The Great Gas Game, Part III

While South Asia struggles with developing LNG midstream infrastructure under the watchful eye of the US, the rest of Central Asia is quickly being divided between Chinese and Russian interests. What might have been considered only twenty years ago safely Russian-influenced territory is now the site of the CACP (Central Asia – China Pipeline), which completed construction in December 2009. At a combined 6,811 km, stretching from Turkmenistan through Uzbekistan and Kazakhstan and connecting with China’s domestic East-West gas pipeline ending in Shenzen, it is longest pipeline in the world and has managed to mostly surpass the conflict zones that have caused the southern projects like the TAPI and IP financial, security, and diplomatic problems.

The pipeline’s original conception can be traced back to the Energy Charter Treaty, an international agreement establishing a framework for cross-border operations in the energy industry. Intended as a basis for the integration of energy sectors in the Soviet Union and Eastern Europe during the Cold War, it has since been appropriated as the legal framework by which Central Asian countries negotiate and contract out their energy resources. China’s status on the ECT remains observational, and its entrance could herald a real challenge to Russia’s de facto claims upon Central Asian energy resources. The second originating factor of the CACP is China’s enormous demand for energy resources and dependence on oil imports (which are projected to be 79% of all consumed oil) leaves its monstrous economy exceptionally vulnerable. LNG represents an excellent diversification option for the Chinese energy market, and indeed, after the pipeline’s completion, 2010 saw China’s aggregate gas demand leap 22% and is expected to keep growing.

The project has driven a wedge between the usually tight relationship between Kazakhstan and Russia, who are both members of the Customs Union to promote closer trade. The project was approved in 2003 with no Russian input by PetroChina and KazMunayGas, and also represented a blow to Russia’s hold on Turkemenistan, who previously was forced to make deliveries westward through either Iran or Russia, with Russia accounting for 70% of its gas exports. These problems are counterintuitive, as the Soviet Union had over 50 years to develop infrastructure that would have developed the region far beyond its current state. Instead, most Soviet infrastructure in rail, river, and air transport led northward to Russian territory and nowhere else. This included LNG pipelines such as the Central Asia-Center gas pipeline system, constructed between 1960 and 1988 and currently controlled by Gazprom. Russia maintained its grip upon Caspian gas and oil reserves, fighting off Chevron for control of the Tengiz and Korolev oil fields in Kazakhstan and BP for development of Azeri-Chiraq-Guneshli gas fields in Azerbaijan. However, these efforts have backfired, as Chevron has successfully created the Caspian Pipeline Consortium (CPC) which aims to establish a submarine pipeline from Turkmenistan through the Caucuses to Turkey, thereby bypassing Russian territory altogether.

Thus, the completion of new lines on the CACP pipeline are causes of great concern for Russian interests. And it appears that China’s efforts are gaining momentum at currying favor with the Central Asian republics: offering loans for economic stimulus and energy investment in the wake of the 2008 financial crisis, when foreign direct investment particularly in the riskier frontier markets of Central Asia plunged have caused Chinese stock to rise. China’s offer of $10 billion  to Kazakhstan for ownership rights of one of their state-run oil producers, as well as a $10 billion loan to the Shanghai Cooperation Organization to assist members in the wake of the financial crisis were greeted with fanfare by the Central Asian republics.

The only glaring omission in LNG midstream infrastructure development, in fact, is between Russian and Chinese territory, especially considering that European demand for LNG has remained highly inconsistent which has led to oversupply in Russia and lack of payoff with their Turkmen partners. For instance, a proposed pipeline from Irkutsk to China was proposed by BP, but disagreements on its purpose and feasibility led to BP selling its stake in June 2012. While Russia culturally dominates Central Asia with the predominance of its language, customs, infrastructure, and military presence – it is looking more and more likely that China will begin to take a larger portion of the LNG pie.

 

NEWS BRIEFS: 

  • The first phase of the Vienna Negotiations of the P5+1 Powers with Iran have ended, but technical talks are expected to begin “next week,” according to a press conference between Belgian Foreign Minister Didier Reynders and Javad Zarif. Reynders is also the third foreign minister from the EU to visit Iran in the past two months, following Sweden and Italy’s examples. This news, in addition to the latest IAEA reports on Iranian enrichment facilities, show that Iran is in full compliance with the Nuclear Non-proliferation Treaty’s safeguard obligations. Iran still remains adamant that its enrichment will not cease altogether, causing skeptics to doubt whether a deal is possible before the expiration of the current deal in July. Optimists such as Professor Stephen Walt argue that the US should consider “taking the military option off the table.”
  • Kyrgyzstan, Tajikistan, and Uzbekistan are all understandably concerned about the withdrawal of American troops from Afghanistan this year. The only country that is not is Turkmenistan, whose recent signature on an agreement between Afghanistan and itself for the safety of the TAPI pipeline, coupled with the fact that Taliban has never threatened Turkmenistan, makes their complacency hard to interpret. The obvious truth is that Central Asian security will be put to the test when forces withdraw by the end of 2014, and when coupled with the disengagement of the US from Kyrgyzstan, many analysts are wondering what will become of the region.
  • Heads of Tajik and Kyrgyz working groups on border issues met on Sunday in Isfara in northern Tajikistan today. The last meeting between officials on their border dispute earlier this year met in Bishkek on February 15 and agreed to address three key issues: 1. Military border forces, 2. Border demarcation and delimitation issues, and 3. Border roads. The source of the dispute in the first place was the construction of a Kyrgyz highway through a disputed zone in southern Kyrgyzstan and the resulting violence resulted in the deaths of 11 border military militia.
  •  The CASA 1000 Power Supply Program (Central Asia – South Asia) has been forwarded by the US as another viable alternative in addition to the TAPI pipeline to the IP (Iran-Pakistan) pipeline project. Both CASA-1000 and TAPI involve transportation of electricity through Afghanistan to markets in South Asia, an understandably risky venture. The World Bank and Islamic Development Bank (IDB) have provided $1 billion in financing to the CASA-1000, and the US has appropriated a paltry $15 million as part of its “New Silk Road” vision. Signatories of the project include Pakistan, Kyrgyzstan, Tajikistan, and Afghanistan, whose implementation is planned in 2014, with electricity exports beginning in 2016-2017.

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