Oil and Energy Trends, 19 July 2002

Contents

• Focus: Afghan proposal reopens Caspian pipeline debate
• Gas and Power: Saudi gas and power plans stall

Focus: Afghan proposal reopens Caspian pipeline debate

• Rich resources
• Geography v. geology
• Oil to Europe; gas to Asia?

The recent decision by the government in Kābol (Kabul) to revive the idea of using Afghanistan as a pipeline route for Caspian oil and gas has reopened the debate in Central Asia over whether exports should go primarily to the east or west.  Some Caspian countries are uneasy at the idea of sending nearly everything to Europe, as is now the case, preferring instead to have a choice of markets.  Apart from the possibility that western markets could become oversupplied, especially with gas, most Caspian states dislike the reliance on Russia that sending exports westward implies.  A pipeline through Afghanistan makes it possible to supply Asia’s growing markets for oil and gas.  Such a route, however, has two considerable drawbacks.  One is the political state of Afghanistan and the other is that any Afghan pipeline would have to pass through Pakistan where the prospects for political stability look scarcely more rosy over the next few years than they do in Afghanistan.

The three main Caspian states—Azerbaijan, Kazakhstan, and Turkmenistan—produce between them 1.3 million bpd of oil and 6,230 million cubic feet a day (cfd) of gas.  Some 0.8 million bpd of oil is exported, mainly from Kazakhstan and Azerbaijan, along with 3.7 million cfd of gas, all from Turkmenistan (see Table A).

All three countries are seen as highly prospective for oil and gas and were once looked upon as a rival to the Middle East, only with the further advantages of not being more politically stable and not belonging to OPEC.  Many in US government circles found these alleged advantages particularly attractive and, during the 1990s, strenuous efforts were made by the Americans to try to ensure the area was developed along lines that reflected the interests of the United States of America.  A further aim of Washington was to loosen the hold of Russia on what was once a part of the Soviet Union.  US policy rapidly came to focus on the need to find a way to deliver Central Asia’s hydrocarbons to world markets without their passing through countries seen as potentially hostile to US interests.  This meant in practice avoiding putting pipelines through either Russia or Iran.  As a result, the USA found itself promoting export routes across Georgia to the Black Sea, to the Mediterranean via Turkey, and an outlet to Asia through Afghanistan to the Indian Subcontinent.  The Afghan option was formally abandoned by the US side in 1998, but is now back on the agenda following the installation of a new US-backed government in Kabul.

Rich resources

There are varying estimates of Central Asia’s oil and gas resources.  OET: Annual Statistical Review gives proved reserves for oil of 7.2 billion bbl (see Table B).  BP offers a rather higher total of 15.5 billion bbl.  Some sources have tried to forecast future discovery levels.  The US Geological Survey, for example, calculates ‘undiscovered’ reserves as 34.2 billion bbl (see Table B).  The range of figures suggests that the Caspian states could become an important producing-region; but in no way is it similar to the Middle East.  Just one of the smaller Middle Eastern producers, Qatar, alone has proved reserves of 15.2 billion bbl.  Even if undiscovered reserves are added to the Caspian’s figures of proved reserves, the resulting total of 41.4 billion bbl is less than half the proved reserves on their own of Kuwait (as reported in OET: Annual Statistical Review of May 2002).

None of this means that there is little potential for growth in the Caspian.  Even though it may not be the new Middle East that some once forecast, it can still make an important and growing contribution to world supplies.  The present and estimated future resource-base, makes it quite conceivable that Caspian output could double to 2.6 million bpd within about a decade without too much trouble.  In the best case, a further 1.0 million bpd might be available by around 2015, giving a total of 3.6 million bpd by then.

Gas, too, appears to have a promising future, particularly in the case of Turkmenistan.  Kazakhstan’s reserves also look good on paper (see Table B) but are likely to prove costly to develop in a number of cases owing to their high sulphur content and remoteness from markets.  This remoteness from markets is perhaps the most important factor influencing the development of the whole of the Caspian’s oil and gas reserves.

Geography v. geology

Geology provides no more than the starting-point for any assessment of the hydrocarbon potential of the Caspian.  Geography, more than geology, dictates what will be produced; but geography refracted through the prism of politics.  The Caspian region is land-locked and remote from major centres of consumption.  Its oil and gas must be transported long distances through other countries.  This has proved a problem not only for the Caspian states themselves but also for those supporting oil and gas developments there: notably the USA.  The Azeris, Kazakhs, and Turkmen have all sought to minimize their economic reliance on Russians, who have frequently made exporting through their territory an expensive exercise, whereas the Americans have been anxious to see Caspian exports bypass Russian territory for political reasons.

