ALMATY, Oct 3 (THE GLOBE)
The first statesmen of the state are still sounding great prognoses regarding the oil production in Kazakhstan (and possible profits from it). So, in the end of August the Prime Minister, a professional oil specialist Balgimbaev announced that by 2010 Kazakhstan would be able to increase the annual oil production to 200-220 million tons. Representatives of Kazakhstan mentioned approximately the same thing during the celebration of the 100th anniversary of Kazakhstan oil in Atyrau.
Let�s try to clarify, what we deal with:
1. Reality
The existing proved raw material basis of Kazakhstan allows to produce approximately 70 to 80 million tons in 2010, if circumstances are favourable. The two oilfields (Tengiz and Karachaganak) will give about 40 to 50 million tons. The balance of 30 million is a total production volume of the rest Kazakhstan oilfields. In our opinion, this reasonable-optimistic variant is able to guarantee a sufficiently high level of profits for both the state and the population and to become the basis of the total economic development of the country. However, this variant can be realised only under the following conditions:
a) Realisation of the CPC project (the pipeline to Novorossiisk), as well as the development of the systems of local pipelines and the increase of the capacity of the pipeline Atyrau-Samara along with the growth of transportation by sea and railways.
b) Maintenance of production at such oilfields as Kalamkas, Karazhanbas, Zhanazhol and Kumkol (it can be hardly believed, as we are watching the results of the work of present investors at these objects).
c) Putting into exploitation of 3 to 5 big and middle-sized new oilfields with proved reserves (e.g. Alibekmola, Kenbai, Northern Buzachi, Dunga, Tasbulat, Saigak, etc.).
d) Stability of the world�s oil market (�Brent� within US$ 15 to 20 per barrel). The development of the gas market in Kazakhstan and adjoining regions.
In conclusion to this real variant (which is not always 100% one) we should state that the above-mentioned level may be the limit, which will be kept for some years, and after that the natural decay of the oil production may be observed. We should also mention that this level is quite good, as it is a little less than the present oil production of Kuwait, but more than, for example, of Libya.
2. Prognosis
With a big degree of optimism we may suppose that by 2010 Kazakhstan may achieve and even exceed the 100 million level of the annual production. We should mention from the very beginning that the achievement of this level as well as any increase of the production over the above-mentioned level of 70 to 80 million tons will be possible only if the Kazakhstan New Big Oil is prospected. For the last 10 years there were no similar findings in Kazakhstan, despite the biggest and most experienced oil companies of the world took part in the researches. Some of these companies have left Kazakhstan (e.g. �Elf�), other are preparing their suitcases (Union Texas�), the third ones have shifted either to exploitation of the proved reserves (�Chevron�) or to the oil prospecting works in the sea.
Well, let�s talk about the sea. At the present time, it is getting more obvious that the Caspian shelf is the last hope for the real big oil in the near future. It is well known that chances for the success are evaluated by the participants of the existing OKIOC consortium as 20%. We also remind you that this sea consortium is the only in Kazakhstan. Maybe, it is too late now to clarify how could it happen that Kazakhstan could not (or did not wanted) to attract some more foreign companies to the other blocks, even less promising ones to insure against OKIOC�s failure. Obviously, none of the new big international companies will come to the Kazakhstan sector of the Caspian Sea until the results of the first drilling are known. By the way, we can hardly count on small companies here: oil-prospecting works in the sea are very expensive and highly-hazardous, and as a rule, it is difficult to juggle with figures, but it is necessary to spend real money. Usually, this does not attract small businessmen (we do not want to say adventurers).
At the same time, even if really big oil is prospected in the Caspian Sea, this will lead to the production of 100 million tons per year in 2010 only in some additional conditions, including the following most important ones:
a) Fast (within 4 to 5 years) improvement of the sea oilfields and their preparation for the exploitation.
b) Simultaneous construction and putting into exploitation of at least one big new export pipeline (TransCaspian, Iranian, Chinese or any other).
