Via World Politics Review, an in-depth summary of the new geostrategic “Great Game” between Russia and the West over the future of Caspian and Central Asian energy resources.  As the article notes, the prize resembles a set of traditional matreshka Russian dolls: the outermost doll represents the three nations bordering the Caspian itself — Azerbaijan, Kazakhstan and Turkmenistan. In the middle of the collection is Uzbekistan, the most populous of the new Central Asian nations. The innermost doll consists of the two most easterly “Stans,” Kyrgyzstan and Tajikistan, rich in hydroelectric potential, but relatively poor in hydrocarbons.

“…As prizes go, it is certainly a tempting one. The Caspian’s 143,244 square miles and attendant coastline are estimated to contain as much as 250 billion barrels of recoverable oil, boosted by more than 200 billion barrels of potential reserves. That’s aside from up to 328 trillion cubic feet of recoverable natural gas. Since 1991, the focus of Washington’s regional policy has been the construction, wherever possible, of multiple export pipeline routes, bypassing both Russia and charter “axis of evil” member, Iran.

When the post-Soviet struggle to control Caspian and Central Asian energy began in earnest after 1991, each side had an advantage. Western energy companies had investment cash and expertise, and concentrated on convincing Azerbaijan and Kazakhstan to buy into Western development of their energy assets and the accompanying Western-oriented export routes. The Russian Federation, meanwhile, inherited the vast skein of Soviet-era oil and natural gas pipelines, most notably the Central Asia-Center natural gas pipeline system. In the subsequent tug of war with Western energy companies, the pipelines, which despite Yeltsin’s fire sale of Soviet assets remained a state monopoly under Transneft, would be be a major asset.

The USSR Collapses and the ‘Black Gold’ Rush Begins

If the December 1991 dismantling of the USSR offered undreamed of opportunities for Western governments and energy concerns, it was an unmitigated disaster for the newly emergent Caspian and Central Asian nations of the former Soviet Union. Moscow’s subsidies ceased, hyperinflation ravaged the new nations’ economies and the USSR’s artificial borders left millions of former Soviet citizens isolated from their ethnic brethren. The problem was particularly acute in Central Asia, which experienced a mass brain drain of ethnic Slavs streaming out of the region. In many cases energy and hydrological facilities that spanned new borders were left without financing for maintenance, much less improvement.

While most former Soviet apparatchiks simply attempted to ride out the storm, some among them eagerly embraced the new capitalist opportunities that the collapse of Communism offered them. None did so more successfully than the man that many Azeris would later affectionately refer to as “Baba” (“Grandpa”) — Heydar Alirza oglu Aliyev.

Azerbaijan

Azerbaijan was the first former Soviet republic off the hydrocarbon starting block, but then, it had more than a century’s lead on its competitors. In 1846, 11 years before Americans discovered oil in Pennsylvania, Azerbaijan drilled its first oil well in Bibi-Heybat. By the late 19th century, Azerbaijan contained the world’s first commercially exploited oil fields, and by 1900, was producing more than 50 percent of the world’s oil. In 1901, Baku’s oil industry was first in the world in terms of total oil extraction, producing 11.5 million tons annually when the United States produced 9.1 million tons per annum.

Perhaps most significantly, Azerbaijan scored another first when, in 1863, Russian chemist Dmitri Mendeleev first proposed the idea of an oil pipeline and developed the principles for constructing one. Fifteen years later, the world’s first oil pipeline was laid across Azerbaijan’s Apsheron peninsula — a 3-inch wide, 7.4-mile long channel for transporting oil from the Balakhani fields to refineries in Baku. By 1917, Russia had over 800 miles of pipelines.

Azeri oil remained an integral part of the USSR’s industrialization until the post-WWII era, when the relative importance of Azeri oil declined as the Soviet Union opened up new deposits in Western Siberia as well as the Volga-Ural region.

Heydar Alirza oglu Aliyev became acting president and then president of the recently independent Azerbaijan in 1993, following a 50-year career in Soviet politics. As a former Politburo and KGB insider, Aliyev knew exactly how far he could maneuver away from Yeltsin’s hardliners in developing Azerbiajan’s hydrocarbon assets. He earned his affectionate epithet from his countrymen when, in 1994, Azerbaijan signed the “contract of the century” — a $7.4 billion production-sharing agreement with Western oil companies.

The centerpiece of the contracts was a plan to develop three of Azerbaijan’s Caspian offshore fields, 75 miles south of Baku, which experts believed held 5.4 billion barrels of recoverable reserves. Two years later, Azerbaijan signed additional development contracts with Western concerns for three more of its offshore fields.

Beginning in 1997, Baku exported its “new oil” via the Baku-Novorossiisk pipeline, with Transneft charging a $15 per ton transit tariff. Baku’s export options broadened in 1999, with the opening of the 515 mile, 100,000 barrel per day (bpd) Baku-Supsa pipeline. The first Western export oil pipeline not under Russian control, the Baku-Supsa pipeline flowed westwards to Georgia’s Supsa Black Sea port. In contrast to Moscow’s greed, Tbilisi charged a relatively modest $3 per ton transit tariff.

