elder brother' syndrome of the past. Building a new pipeline from Western Kazakhstan presents a very difficult and rather distant prospect. Should another pipeline be built via the Russian Federation? or via Iran, the Caucuses and Turkey? The strategic decision which was to be made would have a very serious impact not only on Kazakhstan's economy, but also on the geo-strategic situation in the region in general. On the Mediterranean coast Turkey has huge facilities which were built in anticipation of Iraqi oil, but the economic sanctions imposed upon Iraq are still in progress and nobody knows when they are going to be abolished. Turkey traditionally considers itself to be a bridge between Asia and Europe and the fact that the country is clearly fighting for influence in the Central Asian region has attracted followers among their Turkic brothers and added to the growing support for the Turkish route in Kazakhstan. According to the Turkish estimates, Kazakhstan has a very large export potential of anything between 130,000 and 480,000 barrels per day by 2002. Turkey will ask for only 20 million tons of oil per year in return for transporting Kazakh oil (9). Apart from that, Turkey itself is a potentially huge consumer of gas, so the whole deal may become increasingly profitable for Kazakhstan in future. Turkey is also a sufficiently developed country which enjoys relative internal stability and is willing to give financial support with the capability of providing the necessary security guarantees for the safe transportation. Thus Turkey is trying hard to persuade Kazakhstan put the pipeline through Turkish territory, and is even prepared to accept the oil directly from the tankers on the Black Sea coast. There could be an alternative by way of the European coast of Turkey, without passing through the Bosphorous. As far as the Bosphorous itself is concerned, the Turkish government in July 1994 imposed tough restrictions on the heavy tankers using it because of the growing damage to the environment. To say that Iran is particularly happy about the presence of Western monopolies in the Caspian would be an exaggeration. Teheran openly regards it is a threat to its security. But, again, when it comes to the oil transportation, the interests of Iran and Russia are completely polarised. The Iranian government is clearly interested in co-operation with the countries of the former Soviet Union in the field of the oil transportation. Kazakhstan is evidently the primary target of this sort of Iranian interest, not only because, according to the Iranian estimates, Kazakhstan's reserves comprise 80 trillion cubic feet of gas and 20b tons of oil, but also due to the possible increase of influence in Central Asia. This is already on the increase since the disintegration of the USSR and the growth of Muslim identity is seen as an important factor in the region. Basically, Iran offers both a short- and a long-term solution to the oil transportation problem, the first of which consists of using the territory of Turkmenistan as well as the existing pipe lines on Iranian territory. The attraction of this option primarily lies in the fact that the bulk of the infrastructure is already in place and it would take less than two years and about 1 billion dollars to put into operation the necessary 200 km of the line.(10) As to the long-term solution, Iran in future would be willing to receive Kazakhstani and Turkmenistani oil directly via the Caspian Sea for onward transfer to the Gulf and the existing Iranian refineries. Iran has also suggested that Kazakhstan could use the Turkmenistani part of the infrastructure. As far as the official American position is concerned, all the options are more or less acceptable but one: the transportation of the oil across Iranian territory. Indeed, any co-operation of American companies with Iran, let alone any approval from the US government, could hardly even be discussed. Obviously, the United States does not view the situation in the region in a vacuum and any potential destabilisation of the situation, by which Iran could benefit, would add to American regional security concerns. Iran is openly regarded as a threat to regional stability, an inspirational force behind world terrorism and one of the militant Muslim regimes from which Islamic fundamentalism could start to spread in the near future. Glen Rase, Director of International Policy of the US State Department, at a conference in London in February 1995 made it absolutely clear that Iran did not even figure in American State Department's thinking, except to the extent that any Iranian participation in oil and gas projects in the Caspian region was not desirable. He also added that the current US. law does not bar US. firms from doing business with Iran, although it does place limits on some transactions, particularly those that might have military benefits for Iran (11). At the beginning of May 1995, President Clinton came forward with a pledge to the world community to impose even tougher sanctions against Iran which, in real terms, could lead to an overall economic blockade. Although the President's address was given the cold shoulder by both Russia and the European Community, his move speaks for itself, and any prospective participation of Iran in the Caspian Sea projects in future is very unlikely, unless Central Asian governments chose, for some reason, to reject American assistance and try to integrate fully into the 'militant section' of the Muslim community.