We should say at once that to realise only these two items Kazakhstan will require the inflow and utilisation of more than US$ 10 billion to the capital construction for a very short period. The world has not seen similar tempos from the period of �the oil boom� in the Northern Sea in the end of 1970-s. Will the world see this in Kazakhstan? We may imagine, how hands of finance directors of the biggest oil companies and banks will be trembling, when they will have to sign not just �declarations on intentions� and not even contracts with a lot of �ifs� and �buts�, but real cheques for US$ hundreds of millions/billions. And this money is not to be spent in Norway, Great Britain or in the Mexican Gulf near USA shores, but in a country situated far away from the world�s markets (and this country is surrounded by unstable and sometimes unfriendly neighbours). This will happen despite there are a lot of places in the world, where either value of realisation of oil projects or total hazards connected with the realisation may be significantly less.
Besides, in Kazakhstan such decisions on practically all volume of financing are to be taken almost simultaneously, as they are significantly interconnected. Nobody will construct only a half of a pipeline or to put into exploitation a huge deposit having no clear decision regarding transportation and realisation of the products. Having started the works, there will be no way to return back�
Not trying to conduct a detailed analysis of the theory of probability, where the result is predetermined by the whole complex of events (each of them happens with the probability of significantly less than 100%), we just state that chances for the complete successful realisation of our prognosis are possibly not more than 10%.
2. Mirage
Having come to this point we have understood that we do not want to be involved into a discussion, why the annual level of 200 million tons of oil will not be achieved in Kazakhstan by 2010 (rather, this will never be achieved). We do not dispute that optimistic prognosis regarding new gigantic oil reserves in Kazakhstan (first of all, at the shelf) are based on a contradictory supposition of extremely high concentration of resources in comparatively weakly researched regions of Kazakhstan, which actually do not differ much from the researched regions. We do not want to discuss that to check these prognosis we will require gigantic expenses towards geologic-prospecting works, to fulfil which Kazakhstan is unable, while foreign companies will at first wish to consider the profitability of the present projects. We do not want to discuss that the realisation of these most optimistic prognoses regarding availability and volumes of possible new oilfields will anyhow not justify their hastened exploitation and simultaneous construction of some export pipelines. That the world�s market will be unable (and will not want unless having permitted the next catastrophic fall of the oil prices) to swallow these volumes. That the density of the necessary money inflow to the oil industry of the country is to be extremely high even in case of the Prognosis No.2, and that the world will not agree to increase the inflow two to three times before the prior invested money are repaid.
Instead of this (moreover, most oil professional specialists, including many persons who make very optimistic announcements, understand these problems perfectly well) we would like to talk a little about real things, in particular, about what might be the State strategy under these circumstances.
The first and the most important understanding is that there will be no inflow of easy oil dollars to the country for a long time. Even realisation of the variant 2 (Prognosis) means the continuous repay-off period of great expenses to foreign investors, before any significant profit to be shared with Kazakhstan will be gained. Thus, the main positive aspects may be the total improvement of the economy, the growth of employment and professional level of the Kazakhstan population, the money inflow to the oil and adjoining industries. Namely for this total raise of the Kazakhstan economy we should work jointly. We should do this in a delicate way. It is possible to declare for a long time the necessity to attract Kazakhstan contractors and personnel, but for the time being this is not proved by their obvious competitiveness and attractiveness, and really big orders will be transferred to the far western contractors or to Astrakhan neighbours. This cannot be corrected with any legislative requirements. In the worst case we may just frighten the investor (as it could happened for example with the requirement of obligatory insurance of oil operations by exclusively Kazakhstan insurance companies).
The improvement of the investment image of Kazakhstan. No peculiar comments are required for this. It is sufficient to imagine as if we were the western finance director, who was mentioned above. We just state that there are significant resources to strengthen the control for the activity of Kazakhstan state and administrative organisations. Sometimes their unreasonable and disconnected actions, re-organisational heat and passion for legislative creation does harm to long-term investment processes in the country, which cannot be corrected with any conferences and exhibitions. Another important aspect of this global investment strategy is a well-thought external policy, including in respect to the nearest neighbours of Kazakhstan. Unfortunately, shots and seizing of foreign hostages in neighbouring Kyrgyzstan have already influenced the foreign investment circles working in Kazakhstan. The choice of priorities and directions of the development, including directions of possible ways of oil transportation, is to be based on the economic reality. The experience of project of the pipeline from Azerbaijan to Turkey, and partially of the Kazakhstan pipeline to China proves that no political situation overbalances the economic criteria.