 Azerbaijan initially saw neighbouring Georgia as an alternative, building a 140,000bpd pipeline from Baku to the Black Sea port of Supsa (see Table C).  Subsequently, an 11-member Kazakh consortium led by ChevronTexaco built a 560,000bpd line from Tengiz to the Russian Black Sea terminal of Novorossiysk to operate independently of the main Russian pipeline system.  Turkmenistan has tried to export both oil and gas through Iran, but this has upset the USA, which, among other things, regards Iran as a sponsor of terrorism.

US rivalry with Russia and Iran has led Washington to promote oil and gas routes via Turkey: in particular a 1-million-bpd oil pipeline from Baku to the Mediterranean port of Ceyhan.  Companies operating in Azerbaijan were not enthusiastic at first, claiming there would not be sufficient oil to fill the line, but the project was revived in June this year.  Turkey is keen to see the line built partly to fulfil a long-term aim to develop Ceyhan as the principal oil port of the eastern Mediterranean and partly to forestall further links between Central Asia and the Black Sea.  Ankara is concerned at the rise in oil traffic through the narrow Bosporus, which flows through Istanbul and is in places less than half a mile wide.

Concern over congestion in the Bosporus has prompted proposals for two other routes aimed at moving Caspian oil into the Mediterranean while avoiding Istanbul.  Both involve pipelines from Burgas in Bulgaria: one to Alexandropoulis on the Aegean, and a much longer route to the Adriatic port of Vlore in Albania.  A third, and far more ambitious route has even been proposed to pipe oil from the Romanian Black Sea port of Constanţa to Trieste in Italy where it would feed in to the main Western European pipeline system.  A long-distance route being touted by the Ukrainian government is a pipeline from Odesa to Brody, on the western side of Ukraine, where it would join the main Druzhba trunk-line from Russia to Western Europe.  In keeping with the line’s impressive 425-mile length is the title the Ukrainians have given to the project: the ‘Euro–Asian Corridor of Transporting Caspian Oil to the Nations of Central and Western Europe’.  Officials in Kiev (Kyiv) talk confidently of extending the line to the Baltic.

The prospects for most—if not all—of these routes west of the Black Sea are somewhere between dim and non-existent.  The only one with even a slight chance is the shortest route: the 200-mile Burgas–Alexandropoulis line.  This 700,000bpd scheme is backed by a consortium that includes Greece’s Latsis Group and Rosneft and Yukos of Russia.  Its backers are aiming for a start-up as early as 2005, but this looks unlikely.  The problem all pipeline promoters have is that the likely volume of exports over the next decade is insufficient to fill all but a very few of the proposed pipelines.  There is already more than 1.1 million bpd of pipeline capacity available (see Table C), and this could rise to 2.1 million bpd if the Baku–Ceyhan line were to be built: more than enough to handle the oil likely to be available for export in 2010 on all but the most optimistic forecasts of Caspian production.

This makes the recent revival of the idea of an eastern route via Afghanistan all the more curious.  Now, as before, the idea only makes sense as a political move.  Back in 1995, when the USA supported the Taliban, and Iran was the enemy, Washington backed a plan to build an oil pipeline from Central Asia to the Pakistani port of Gwadar on the Arabian Sea as an alternative to Tehran’s plans to link the southern Caspian by pipeline with the Persian Gulf.  The line to Gwadar had the further merit of discomforting the Russians, whose influence in Central Asia the USA was anxious to diminish.  Similar reasoning applied to US support for the Taliban, which was seen as both anti-Iranian and anti-Russian.  Washington eventually fell out with the Taliban in 1997; but its overthrow last year gives the USA the opportunity to revive its geopolitical vision for the region.

Oil to Europe; gas to Asia?

Even the USA may hesitate before promoting an oil pipeline to Asia.  A (marginally) more interesting proposal from Afghanistan is for a gas pipeline route through the country to Multan in Pakistan and thence, later, to India.  Central Asian gas suffers from the same geographical restraints as the region’s oil: the main fields are far from markets and exporters are highly dependent on the good offices of Russia to sell their output.  For the Turkmen, the Russian connection has proved particularly difficult.  Moscow has been reluctant to allow Turkmen gas to compete directly with its own exports in Western Europe.  Hence it was initially sent to Ukraine and Armenia, which were unable to pay in hard currency.  The Russians subsequently agreed to take Turkmen gas themselves, but the situation is still far from ideal from Turkmenistan’s point of view.  Another export pipeline connects Turkmenistan with northern Iran, but this has suffered various operational problems

 As with oil, several rival pipeline schemes are competing for Central Asia’s gas.  Most of them are aimed at delivering gas to Western Europe but one or two also envisage gas exports to Asia.  Turkmenistan is the prime target of any such schemes, though there is a growing interest in exporting gas from Azerbaijan, Kazakhstan, and Uzbekistan.  Turkmen production could almost double to 8.5 billion cfd, provided markets for the gas could be found.  Azerbaijan, now a net importer, is due to begin exporting within five years.  By 2010, its total output could exceed 1.5 billion cfd, while Kazakhstan and Uzbekistan could, in the best case, produce more than 6.0 billion cfd, mainly from Kazakhstan.

