Russia: CPC Down; Kazakhstan-China Pipeline To Go

Via Stratfor, a detailed analysis of the implications arising from Russia increasing its share in the Caspian Pipeline Consortium (CPC) to 31 percent after buying a 7 percent stake from Oman. The Kremlin has now reached its objective in controlling a key east-west oil pipeline in Central Asia, giving Russia even greater leverage in tampering with Caspian crude exports to the West in accordance with the Russian geopolitical agenda. With CPC under its belt, Moscow’s eyes will now turn to the only remaining Central Asian pipeline outside its control: the Kazakhstan-China pipeline.  As the article notes

“…Kommersant sources claim that Russia bought the stake from Oman for around $350 million — about half the starting price that Hungarian energy group MOL had offered. The hefty discount that Russia apparently got on this deal was in all likelihood thanks to a number of political and energy levers Moscow used to gain the approval of Nazarbayev and the other consortium members.

Russia’s acquisition of the Omani stake in CPC is no ordinary business deal. The negotiations with Oman over this stake were rooted in Russia’s core geopolitical interest in monopolizing Kazakhstan’s export routes and bullying Astana’s energy clients, in yet another move to consolidate Russia’s control in its Central Asian periphery. The 935-mile CPC pipeline runs from the Tengiz oil field in Kazakhstan to the Russian Black Sea port of Novorossiysk, carrying around 700,000 barrels per day (bpd) of oil from the Caspian Sea region across the Caucasus to the global crude market. There are plans for the pipeline’s capacity to be expanded to 1.3 million bpd by 2010.

Chart - CPC Ownership

The CPC pipeline has been a challenge for the Russians since it was first commissioned in 2001. Prior to the deal with Oman, the consortium was run by three governments (Russia, Kazakhstan and Oman) and 10 companies representing seven countries, including U.S. energy giant Chevron.

The Russians previously tried a number of heavy-handed tactics to cripple the consortium so they could then swoop in and take full possession of the largely U.S.-funded and privately owned pipeline. Those tactics included having Transneft try to drive the consortium into bankruptcy by charging millions of dollars in transit fees and back taxes, halting Russian crude shipments to the pipeline and delaying the CPC’s expansion plans for years.

All these moves backfired, however, and pushed Astana closer to entertaining energy deals with the West and especially the Chinese, who have long been yearning to get a strong energy foothold in Central Asia. The more Russia bullied, the less Kazakhstan felt compelled to maintain a commitment to Soviet-era pipelines and railroads to ship its crude, and the more interested it became in trying to strike a balance among Russia, China and the West.

Though Kazakhstan has notably increased its energy independence in recent years, it still has not been able to break free from Moscow, particularly when it has much to fear from the Russian Federal Security Service’s strong presence in the country. Now that Oman and Russia have struck this deal over CPC, Russia has a lot more leverage in influencing how Astana manages its future energy relations.

Russia previously held a 24 percent stake in the consortium, which was not enough for the Kremlin to use the pipeline as a tool in its foreign policy arsenal. According to Russian law, a stake of at least 25 percent is required to veto management decisions of any company or consortium. Now that it holds a 31 percent stake, the Kremlin can control the CPC’s actions and block any decisions made by the consortium that go against Russian interests. This means Russia can raise transit fees and block crude shipments at will in accordance with its political preference while consolidating control over Western-extracted oil from Kazakh oilfields.

In addition, Russia now has more leverage over Russian oil producers who have opted to load more of their crude into the CPC pipeline as opposed to the Atyrau-Samara pipeline, which is linked to Russia’s state-owned oil transport monopoly Transneft to save on transit fees. Transneft will be much relieved to see Russia gain a bigger chunk of the CPC, and thus more control over the pipeline’s pricing to direct which way Kazakh crude will flow.

With the CPC locked down, Russia will now be freed up to target the last remaining Central Asian pipeline that has escaped the Kremlin’s grip: the Kazakhstan-China pipeline. China has watched carefully as Kazakh-Russian ties have eroded since the fall of the Soviet Union. Planning its moves into Central Asia carefully, China has built up a strong relationship with Astana and has signed a series of deals to fund new roads, railroads, and oil extraction and production. Most importantly, energy-hungry China is in the process of building a 200,000 bpd pipeline that runs across the entire width of Kazakhstan, and it also plans to construct a natural gas pipeline from Kazakhstan to Turkmenistan.

Turkish-Kazakh pipeline map

The last thing Russia wants to see is some 2 million bpd of crude and 70 billion cubic meters of natural gas per year diverted away from Russian-controlled energy networks. Not only would such an outcome deal a heavy blow to the Russian economy, it would also constrain Russia in supplying European energy contracts — an area key to Russia’s ability to bully Europe on political matters — and seriously undermine Russia’s influence in Central Asia.

The Chinese, therefore, have much to be concerned about. They can expect to be hit with all the usual Russian pressure tactics, including delays on construction, monopolizing consortiums and pressure on Astana to hike expenses. Many of these tactics are already in play, but the geopolitical balance is now tilting more strongly in Moscow’s favor. With the CPC deal, Russia has taken care of a huge obstacle in monopolizing Kazakhstan’s energy export options to the West. Russia’s attention can now be expected to turn eastward to China’s energy networks in Central Asia.”

This entry was posted on Thursday, November 6th, 2008 at 4:48 am and is filed under China, Kazakhstan, Oman, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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