The sober view of things helps to determine priorities and to concentrate on realisable tasks. For example, without timely measures to improve the situation at the existing oilfields and to put into exploitation some new ones, even indices of the first most real variant will become unachievable. Moreover, the delay in settling these issues while the total tendency of reduction of investment attractiveness of the Caspian region may result in an irreversible crisis at a number of important existing objects and in a practical collapse of the Kazakhstan oil industry (2 to 3 big objects will be still under the foreign control). The economic and social consequences of this situation may be very difficult.
We would like very much to see Kazakhstan in 2010 prosperous, politically stable, and wealthy with easy money, where the main problems will be �the Dutch disease� (too high rate of the national currency) and discussion of honourable conditions of entrance into OPEC. Indeed, even if the situation is not so cloudless, oil will be still able to give much to Kazakhstan. It depends only on the Kazakhstan population, whether they use oil reasonably or waste their forces, time and their real wealth while striving for mirages.
By John Bonjovi (Jun.)
(Brief variant. The complete version read in �The Energy of Kazakhstan� magazine, # 4)
Let�s make it straight, Kazakstan oil and gas industry is not a boundless sea of opportunities and projects, but rather a limited and manageable structure. Just 12 fields contain 88% of the proven oil reserves of the country, while 9 of them being on commercial development provide 90% of the actual oil production. Of course, one should be warned that oil reserves estimates could vary considerably by different sources. Therefore we usually tried to follow the official Kazakstan statistic.
What could change about that?
No large commercial oil discoveries were made in Kazakstan for the last ten years. Optimism is the lifeblood of oil business and investment, and what was not found onshore it is now expected from the Caspian Sea. However, too much hope could deceive! Experts at OKIOC (consortium of 8 foreign companies, involved in exploration of most promising blocks in Kazakstan sector of Caspian Sea) now admit that the chances for success are about 20%. Success in this particular case would mean proving oil reserve of more than 1.5 billion tons (bigger than Tengiz). This is not a news to oil professionals. The reality of Caspian projects in Kazakstan is the fact that they are running from the scratch regarding the entire infrastructure, gathering and treatment of possibly sour oil and gas, its transportation and marketing. Therefore the above number is the minimal requirement, kind of critical mass which could justify (i.e. pay back) all those huge capital expenses, subject for oil prices are not collapsing again!
Another feature of Kazakstan Caspian shelf is not bright either: despite relatively large number of other prospective structures, they all are much smaller than Kashagan belonging to OKIOC. If this project fails, all the rest together may not justify the expenses of infrastructure. It means that nobody will probably bother even to test them. This by the way is a difference from Azerbaijan, where the basic infrastructure for offshore oil industry was already established and production is existing. Currently it could be simply expanded, so even the first exploration failures did not turn into complete shutdown. There are about 15 offshore projects in Azerbaijan, which are of the compatible size and have nearly the same odds for success. Somebody should win sooner or later.
Kazakhstan definitely had a chance to lunch two to three new offshore consortiums about a year ago. An interesting option could be to have foreign companies pay signing bonuses of US $30 to 100 million per block but provide them with flexibility in their working programs and commitments, so they could adjust their actual performance, depending on OKIOC�s results. Just let them put the foot in the door� Today, it seems that Kazakstan bet its entire stakes �on zero�. Foreigners are also now prepared to wait for a while, but then start counting money with open eyes. Yes, if OKIOC succeeds, the price to participate in every next perspective block may rocket, but if it fails, nobody will take them, even for free.
So, let�s count our chickens when they are hatched or wait till the fall when the first results of drilling on Kashagan structure will be available. Unfortunately, it seems that those chickens had been counted, cooked and already eaten sometimes ago. There is no intention to discuss here, how prudent it was to launch some grandiose and expensive projects and reorganizations on the very slim chances for Kazakstan to become another Kuwait. However another dark side of this problem is that, by the chasing the rainbow, even existing wealth of the country is somewhat overlooked and ignored. And this existing, proven wealth is enormous. Of course, it is not only oil and gas, but this is what we know better, so let�s talk it.