Although he didn’t live to see it begin operations, the crown jewel of Aliyev’s foresight is the Baku-Tbilisi-Ceyhan (BTC) pipeline. The 1,092-mile, one million barrel per day (bpd) pipeline transits high-quality Azeri crude from Caspian offshore fields to Turkey’s deepwater Mediterranean terminus at Ceyhan.

The BTC consortium is headed and operated by British Petroleum, whose 30.1 percent interest is greater than the 25 percent retained by the State Oil Co. of Azerbaijan. Western concerns — including Chevron, Norway’s StatoilHydro, Italy’s Eni/Agip group, France’s Total, and the American Hess Corp. – receive a combined 75 percent of the pipeline’s revenues, the highest revenue share of any post-Soviet energy project.

From the outset Aliyev well understood that oil was independent Azerbaijan’s sole viable economic export. In explaining why his father had invited Western concerns to develop Azerbaijan’s hydrocarbon potential rather than Russian concerns, Aliyev’s son and successor as president of Azerbaijan, Ilham Aliyev, simply noted, “We used oil in order to achieve our primary goal — to become a truly free, independent state. And we have achieved this goal.”

Kazakhstan

Kazakhstan’s path to petrochemical prosperity also predated the Soviet era. By the beginning of World War I, its two developed fields had produced over 200,000 tons of oil, and by the outbreak of World War II, additional fields with more than 30 million tons of reserves had been discovered. In 1979, Soviet geologists discovered the Tengiz oil field on Kazakhstan’s Caspian Sea coast. With reserves estimated at up to 25 billion barrels and recoverable reserves estimated at 6-9 billion barrels, Tengiz is the sixth largest oil field in the world. But due to Moscow’s fixation on West Siberian oil at the time, its development would be delayed until after independence.

Kazakhstan’s sole executive since independence, Nursultan Abishuly Nazarbayev, was elected president on Dec. 1, 1991, a position he has held ever since. Fifteen days after Nazarbayev won the presidency Kazakhstan declared independence, the last of the Soviet republics to do so. Nazarbayev inherited a moribund oil industry that in the last year of the USSR had exported 7.7 million tons of oil to other Soviet republics, an amount equivalent to 5.3 days’ worth of Kazakhstan’s current output.

Recognizing that Tengiz would be the economic engine driving the post-Soviet Kazakh oil industry, Nazarbayev wasted no time in establishing the Tengizchevroil joint venture (TCO) to develop Tengiz in 1993. As in Azerbaijan, the host government held a minority share in Tengizchevroil, but Nazabayev adroitly allowed Russian companies to participate. TCVO’s major shareholders are Chevron (50 percent), ExxonMobil (25 percent), the Kazakh government’s KazMunayGas (20 percent) and Russia’s LukArco (5 percent).

Astana pursued a similar pattern in establishing the Caspian Pipeline Consortium (CPC), to construct a pipeline to transport Tengiz oil to Novorossiisk. CPC, established in 1992, underwent multiple variations on ownership and shareholders before finally settling into the current arrangement, where Russia’s Transneft owns the largest stake, 31 percent, higher than the Kazakh government’s 19 percent share. Other substantial partners include Chevron Caspian Pipeline Consortium Co., Mobil Caspian Pipeline Co. and Rosneft-Shell Caspian Ventures Ltd.. CPC now delivers 700,000 bpd of Kazakh crude to Novorossiysk, with Russian oil firms using approximately 25 percent of CPC’s capacity.

Western companies now operating in Kazakhstan include Baker Hughes, Chevron, Greenoak (Norway), Eni SPA (Italy), Exxon Movil, INPEX (Japan), ConocoPhillips, Petrom (Romania), Royal Dutch Shell and Total SA (France). Western influence has also been reflected by some of the members of Kazakhstan’s dozen-member Oil Advisory Board, which have included Vice President Dick Cheney, while he was still CEO of Dallas-based Halliburton in 1994, as well as the heads of Chevron and Texaco.

Kazakhstan’s economy is larger than those of all the other Central Asian states combined, due to the country’s vast natural resources and relative political stability. The U.S. government’s Energy Information Agency reported that in 2007, Kazakhstan produced approximately 1.45 million bpd of oil; as it consumed 250,000 bpd, Astana was able to export about 1.2 million bpd. According to the 2008 BP Statistical Energy Survey, Kazakhstan has the Caspian Sea region’s largest recoverable crude oil reserves, with proven oil reserves of 39.828 billion barrels — or 3.21 percent of the world’s reserves — and proven natural gas reserves of 1.9 trillion cubic meters.

More recently, political bickering has emerged between the Kazakh government and its foreign partners over Kazakhstan’s largest oilfield under development, the offshore Caspian Kashagan superfield. Discovered in 2000, Kashagan is the largest oil field uncovered in the last 30 years, with potential reserves estimated to be as high as 70 billion barrels.

