Elsevier

Energy Policy

Volume 37, Issue 8, August 2009, Pages 3171-3182
Energy Policy

The Trans-Caspian energy route: Cronyism, competition and cooperation in Kazakh oil export

https://doi.org/10.1016/j.enpol.2009.04.009Get rights and content

Abstract

The article delineates the major national, regional and international level stakeholders in the westward Trans-Caspian transportation of Kazakh oil, supplemented with a discussion of the prospect of expansion of the Trans-Caspian/South Caucasus corridor in light of the presumably harmful effect of the war between Russia and Georgia in August 2008. It demonstrates that while foreign companies have been backed by their respective governments, national firms have also enjoyed considerable state support, partly due to their close links to the interests of state elites in Kazakhstan and Azerbaijan. It appears that most companies along the shipping line either belong to the governments of Kazakhstan or Azerbaijan, directly or indirectly (through subsidiaries), or enjoy favoritism and a near monopoly in their markets (crony capitalism). Some of these firms are privately owned but registered in offshore tax havens, while some others have rather obscure ownership structures and corporate profiles. It suggests that cronyism and state capture comprise that politico-economic environment within which the future of Caspian transport systems will have to be decided.

Introduction

The Caspian region is emerging as one of the world's most important sources of non-OPEC oil supply. Projected estimates of hydrocarbon reserves in the Caspian region range between 17.2 billion barrels (b/bbl) at the lowest level and 49.7 b/bbl at the highest (EIA, 2006). Based on the data from BP from late 2007, oil reserves on the territory of Azerbaijan and Kazakhstan account for about 4% of the world's proven oil reserves (Kazakhstan 3.2%, Azerbaijan 0.6%), while the two countries produce roughly 3% of the world's oil output: Kazakhstan 1.8%, Azerbaijan 1.1% (BP, 2008).

But the region's landlocked position in the heart of Eurasia made it necessary to develop export and transportation infrastructure to carry the growing output of hydrocarbon production to the international energy markets, the issue that has been the subject of politics and economics manifesting itself in both rivalry and cooperation between and among local states, foreign firms and their respective governments.

On November 14, 2008 national energy companies of Azerbaijan and Kazakhstan concluded an agreement with respect to the development of a Trans-Caspian oil transport system to help get Kazakh oil to international markets. The new agreement outlines the key terms and principles of the Trans-Caspian Project, and determines a piecemeal development of the Trans-Caspian transport system. According to the plan, KazMunayGaz, the Kazakh National Oil and Gas Company and SOCAR, the Azerbaijani State Oil Company, will set up a joint project company to implement the task. The new transport system would use a fleet of barges and tankers to carry Kazakh crude to Azerbaijani Sangachal terminal to be fed into the Baku–Tbilisi–Ceyhan pipeline (the BTC) as well as other types of oil transportation infrastructure (The Moscow Times, 2008; AP, 2008b; SOCAR News, 2008). The network would be able to ship initially 500,000 barrels of oil daily (bbl/d) (or 23 million tons a year, mt/y), eventually increasing to 750,000–1.2 million bbl/d (35–56 mt/y) (SOCAR News, 2008).

This arrangement is a further step in the development of westbound routes for Kazakh oil export. The South Caucasus corridor has been in use for oil exports from Kazakhstan to the Black Sea, and, beginning in late October 2008, Kazakh crude from the Tengiz oil field was shipped, for the first time, to Sangachal and then loaded to the BTC. Until now, a total of 686.4 thousand tons of Kazakh crude was shipped via the BTC (Kazinform, 2009). In addition, there is a work underway to create the Kazakhstan Caspian Transportation System (KCTS) that will upgrade the Kazakh and Trans-Caspian transport infrastructures to enable larger volume shipments across the Caspian. But before the KCTS is materialized, there are already signs of disagreement between the Kazakh government and some oil companies operating Tengiz and Kashagan oil fields. Declaring its willingness to control the KCTS (i.e., Trans-Caspian oil supplies), the government of Kazakhstan insists on an arrangement in which it will get a 51% stake (New Europe, 2009).

The new Trans-Caspian oil transport system agreement and the shipment by the BTC indicate that, despite some disagreements over transit tariffs and use of Black Sea terminals, Azerbaijan and Kazakhstan are willing to cooperate in oil transit and that Kazakhstan is keen to improve exporting capacities and is looking for options to diversify export routes. It is noteworthy, however, that Kazakhstan did not sign a final declaration of the Baku Energy Summit held on November 14, 2008, the day of signing the above-mentioned agreement concerning the establishment of the new transport system. The final declaration underlined the importance of alternative export routes and articulated support for existing and planned Western-backed pipelines (The Moscow Times, 2008).

The issue of energy transportation routes, especially pipelines, has been a key issue in the geopolitics of the Caspian region. The US and several European governments have promoted transportation projects that would carry Caspian energy via East-West Energy Corridor bypassing the Russian territory, such as the BTC as the first leg of the route; whereas Russia has used its power to keep almost all Central Asian energy exports under control and to prevent any major shift in Central Asian energy exports balance. The region, thus, has been a playground for Russian–Western rivalry over the access to the vast Caspian resources and control of the exporting routes. In the meantime, a booming economy of China with its accelerating energy demand added to the complex geopolitical game. Pursuing a balanced foreign policy, Kazakhstan agreed to export parts of its energy resources eastward. The Central Asian oil producer has already begun to deliver its crude to China through the newly built Atasu–Alashankou pipeline.