Situation when just a few oil fields, relatively easy to reach and mostly already developed contain mineral resources worth of hundreds billion dollars � it is a blessing for the young and not heavily populated country. And it is not just proven mineral resources, but many thousands skilled and dedicated oilmen. So what is going on there?
Basically only four oil projects comply with the �international standards� in Kazakhstan: Tengiz, Karachaganak, Caspian shelf (OKIOC) and CPC (Caspian Pipeline). We recognize that this statement is polemical and we do not mean even to say that they all are good. However, despite differences, all these projects have something in common � presence of the high rank foreign oil companies (and only those, no entrepreneurs little known in the oil world), thoughtful work-out of the legal and tax problems and even some �estrangement� from the rest Kazakhstani oil industry (regarding operations and management, marketing, logistics etc). Two of them: OKIOC and Karachaganak are Production Sharing Agreements, Tengiz and CPC are based on the special tax and juridical standards, rather international than Kazakhstani domestic. In Karachaganak and OKIOC Kazakhstan did not keep its share of partnership, counting on possible revenues in the form of taxes and payments. In the other two projects the country still has a property share (and financial responsibilities as well). For the time being* �
1. Probably Tengiz will be a show-room oil project in Kazakhstan for a long time. Production figures since 1992 clearly indicate that the general decline of the whole Kazakhstani oil industry was compensated only by the steady rise of output from Tengiz. We may dispute forever, whether there was a chance in 1992 to cut a better deal for Kazakhstan (and still the working one!) or whether the government should or should not sell its remaining 25% of Tengiz (or part of it). However the deeds that what count. It seems that Tengiz is one of a few oil properties, which could draw $1-2 billion tag at any time and be sold in a case of financial emergency.
2. Karachaganak. Kazakhstan has �wisely� distanced itself from this �politically sensitive� project that depends heavily on interactions with Russia. Yet maybe due to this reason, this object needed state support more than any one else. The things are not bright today at Karachaganak. It is not yet clear how Karachaganak� condensate may get into the Caspian Pipeline. However some relieve could come from an unexpected side, if the Russian Gasprom �Blue Stream� gas pipeline across the Black Sea to Turkey will succeed. Participation of the Italian and Russian companies in both projects may help Kazakhstani gas to reach Turkey.
3. Uzen. Starting from this project we are stepping on the dangerous path of analyzing privatization programs in Kazakhstan. In fact this field was left without responsible owner. While KazakhOil officially has Uzen on its balance (and production from this field accounts for a significant part of 5 million tons of annual oil output by KazakhOil), the decision on CNPC (Chinese National Petroleum Corporation) winning the tender for its privatization was not canceled. The Chinese Company is neither in a hurry to take possession of the deposit (having paid the bonuses, and undertaken the increasing liabilities on debts and investments), or give it up. In the nearest future the technical feasibility study for the laying of oil pipeline Atyrau-Urumchi is to be submitted. This oil pipeline to China was an obligatory part of the Uzen deal. We could be wrong but it is hardly to believe in this project. So, what is next? Until the legal (and responsible) owner of the project is defined, it is useless to talk about long-term investments and reconstruction programs. This means that the low effective, marginally feasible (and still declining) production in this field is to continue, instead of revealing its full potential (of course, after investing several hundreds million dollars).
4-5. Zhanazhol-Kenkiyak. The controlling stock package in Aktobemunaigas belongs to the same CNPC. Terms of the contract are not public. At this time the only specific information about achievements of the new owners is the agreement for the oil swap with the Russian oil company Yukos. Siberian oil is being supplied to China through the Pacific Ocean ports in exchange for the oil from Kazakstan going to Samara, Russia. We will dare to guess that this achievement, probably, fells short from expected large investment program. The shy criticism started to be heard even toward this important political partner. Having buried the idea of the China pipeline (if it is not economical for Uzen, moreover, it will not work for Aktyubinsk only), the new owners also will not be motivated much in speedy development of this project. And besides they are not required to report to their shareholders, as the Western companies do.