Under terms of the 2001 North Caspian Sea Production Sharing Agreement (PSA), Italy’s Eni originally managed Kashagan in partnership with Kazakhstan’s national hydrocarbon concern, KazMunayGas, and Japan’s Inpex. Other participants include ConocoPhillips, France’s Total, ExxonMobil and Shell. Last autumn, however, the Kazakh government, citing environmental concerns and cost overruns, unilaterally renegotiated the PSA. When the dust settled in January, KazMunayGas doubled its share in Kashagan, to 16.81 percent, while its foreign consortium partners surrendered 2 percent apiece of their stake, on top of up to $5 billion penalties in compensation for lost profits due to cost overruns and significant delays in commercial production.

While Western companies felt blindsided by the move, Kazakhstan argued that the original PSA was exploitative, taking advantage of the country’s lack of funding and expertise. When asked earlier this year about Kazakhstan’s cavalier attitude towards a signed contract, a Chevron executive simply observed that his company was unlikely to get a fair hearing in a Kazakh court.

Given the size of Kazakhstan’s oil reserves, Western energy firms have adopted a “grit your teeth and bear it” philosophy, while grumbling privately about such unilateral actions. Given that Kazakhstan has now soaked up over $50 billion in foreign investment, they have little choice. All the more so since Astana has not limited its gaze to looking westwards: in 2006, Kazakhstan completed the Atasu-Alashankou section of an oil pipeline that will eventually extend from the Caspian to the Chinese border.

Turkmenistan and Uzbekistan

If Kazakhstan and Azerbaijan represent the Caspian’s oil treasury, for the U.S., Russia, the EU and China, the last glittering Caspian prize remains Turkmenistan’s vast natural gas reserves, largely off-limits from 1991 until 2006 due to the quixotic policies of “President for life” Saparmurat Ateevich Niyazov, the self-styled “Turkmenbashi” (“father of the Turkmen.”)

As in the days of the Soviet Union, Turkmenistan gas is exported through Gazprom’s Central Asia-Center pipelines to Russia. Much to Niyazov’s annoyance, in the mid-1990s, Moscow refused to export Turkmen gas to markets outside of the CIS. The policy, combined with low prices, caused Niyazov to halt gas exports in March 1997. In a pointed reminder to the Kremlin of Ashgabat’s other options, Turkmenistan opened the 124-mile Korpezhe-Kurt Kui pipeline to Iran later that year. With a potential carrying capacity of 8.4 billion cubic meters (bcm), Korpezhe-Kurt was Central Asia’s first gas export pipeline to bypass Russia.

Niyazov also broadened his diplomatic options. On his visit to the United States in April 1998, he met with both President Bill Clinton and Vice President Al Gore. Despite reports of Turkmenistan’s poor human rights record, he also managed to sign a number of energy exploration and production accords with U.S. firms, although all of them remained unrealized.

The Turkmen political landscape changed completely when Niyazov conveniently died in December 2006. Government and energy officials east and west hastened to Ashgabat to pay their last respects to Turkmenbashi and tempt his successor, Gurbangeldy Berdymukhammedov, with offers. The prize was certainly worth a few kowtows. In October, a British firm had released estimates of the natural gas reserves of two fields in eastern Turkmenistan. The Southern Yolotan-Osman superfield was estimated at an impressive six trillion cubic meters (tcm), while the Yashlar deposit was estimated to hold 700 billion cubic meters.

Unlike Turkmenistan, Uzbekistan consumes a high percentage of its gas production for domestic use at heavily subsidized rates. Indigenous annual consumption over the past decade averaged 48.4 bcm, or nearly 80 percent of the country’s production, leaving only 12 bcm for export. Like its southern neighbor, it is totally reliant on the Gazprom’s Central Asia-Center pipelines for exports. Given the country’s geographical isolation, Uzbekistan’s natural gas reserves, estimated in 2006 at 1.798 trillion cubic meters, will remain offline to foreign investors for the foreseeable future.

Central Asian natural gas remains of critical importance for Russia. As Gazprom Deputy Chief Executive Officer Valery Golubev said, “The main aspects of our work are the purchase and export of gas to Europe. Turkmenistan provides 63.7 percent of (Gazprom’s) gas bought in Central Asia.” He added that Gazprom’s 2007 purchases totaled nearly 67 bcm. But the West, too, is eager to tap into Turkmen reserves, proposing a Trans-Caspian Pipeline (TCP) laid on the Caspian seabed between Turkmenbashi and Baku, a project that Moscow has strongly opposed since it was first broached.

As a counter, Gazprom is proposing an upgrade of the Central Asia-Center pipeline, which, when complete, will double its annual carrying capacity from its current rate of 45-52 bcm to 75-90 bcm in 2010, eventually rising to 100 bcm. An added barrier to TCP, though largely downplayed by Western companies, is that the final legal status of the Caspian’s waters has yet to be delineated by its coastal states, making TCP’s development even more problematic.

Last but not least, Gazprom has adroitly outmaneuvered the West’s last remaining card, its pricing incentives. Abandoning its previous policies of “buy cheap and sell dear,” it earlier this year offered Azerbaijan and Central Asian states market rates for their gas.