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Kazakhstan: Deal Brings Astana Closer To Europe's Gas Markets

Kazakhstan has gained access to Europe for its natural-gas exports through a joint venture agreement with Russia. The benefit, which has long been sought by neighboring Turkmenistan, also gives Russia a valuable interest in Kazakhstan.

Boston, 24 May 2002 (RFE/RL) -- Russia seems to have rewarded Kazakhstan for its Caspian cooperation, but it is hard to say which country got the better of the deal.

After years of negotiation, Kazakhstan agreed in May to joint development with Russia of three offshore oil fields in the northern Caspian. The decision cleared the way for a Caspian division accord signed by Presidents Vladimir Putin and Nursultan Nazarbaev on 13 May in Moscow.

In mid-May, the industry newsletter "Petroleum Argus" reported that the agreement on the Kurmangazy, Tsentralnoye, and Khvalynskoye oil fields may be a setback for the Russian oil giant LUKoil. The company had already invested $300 million in the offshore area and expected huge returns from the fields. The "Asia Times" this week estimated LUKoil's investment at $800 million.

It is not yet certain that LUKoil will be the Russian partner in the joint development with Kazakhstan, although it has been assured that its investment will be repaid, "Argus" said. Whatever the effect on LUKoil, the bargain seems to be one of several moves that will boost Russia's stake in Kazakhstan's rich energy sector.

Nazarbaev has said he now expects a long-term deal on the transit of Kazakh oil through Russian pipelines. Reports vary on whether the pact will be for 10 or 15 years. Until now, transit agreements have been reached only on a year-to-year basis. Kazakhstan exports oil through Russia by a main pipeline to Samara and a second route across the Caspian to Makhachkala, as well as the Caspian Pipeline Consortium's connection to Novorossiisk.

A long-term agreement would give Astana security. The accord has been held up since November in wrangling over tariffs and volumes. But the Caspian settlement may be a key to closing the deal.

Perhaps just as important, the division seems to have led to an agreement that is supposed to give Kazakhstan a chance to sell its gas directly to Europe, an opportunity that has long been sought by neighboring Turkmenistan. The break for Kazakhstan, which is closer to Russia and its pipeline network, may demonstrate the benefits of giving Moscow what it wants.

Although Kazakhstan's oil production has grown dramatically, its gas output has stayed small. The vast country has no national pipeline network, leaving its population centers isolated from its sources of gas supply.

The country produced only 8 billion cubic meters of gas in 2001, although reports suggest the figure could rise to 14 billion this year. It is still only a fraction of the volumes produced by Turkmenistan and Uzbekistan, and only about 1.5 percent of Russian output.

But the situation will change as Kazakhstan taps giant Caspian offshore fields like Kashagan for both oil and associated gas. The government believes that gas production will jump to between 45 billion and 50 billion cubic meters by 2015, 29 to 34 billion of which will be available for export, Reuters reported.

Russia seems to have taken the opportunity of recent bargaining to lock up a deal for Kazakhstan's gas trade. On 20 May, Russia and Kazakhstan signed an agreement for a new joint venture KazRosGaz, made up of the Kazakh gas monopoly with 50 percent, Russia's Gazprom with 30 percent, and state-owned Rosneft with 20 percent.

Interfax reported that the venture will have a sweeping mandate "to develop a joint balance for supplies and transit of Russian and Kazakh gas," as well as exploration and transport to world markets. Kazakh officials have been thrilled about the export access.

KazMunaiGaz President Lyazzat Kiinov said, "For us this will have enormous significance, because we have had practically no access to send our gas to Europe. Russia has bought all the gas from us itself, after which the Russians did with it what they wanted."

The terms of transit and other unsettled matters leave it uncertain how much the situation will change. But some factors may favor Kazakhstan. For example, the European Union's energy sector reforms will compel member nations to reduce their reliance on single suppliers like Russia. Moscow has been griping about the requirements but now seems to be hedging its bets with a possible offering of Kazakh gas.

After two years, Russia also seems no closer to a long-term gas pact with Turkmenistan, whose President Saparmurat Niyazov seeks ever-higher prices while resisting Moscow's formula for a Caspian division deal.

Niyazov may have played his cards badly by not backing Russia's plan in exchange for European access for its own gas exports and a long-term transit accord. The country is downstream from Kazakhstan on the Central Asia-Center pipeline, which Russia effectively controls.

Instead, Russia has left Turkmenistan with Ukraine as its main gas customer, with its spotty record of payment for gas. For the record, Kazakhstan says that it looks forward to handling up to 80 billion cubic meters of Turkmen gas on the Central Asia-Center pipeline, once Niyazov and Russia reach a deal. Kazakhstan has already invested $170 million in keeping its section of the Soviet-era line from falling apart.

But in reality, Kazakhstan is a step closer to Europe, giving it a priority as its gas output grows. And Russia remains several steps closer with a valuable foothold in Kazakhstan.