Unlike the largely peaceful eastern part of the Caspian, the Western Caspian (the South Caucasus) has been rather volatile, partly due to the existence of a number of lingering territorial disputes in which Russia has played a part and used it as leverage in its policy of keeping the “near abroad” as a domain of its exclusive influence. The August 2008 outburst of violence in Georgia's breakaway region of South Ossetia was described by some regional analysts as a “reality check” for the functioning westbound transit routes—the BTC (oil), Baku–Supsa (oil) and Baku–Erzerum (gas) (LeVine, 2008; Moors, 2008; Yenikeyeff, 2008). According to media reports, as a result of the bombing, an important railway bridge in Georgia that was part of the oil export route was damaged, and oil trunk carrying Azerbaijani oil was blown up. Some damage was inflicted on the physical infrastructure but, most importantly, the future of the entire South Caucasus corridor, as a safe transit route, was put under threat. Indeed, the Russo–Georgian War has raised concerns over security and reliability of the existing Caspian and South Caucasus routes and other westbound Trans-Caspian oil and gas projects currently under consideration (Directorate of Global Energy Dialogues/IEA, 2008; Kassenova, 2009; Tsereteli, 2009, p. 15), and fueled doubts among Central Asian leaders, notably in Turkmenistan and Kazakhstan, as to whether to expand their participation in the westbound transportation projects in the future.

In light of these developments, the present article1 examines how the interplay of competing domestic and international interests, provides opportunities and imposes constraints on the choices of key players involved in the westward oil shipment. It uncovers some important linkages between political classes and business elites that allow for rent-seeking under permissible conditions of prevalent crony economic system, that is the system of distributing economic favors by governments to their personal connections, and state capture, understood as the relationship between private interests and the state in which private groups may penetrate the state and exercise considerable influence over the government's policy making. (According to an influential study, state capture refers to “the capacity of firms to shape and affect the formation of the basic rules of the game (i.e., laws, regulations and decrees) through private payments to public officials and politicians” (Hellman et al., 2000).) It suggests that cronyism and state capture comprise that politico-economic environment within which the future of Caspian transport systems is to be decided. Additionally, it investigates the implications of current developments, such as the Russian–Georgian War, for the possible participation of Kazakhstan in building the Trans-Caspian pipeline and other infrastructure to join the BTC.

The article is organized into three sections. Section 2 provides a short background to the oil reserves and production in Kazakhstan, and a description of existing exporting schemes. Section 3 looks specifically at cross-Caspian routes, focusing on the existing tanker and railway export through Azerbaijan and Georgia (the South Caucasus corridor), and Kazakhstan's latest decision to export Tengiz crude via the westbound BTC. It also covers the Caspian shipping companies as well as Azerbaijani and Georgian ports and terminals as important stakeholders. Further, in light of the recent Georgia crisis, it discusses the prospects of Kazakhstan's joining the BTC by constructing a seabed Trans-Caspian pipeline to connect the eastern and western shores of the Caspian, and how the future launch of Kashagan might affect all this. Finally, in Section 4, we discuss the linkages between companies and political interests involved in the transport of Kazakh oil, and then present a summary of the main findings and some implications.

Section snippets

Kazakhstan: oil profile

It is estimated that Kazakhstan's proven oil reserves in the Caspian basin are between 9 and 29 b/bbl (1.2 and 3.9 billion tons) (EIA, 2006). The country is the second, after Russia, largest oil producer among the former Soviet states and is ranked as one of the top 10 countries in oil and gas deposits (Ernst and Young, 2007b, p. 2). The main deposits of crude oil are located in the western part of the country near the Caspian Sea and offshore. The largest fields are Kashagan (15 b/bbl), Tengiz (9

An overview

Although most Kazakh petroleum is exported through Russia, some of it is transported through the Caspian Sea toward the coasts of Azerbaijan (and from there by rail toward Georgia or via the BTC), Russia and Iran. The Kazakh port of Aktau sends some 9–10 mt of oil annually by small-capacity tankers across the Caspian Sea to various destinations, mainly the Baku terminals in Azerbaijan, Neka in Iran and Makhachkala in Russia (Socor, 2007). The oil transported to the port in Makhachkala via the

Political–economic linkages

In this final section, we discuss the linkages between governments and businesses, both domestic firms and foreign companies. Do Western governments provide support for their oil companies operating abroad? How can we characterize the relationship between governments of Kazakhstan and Azerbaijan, and the companies operating along the westbound route for Kazakh oil transportation?

Most of our interviewees believe that foreign companies involved in the Caspian energy projects enjoy support from

Key findings and conclusion

Although plans to enhance the westbound route for the transport of Kazakh oil have long been under consideration, it is only in the autumn 2008 that the interest in this route was revived and, beginning late October 2008, Kazakh crude started to flow, for the first time, via the Baku–Tbilisi–Ceyhan (BTC) pipeline, bypassing Russia, by far Eurasia's biggest transportation network accounting for almost 80% of Kazakh oil exports. At the November 2008, Energy Summit held in Baku, Kazakhstan's

Acknowledgments

The work for this article was funded by the research project “RUSSCASP—Russian and Caspian energy developments”, financed by the PETROSAM—program of the Research Council of Norway 〈http://www.fni.no/russcasp/index.html〉. For sharing their information and invaluable insights, the authors thank Ingilab Ahmadov, Vladimir Socor, Rauf Guseynov and Yuriy Krivodanov as well as the participants in the expert survey, whose names have been kept confidential. The authors also gratefully acknowledge

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