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Kazakhstan: Nazarbaev To Seek Balance Between U.S., Russia On Oil

Boston, 7 December 1999 (RFE/RL) -- Just weeks after the signing of agreements on the Baku-Ceyhan pipeline, Kazakhstan President Nursultan Nazarbaev is expected to come under pressure this month to make the project work.

Nazarbaev's planned visit to the United States starting December 17 will give U.S. officials another chance to make the case for the Caspian export plan, despite Kazakhstan's apparent reluctance to help.

Although Nazarbaev participated in the Istanbul signing ceremonies for the Baku-Ceyhan agreements on November 18 at the OSCE summit, reports have since suggested that he was not comfortable with the role that he was asked to play.

Less than a week after the meeting, Nazarbaev was quoted as saying that the Baku-Ceyhan project "cannot take place without oil from Kazakhstan," and that the 20 million tons of oil that he had committed to the pipeline did not even exist yet. The Russian news agency Interfax cited doubts about the process that led to Nazarbaev's promise in Istanbul.

"The fight was big and they put a lot of pressure on us," Nazarbaev is quoted as saying.

The problem is that the pipeline to be built by 2004 is designed to carry 1 million barrels of oil per day from the offshore development of the Azerbaijan International Operating Company. But the peak volumes from the AIOC consortium will reach only 800,000 barrels per day sometime after 2005.

Returns from other ventures in Azerbaijan's offshore sector have primarily been gas, forcing U.S. officials to turn toward Turkmenistan and Kazakhstan for added oil volumes to make the plan work. Because oil output in gas-rich Turkmenistan remains modest, attention has focused on Kazakhstan, where there are hopes that the Caspian shelf will yield volumes even greater than the giant oilfield at Tengiz.

But with winter closing in, the first drilling in the shelf area remains incomplete. On Friday, Nazarbaev voiced hope that the Offshore Kazakhstan International Operating Company will strike oil before the end of the month. But the consortium known as OKIOC plans to stop work for the winter as soon as it makes its first finding, raising questions about whether the size of the deposit will be known.

In any case, oil from the OKIOC venture would not be available until after 2005, said Julia Nanay, director of Petroleum Finance Company in Washington. The timing could be a further problem for the schedule of Baku-Ceyhan.

The uncertainties highlight the challenges that the plan continues to face, despite the breakthrough in Istanbul last month. But the hurdles of oil production may be secondary to the political problems for securing a stronger commitment from Kazakhstan.

Although it has attracted more foreign investment than any other part of the former Soviet Union since independence, Kazakhstan continues to struggle with fragile finances since the Russian ruble collapse of August 1998. Nazarbaev sees his country's future as inevitably linked to Russia's fortunes, despite the $8 billion in investment that has poured into Kazakhstan from the West. Last week, officials expressed concern that foreign investment will drop to $960 million this year from over $1 billion in 1998.

Since October, Nazarbaev has also traveled to both Iran and China in an effort to balance his ties to the United States. Last month in China, officials of both countries insisted that Beijing has not abandoned plans for a 2,800-kilometer oil line from Kazakhstan to the east, despite conceding earlier this year that the project had been shelved. Some European oil companies like ENI of Italy have made a case for exporting Kazakhstan's oil through Iran. The situation is delicate for Nazarbaev. He feels that he cannot afford to spurn any outlet for exports. At the same time, he cannot be seen by prospective transit partners as leaning too heavily toward any one route.

At the moment, Kazakhstan can count on only two pipelines, both involving Russia. The first is its Soviet-era link to the Russian pipeline system. The second is the Caspian Pipeline Consortium's line now under construction from Tengiz to the port of Novorossiysk.

If Kazakhstan has extra oil after its commitments to both those routes are fulfilled, it is likely to see a political benefit to using Baku-Ceyhan. Western oil companies in Kazakhstan must also be convinced that the route is economic for the added distance of crossing the Caspian.

While Russia holds geographic dominance, Nazarbaev knows that a major source of Kazakhstan's investment has been the United States. He is likely to continue balancing both countries' wishes, rather than risk alienating either one.

U.S. pressure may induce him to declare his interests sooner and more openly than he would like. But it will ultimately be up to Nazarbaev to keep the benefits rolling into Kazakhstan and to keep its oil flowing out. Finding oil in the Caspian is only the first test.