Apart from banning Iran from acquiring any benefits from possible co-operation with the Central Asian states, the United States has positive interests in the region. Both government officials and representatives of major business corporations have repeatedly claimed that the Caspian sea countries offer an important resource for the future and see clear-cut commercial interests there. The example of Chevron's activities in Kazakhstan demonstrates the amount of support given by American government officials. The American company Chevron which was the first to break the ice of suspicion and started investing huge sums in the Tenghiz project - the 'project of the century', as it is called in Kazakhstan. The rivalry between Russia, Turkey and Iran over the oil transportation routes from the Caspian sea region has started to manifest itself, even to the extent of outright military hostilities. Thus, the Russian operations in Chechnya is looked upon by some analysts as an attempt either to secure the option of using the infra-structure of the Chechenian oil facilities or, alternatively, to make sure that the infra-structure is not used by a hostile, or just unreliable, party for purposes largely contrary to Russian will, i.e. the Caspian states' preference for the pipe line route via the Caucuses and Turkey. On the other hand, the Turkish army's activity in the North of Iraq against Kurdish gunmen has similar implications: to secure its own section of the pipeline in view of a possible participation in the Caspian sea projects. It is interesting that both operations initially failed to arouse any strong reaction in the West whose companies are actively involved in the Caspian Sea developments. Only when it became evident that the operations were not going to reach their objectives very quickly did the Western governments start to react in view of the rising number of casualties among the civilian population. Chevron Oil has already invested about 1 billion US dollars in the Tenghiz project. At the end of 1994, Chevron Oil also became very interested in the Caspian Sea oil. At the Kazakh coast, experts say, there could be 25 bn tons of oil. Although the transportation problem is as difficult as in the case of Tenghiz, and many different and ambitious projects have been recently worked out, the Americans realise that the deposit could also bring further influence in the region and a considerable amount of petrodollars. At the end of January 1995, a major decision was taken by Kazakhstani and Russian governments. A new pipe line is to be built between the Russian cities of Astrakhan (North of the Caspian Sea ) and Novorossiisk ( on the Black Sea ), with a financial contribution from Oman. This is a constructive step in the re-integration process between Kazakhstan and Russia, which could, at the same time, eliminate the difficulties concerning both the transportation of oil via the Caucuses and the difficult option of using the existing (or, probably, now non- existing ) pipe-line in Chechnya. At the same time, this decision seems to have placated American concerns over a possible Iranian participation in the deal which, in May 1995, presented an extremely unlikely prospect. Chevron was also keen to participate in the project, but when it turned out that they were not allowed to play an equal role in the deal in spite of the original personal support from Viktor Chernomyrdin, the Russian Prime Minister, the Americans had to pull out, or at least pretended to do so. The Wall Street Journal on the 13th of February, 1995 published an article under the title 'Chevron Cuts Investment In Kazakhstan Oil fields' in which is reported that Chevron had to cut its major investment for the development of Tenghiz oil deposits by 90 per cent for 1995. In monetary terms this move could be translated into a budget reduction from 500 million to 50 million US dollars for the development of the project. Nevertheless, the company is still planning to invest 20 bn US dollars over the next 40 years. At present, Chevron produces about 65,000 barrels a day - approximately the same amount that Tenghiz used to yield in Soviet times - in spite of the huge Chevron investment made before 1995. According to the initial plan, Chevron was to produce up to 130,000 barrels a day by the end of 1994, and to export, together with Kazakhstani partners, up to 260,000 barrels a day by 1998 (12). The main problem which Chevron faced at the beginning of 1995 at Tenghiz, which, according to some estimates, has up to 9 billion barrels of oil, was that of transportation from Western Kazakhstan to the world market. The project of the new pipe line, with the participation of Oman, made the whole situation all the more difficult, because, on the one hand, the attitude of the 'oil-producing community' in the West to the Omanis participation in the deal left much to be desired. On the other hand, Chevron was very eager to take part in the project, making it absolutely clear that it was going to finance the construction of the pipe line - but was, eventually rejected. It could hardly have been otherwise because the terms, introduced largely by Russia, and consisting in giving Chevron Oil 25 per cent of so called 'class B' shares without the equal voting rights, were unsatisfactory, especially taking into account the fact that the Omanis, after paying just 35m dollars for the initial costs, acquired an equity share in the pipe line which could be potentially worth two hundred times more in tariffs. (13). There is still a prospect of increasing Chevron's investment in 1995 if the Russian authorities allow increases in the transportation quotas for Kazakhstan oil, and, perhaps, soften their position as regards the company's equal participation in the Caspian Pipeline Consortium (CPC). In February 1995, the commercial director of Chevron Oil in Alma-Ata, Bruce Kososki, told Interfax that Chevron did not believe that the Joint Venture Tenghizchevroil was having insurmountable problems. He pointed out that all the investment for 1995 would fully correspond to the initial plan. At the same time he noticed that Chevron would still be interested in participating in the CPC calling new Chevron proposals (financing of 50% of the whole project in return for 25% of the shares plus a more realistic approach to the Omani participation in the project) good and fair. (14) One of the most difficult options for Kazakhstani oil transportation in May 1995 was the question of the route via the territory of the People's Republic of China. In a private exchange, one of the senior government officials did not rule out the Chinese option saying that the existing infra-structure on Chinese soil had been in place for a long time, and the only missing link through Xingxian Province did not exceed 200 kilometres. The Chinese are obviously interested, and have expressed a willingness to build the pipeline itself without drawing any capital from abroad. Different aspects of this option are still under discussion but, should they succeed, the oil-producing world is in for one of the major surprises as far as 'the project of the century' is concerned.