6-7. Kalamkas-Zhetybai. They are the two main deposits of Mangistaumunaigas. And this is, probably, the worst headache of the Kazakhstani oil industry. Today�s �Indonesian� owners of CAP (Central Asia Petroleum) neither can guarantee the inflow of investments, new management principles and technical reconstruction of the project, nor resell it. Not one of the big Western oil companies, which have analyzed the situation of Mangistaumunaigas in 1998, was interested in purchasing the CAP� shares (along with all the accompanying liabilities), even at the significant discount. The tensions with the local personal and technical problems with the fields are piling over.
8. Kumkol. Probably, Hurricane did not make any obvious mistakes or irresponsibility. Unfortunately, its basic financial weakness has not allowed the company to weather the storm (i.e. low oil prices and underdeveloped local market in Kazakstan). Besides, the lack of political influence did not allow Hurricane to �fence� this project and to place themselves �on the hill, above the battle�, as Chevron has done in Tengiz, and as is the case to some extent in Karachaganak and Aktyubinsk. Hurricane became involved in the internal political and economic arguments in Kazakhstan, which apparently extended in to the company itself. All this evidently did not strengthen the project�s stability.
9. Karazhanbas. The situation is not very different from Kalamkas. Besides, it is one of the most expensive projects in Kazakhstan. Its operational costs (if fully paid) won�t break-even with existing revenues. Of course, significant financial investments may essentially increase the output and reduce cost, but problems concerning current owners and unclear terms of the contract do not make it more attractive.
10. Northern Buzachi. Though such a major as Texaco took part in this project, its total economic attractiveness and logic seem doubtful. It is obvious, that the problems of its neighbors from Kalamkas and Karazhanbas should be first resolved to unlock the door for speedy development of N. Buzachi field.
11. Kenbai. We may only regret that the legal conflict with the previous �investor� Biderman practically paralyzed the development of this project. The court process with claims for the amount of US$ 800 million, even if plaintiff Biederman�s chances are slim, will not inspire trust from any investor or bank.
12. Alibekmola. It is an interesting, but not completely self-sufficient object. Even its ownership rights are unclear.
This is not a sunny picture on the threshold of the 100th anniversary of the Kazakhstani oil industry. Problems with destabilized oil prices and world markets were coupled recently with self-made internal difficulties. There is no use in hiding the problems. The real value of many oil projects in Kazakhstan is continuing to shrink and even getting negative, once the existing debts, liabilities, Kazakstani taxes and international legal claims are deducted from the anticipated revenues from the future oil sales. Probably, the State is better to pay all attention to the existing, real oil projects, rather than count on discovering three new oil giant fields tomorrow to replace one Kalamkas, which was badly sold and now is badly managed and financed.
The curing could be painful and long, requiring persistence and patience. The delicate and careful work with existing legal owners will be required, even if somebody does not like them. It is enough for Kazaksatn to have Kenbay stack in the legal muddle. The re-working of the existing contracts could be required, to make the projects more attractive to new investments (through the equity partnership or borrowing). By the way, it does not necessary mean giving additional incentives to the foreigners or decreasing the State revenues. For the serious investor (like a major international oil company or financial institute) the clear legal frameworks, risks management, transparent and internationally accepted contractual and tax systems are much more attractive than doubtful benefits of eluding its own commitments and loopholes in the contracts. The practice of Production Sharing Agreements should not be underestimated. It could allow customizing the contractual and taxation environment and making it more responsive to the actual needs of the each specific project. By the way, it is here where Russia is looking for the way to resolve the problems of such great and troubled fields as Romashkinskoye and Samotlor. They may be compared with Kazakhstan�s Uzen and Kalamkas.
Of course, one may play �Kazak roulette�. One in five odds of the great discovery are not so bad. Even if Kazakstan win, however, the pay off will not come soon. Meanwhile the existing wealth of the country is being wasted and lost.
* To the moment of publication Kazakhstan has announced about selling some part of its share in Tengiz project (editor�s note).