Azeri gas is earmarked for Turkey which could have provided a useful short-haul market for Turkmen and Kazakh gas had not the Turks already signed contracts for gas considerably in excess of their likely needs over the next few years.  Turkey, rather than being a market for Central Asian gas, could nevertheless provide a conduit for Caspian exports to Europe.  Earlier this year, Turkey signed a memorandum of understanding with Greece for a 350-million-cfd line to link the two countries.  The line is meant to carry Iranian gas but is part of a much grander design to provide a link between Iran and Western Europe: one that could be extended further eastwards into Central Asia.  Europe, however, faces a supply surplus over the next 5–10 years and may not be able to absorb additional gas from Iran and Central Asia.  Hence the latter’s interest in pipeline connections to Asia.  The Afghan line is unlikely to be economic as long as Pakistan and India remain at loggerheads over Kashmir.  Kazakhstan and Turkmenistan have been exploring the idea of an export route to China.  Such a scheme is estimated to cost in excess of $12 billion and no one is rushing forward to offer to finance it.  Russia may, in the end, be in a better position than Central Asia to supply gas to East Asia; just as at the moment it is better able to supply gas to Europe as well.  On the other hand, within a decade, Russia could find itself short of gas to export as its domestic requirements increase, which could provide Central Asia with its best export opportunity of all.

Gas and Power: Saudi gas and power plans stall

This month we introduce a new section covering gas, electricity, and the links between them

Problems over reserve estimates and pricing are stalling discussions on three major gas developments in Saudi Arabia and threatening the kingdom’s plans to open its gas and electricity sectors to international participation.  The developments were offered to outsiders in May 2001, but lengthy negotiations have failed to agree on basic terms.  The projects, known as the ‘Saudi Gas Initiative’, consist of three so-called ‘core ventures’ worth $25 billion, and form part of a $45-billion plan to develop the gas industry.  The total cost proved beyond the means of the national oil company, Saudi Aramco {http://www.saudiaramco.com/bvsm/JSP/home.jsp}, and three ventures were accordingly offered to international oil and gas firms.

The core ventures are proving less attractive than they first appeared.  Saudi reserve estimates of 30 trillion cubic feet (tcf) have been considerably revised downwards by the international oil companies to somewhere in the region of 7 tcf.  There have been further disagreements over transfer pricing, and the two sides are also unable to agree on a rate of return.  The oil companies have a rate of 18-20% in mind, while the Saudi figure is only 12%.

Differing aims

Part of the problem may well be that the two sides have different aims.  The Saudis are essentially seeking outside help in developing their downstream energy infrastructure, including pipelines, power stations, and petrochemical plants.  The oil companies, on the other hand, are more interested in exploration and production.  Moreover, their long-term upstream interest is in oil rather than gas, and oil is likely to remain off-limits to foreign companies for the foreseeable future.

In the case of the power and petrochemical plants, the Saudis want the costs of feedstocks to be kept at low levels as part of their general industrial strategy of developing industries based on supplying oil and gas at prices well below world market levels.  Methane and ethane are currently supplied to Saudi industry at 75 cents per million British Thermal Units, while liquefied petroleum gases are sold at less than 70% of the world market price.

Domestic considerations

Saudi Arabia sees natural gas primarily as a domestic substitute for oil, allowing more oil to be freed for export.  This has considerable relevance in the context of OPEC, which controls only the production of oil; not the proportion that is exported.  The Saudis are anxious to increase oil revenues in order to finance an ambitious programme of social and economic development.

The domestic gas economy is based on a gathering and distribution system dating from 1984, and known as the Master Gas System (MGS), which is now being expanded.  Part of this involves a $2-billion project managed by US engineers Parsons Corp to build a 2.4-billion-cfd gas processing unit at Hawiyah.  A further $2 billion is being spent on a processing plant in Haradh.  By the end of this year the MGS should be capable of processing 6.3 billion cfd.

Faltering power plans

The international oil companies have been trying to split up the core venture contracts into upstream and downstream components.  The Saudis, however, want to retain the projects as vertically-integrated developments.  Riyadh (Ar-Riyād) is particularly anxious to pursue the development of new power stations to meet the kingdom’s rapidly rising demand.  Some 50 GW of capacity are forecast to be needed by about 2020: roughly double the present level.  So far, however, there is little indication how this is to be provided.

Some of it is meant to be provided by the stalled core ventures.  A further tranche is supposed to come from independent power producers (IPPs), but these are still some way from being realized.  The country only has one private project at present and outside interest in IPPs has been small.  The problem is one that afflicts gas projects: the purchase prices proposed by the Saudis are too low.  The government wants low electricity tariffs: not only to encourage industry but also to forestall public unrest in a country where there is inadequate economic growth and rising unemployment.

© Blackwell Publishing Ltd, 2002