Dr. Robert M. CUTLER*
(Brief variant. The complete version will be pubished in �The Energy of Kazakhstan� magazine # 6)
Oil and politics is a pair like love and passion. Big oil goes hand in hand with big politics. Kazakhstan has some oil. It is probably big reserves. Territorially big country, as Kazakhstan, is facing problems both internal and external ones. Internal political problem is to keep all regions (oil and non oil) together. External political problem is to transport oil to the customers. Latter case means that in oil game three parties are running around: Kazakhstan itself, customers and countries which have pipelines.
E.K.
The strategies and choices open to Kazakhstan concerning international energy development must be seen in the perspective of the difficult political and economic problems facing the country�s leadership. President Nursultan Nazarbaev is faced with the task of guaranteeing the geographical integrity of the country. For example, China has been stepping into the vacuum in Central Asia while Western powers were preoccupied with the false image of Turkish-Iranian competition for influence.
The Political Geography of Kazakhstan�s Economy
The country�s political leadership must hold together the three key, far-flung regions of the country. The oil-rich regions of the west look to export to western markets and already draw western capital. In the south, the ties with Uzbekistan and Kyrgyzstan and Tajikstan are strong. The provinces in the north-central region are indissolubly tied with the corresponding trans-frontier regions in southern Siberia.
The Western Macro-region.
Large areas of the western macro-region of Kazakhstan are desert or marsh. Over a third of the population resides in the provincial capitals, which in turn represent more than two-thirds of the total urban population. The general population density is roughly two per square mile. In these far-flung reaches, it is not difficult for local elites to pursue policies somewhat divergent from those that the center might prefer. In particular, these regional governments have sought economic autonomy and a larger share of the oil revenue. Clan structures in the west of the country seek greater political autonomy as well. They can threaten to destabilize Kazakhstan�s delicate equilibrium and relations with Russia as well as co-opt any political prefects sent from Almaty.
The Southern Macro-region.
The southern macro-region has nearly two-fifths of the entire country�s population. Four-fifths of the region�s 6.5 million inhabitants reside in its three central provinces (plus the city of Almaty). Huge tracts of all five of these provinces are desert, but there is also rich agricultural land and farming. Human settlement follows the main waterways (Syr-Darya, Talas, Ili, and adjacent Lake Balkhash) and rail lines (parallel Syr-Darya, diverging eastward to Shymkent, Zhambyl, Chu, and Taldy-Kurgan). Collective agricultural life was traditionally organized around the management of irrigation (in particular, the Syr-Darya and Ili rivers).
The Crucial North-central Macro-region.
The ten provinces in central and northern Kazakhstan present patterns that are more complex. The entire northern tier of Kazakhstan, above the fiftieth parallel, represents a distinct subregion: this is where Russian interest was historically directed from the Tsarist period on. The pattern of human settlement is nearly exclusively determined by three rivers and three rail lines. Moreover, the cities near the border always had and still have significant trade with nearby cities in Russia itself. Yet even this Russian region has a differentiated history. In fact there are two areas of historical Russian concentration, one greater than the other and including it.
The smaller is a wide strip shadowing the border and principally including the industrial concentrations connected with natural resource exploitation and heavy industry. On this �shadow� of the border between Russia and Kazakhstan, a larger area is superimposed that includes those agricultural lands historically settled by Russians. These are not limited to the Virgin Lands of Khrushchevian fame; they stretch down almost to the central part of the country. This area in fact largely coincides with the area historically occupied by the northern Kazakh zhuz. The other major subregion of north-central Kazakhstan is known as the �polygon.� The �polygon� is the area exposed to radioactive fallout from the nuclear test range at Semei (Semipalatinsk). It formed the political base of the People�s Congress Party, which President Nursultan Nazarbaev co-opted on his way to power in Almaty. It intersects with the region of the Virgin Lands campaign and the historical area of Russian agricultural and industrial settlement, mainly in the Pavlodar, Aqmola, and part of Qaragandy provinces.
That area of intersection is crucial to maintaining economic integration and political cohesion northern Kazakhstan with the central part of the country. Maintaining the cohesion of north-central Kazakhstan is in turn necessary to assure the existence of unified political and economic entity on the entire country�s territory. These three provinces � Pavlodar, Aqmola, and Qaragandy � are a key for maintaining the demographic and economic unity of the north-central macro-region of the country. That north-central macro-region is the largest of the three geographic macro-regions in the country and represents the only �pole of attraction� that can hold the west and the south together. Qaragandy province indeed represents the southern limit of the traditional northern zhuz habitation and the northern limit, and it is the geographic transition between the northern and central parts of contemporary Kazakhstan. It also includes the city of Temirtau where President Nursultan Nazarbaev begin his political career three decades ago, as well as the capital Astana.
China Is Not the Solution
The economy of the western region is based mainly on oil, that of the southern mainly on agriculture, and that of the north-central mainly on extractive industry with some agriculture. The hearts of these three macro-regions are respectively the two oil-rich provinces on the Caspian sea, the three most heavily populated provinces in the south (plus Almaty city) and the three provinces representing the overlap between the �polygon� and the Virgin Lands region. These provinces comprise barely one-third of the land area of the country but nearly two-thirds of the population as well as two-thirds of the country�s economic product. It is no exaggeration to say that the nexus of the national-unity problem in Kazakhstan is to knit together these diverse regions of these countries, while promoting each of them to develop its own propensities and developing the center of the country as a political, economic, nexus uniting the diverse parts. What is needed above all is to get oil to market as soon as possible, in as great a quantity as possible.
This being so, one would think that the project with China to build a pipeline across the north-central part of the country to Xinjiang would be a natural choice. But this is far from the case. It is true that China needs large imports of energy in the new century as its domestic requirements, especially for transportation, begin to take off. However, the gigantic project faces extreme financial and logistical difficulty. First, there is a lack of capital for investment and there is no clear source where to go to find it. Second, the completion of the feasibility study has been delayed several times. Third, even at current oil prices, which have recovered from recent bottoms, the pipeline is not economically justifiable. Fourth, there are political impediments, not least the inter-ethnic situation in Xinjiang, where the Uyghurs face racial persecution worse than the Kosovars did from the Serbs. Fifth, the prospect of Chinese workers remaining in Kazakhstan is not appealing to young male Kazakhs who must compete for jobs, land and their prospects for better future. Sixth, the organizational design for realizing the project is unclear, just as organizational problems remain with the administration of the production properties now under Chinese ownership. And seventh, all this means that logistical issues are far from settled. Even the Asian Development Bank has become skeptical, if not pessimistic, about this project�s chances for success.
Problems and Lessons
The government of Kazakhstan is weighing its options on the export route for Tengiz oil. It could decide to postpone the decision. There are a number of possible routes. Aside from the route to Xinjiang, the principal possibilities are 1. the Caspian Pipeline Consortium (CPC) line projected across southern Russia, 2. undersea to Baku and out through Ceyhan, 3. and south through Iran. All that is certain is that Kazakhstan would like to, and needs to, sell as much as possible, as soon as possible.
Not only the difficulties with the Tengiz field, but a perspective on the whole field of circum-Caspian energy development reveals three problems that everyone faces everywhere. These three problems each imply a lesson that is taught by the experience of international co-operation on environmental issues.
1.The first problem is that the energy consortia cannot do it alone. The corresponding lesson is that they need help and know it. The technical problems of constructing the pipelines are inseparable from the political issues of who will build and control the pipelines, who will finance and manage them, and where will they be built. The nature and variety of technical and geophysical obstacles require pooling of financial resources and transport facilities. The complexity of the technical problems in the Tengiz venture has already required new forms of organization and decision making. Existing political and economic structures and incentives are just as outdated as old methods of business operation. These have involved the application of specialized knowledge to fields as different but integrated as enterprise management, political engineering, and financial settlement.
2. The second problem is that unilateral coercion fails. The corresponding lesson is that states need more information and better evaluation of it. States have to seek more information and evaluate it properly, because in the post-Cold War international system there is no holding back the free flow of information, nor in the end any holding back the ability of people to act on that information. The involvement of citizens of the resource-holding country represents a type of at least �virtual� participation in policy making by the host country�s citizenry. It is related to the model of the small European countries such as The Netherlands, where specialized public interest groups have long co-operated with ministries for the practical resolution of policy questions, irrespective of legislative intervention. The AIOC example illustrates how private voluntary and nongovernmental organizations can, through intermediaries, work informally with governments.
3. The third lesson is that intra-governmental politics do not always help. The corresponding lesson is that human resources must be better integrated into the policy process. Indeed, enhanced citizen participation is necessary, for in the Caspian region these publics are increasingly literate, increasingly informed, and increasingly politically active. Moreover, foreign investors increasingly recognize that their own economic interest requires emergence of an experienced younger generation that will be capable of taking over greater responsibility and carrying on the work of the present-day leaders later in the twenty-first century. This is in the medium-term and long-term interest of the governments and consortia, because, as the new international system organizes itself from the bottom up, the newly independent states (NIS) need people who can respond appropriately to new and unexpected challenges, quickly adapting policies and strategies efficiently to changing circumstances.
Why Do These �Lessons� Matter?
These are not the only lessons to be drawn from the entire tableau of Caspian energy development. However, they are the ones that emerge most clearly from a comparison of the experiences of the Azerbaijan International Operating Company and the Caspian Pipeline Consortium. In fact, they represent more general lessons that research on the effectiveness of international environmental institutions has shown to be significant.
1. The Caspian energy lesson that the energy consortia need help and know it, follows from the problem that the energy consortia cannot do it alone. It is the energy analogue of the environmental lesson to enhance the contractual environment.
2. The Caspian energy lesson that states need more information and better evaluation of it, follows from the problem that diktats fail. It is the energy analogue of the environmental lesson to increase governmental concern.
3. The Caspian energy lesson that human resources must be better integrated into the policy process, follows from the problem that intra-governmental politics do not always help. It is the energy analogue of the environmental lesson to build national capacity.
In March of this year, the private U.S. consulting firm Legal Technical and Advisory Services (LTAS) held a training session for energy officials from Turkmenistan, Uzbekistan, and Kazakhstan. This high-level hands-on seminar focused on legislation, policy and regulations of the oil and gas sectors. A particular advantage was the simultaneous presence of leading officials from the three most important energy-producing countries in Central Asia. The LTAS meeting in Atyrau could have provided an informal opportunity to look for ways to enhance Central Asian co-operation at ministerial and subministerial levels. Indeed, over the last year the CAU�s Committee of Prime Ministers has undertook, at the direction of their national presidents yet without full success, to design plans for establishing multinational consortia in the areas of energy, water conservancy, unified telecommunications systems, mining and foodstuff.
In fact, Kazakhstan and the energy consortia operating on its territory would do well to consider their interest in a new security concept that has recently been developed, called �co-operative energy security.� The three necessary components of co-operative energy security are an investment-friendly financial climate, guarantees of secure transport, and political stability. These components represent �transparencies� of the three classical economic factors of production: land, capital, and labour. First, the provision of secure transport means the transparency of land�which signifies geographical distance and therefore includes bodies of water�simply because transport occurs through and over land. Second, the transparency of capital signifies a similar absence of obstacles to foreign direct investment as it moves through the host country�s domestic legal and financial regimes, which must be conducive to those flows and tailored to such a purpose. Third, the transparency of labour signifies political stability, without which there is no labour market: that is, without political stability, individuals do not have the necessary incentive structure to manifest socially as an aggregate labour force.
Implementing the three lessons mentioned above would respond to the needs of consortia, of governments in the region and outside, and of the populations in the region. The second energy lesson responds to the needs of transnational corporations and their consortia, because it promotes transparency of capital. The first responds to the needs of states in and outside the region, because it promotes transparency of land. The third responds to the needs of populations in the region, because it promotes transparency of labour as well as civil society. Combining these lessons in practice would offer something to everyone.
* Robert M. Cutler was educated at the Massachusetts Institute of Technology and the University of Michigan and holds a Ph.D in Political Science. He has worked in European and Eurasian affairs for twenty years, specializing in Euro-Caspian and post-Soviet energy. His management specialties include organizational analysis and design, and organizational learning under complex systems of information and cross-cultural communication.
All Over the Globe is published by IPA House.
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