Stanislav Zhukov , IMEMO, Moscow Energy Resources of Central Asia and South Caucasus

1. Stanislav Zhukov, IMEMO, MoscowEnergy Resources of Central Asia and South Caucasus 12th SPF Issyk-Kul Forum Goa 5-7 November 2006

2. The Great Oil Game

3. Global factors: - last frontier region for oil industry untapped by global actors; - increasing global competition for energy resources; - diversification of energy supplies. Local and regional factors: - curtailment of internal demand due to the shock therapy transition; - lack of financial resources; - lack of indigenous technical expertise for keeping industry afloat (esp. shelf exploration); - establishing of national oil and gas industry

5. Caspian Oil Exporters: Oil output, mln barrels/day

6. Share in incremental world oil supply, %

7. Caspian-4 in world oil supply in 2005

8. Caspian-4 in world oil reserves, %

9. Reserves to production ratio, years

10. Recent oil sector failures in Kazakhstan 1.Kashagan offshore deposits - recoverable reserves at 7-9 bln barrels/1-1,2 bln tons - drops out of Kazakhstan energy equation (until 2010 at least) (PSA signed 1997 until 2036, initially exploration planned for 2005; in 2004 exploration shifted to 2008; in 2006 exploration shifted to 2009/2010) 2. June 2005 “dry well” at Tyub-Karagan offshore deposit (developed by KazMunaiGaz (Kazakhstan) and Lukoil (Russia)) 3. May 2006 “dry well” at Kurmangazy offshore deposit – expected reserves at 1,8- 7,3 bln barrels/240-990 mln ton - (developed by KazMunaiGaz (Kazakhstan) and Rosneft (Russia))

13. Azerbaijan: A country of one large deposit?oil output by source in 1995-2010

14. Azerbaijan – Georgia – Turkey Pipelineannual throughput capacity – 50 mln. tonOfficially run in May and October 2005First tanker with Azeri oil set sail on June 2, 2006

15. China: increasing dependence on oil import(share of import in apparent consumption, %)

16. Exposure to the vulnerable Middle East & North Africa RiskGeographical structure of oil import in 2005, %

17. Kazakhstan – North-West China Pipelineannual throughput capacity – 10 mln. ton (since 2011 – 20 mln. ton) Officially run on December 15, 2005First oil filled in on May 25, 2006

19. Deficit of export capacity?

20. Projection of oil production and exportin Azerbaijan in 2005-2015, mln.ton * - oil products are partially exported

21. Projections of oil production and export in Kazakhstan in 2005-2015 (mln. ton) * - oil products are partially exported

22. Next Rounds in the Great Oil Game: Sharpening competition over Kazakhstani oil • Excess of export capacities over oil output • Increasing competition of export routes • Sluggish demand for oil in Europe and rapidly increasing oil demand in China • Non-cooperative win-loose game • Iran remains a joker

24. The Great Gas Game

25. Caspian Gas in 2005

26. Caspian Gas Industry • Comparatively less open to foreign capital • Turkmenistan and Uzbekistan: 100% state control (production and transportation) • Kazakhstan: 100% state control over transportation • Azerbaijan: one large oil deposit and export gas pipeline operated by foreign companies (since 2006) • More internal market oriented • Kazakhstan: associated gas (up to 70% at Tengiz, Karachaganak and Kashagan) • Large dependence on Gazprom export pipelines

30. Azerbaijan Shakh-Deniz gas deposit • Discovered in 1976, international consortium set up in 1996 • Recoverable reserves – 625 bln cubic meters of gas and 101 mln ton of condensed gas • Operated by: British Petroleum (UK) – 25,5% Statoil (Norway) – 25,5% Azerbaijan Rep. State Oil Company - 10% Lukoil (Russia) – 10% TotalFinaElf (France) – 10% OIEC () – 10% TPAO (Turkey) – 9% • Export pipeline Baku (Azerbaijan)-Tbilisi (Georgia)-Erzurum (Turkey). Annual throughput capacity – 8,1 bln cubic meters until 2010 - up to 20 bln cubic meters since 2010

31. Next rounds in the Great Gas Game: sharpening competition over export gas pipelines • Export pipeline Turkmenistan – Afghanistan?? • The Black Sea Region: New Gas Production Zone?? • Export pipeline Turkmenistan – Europe?? • Export pipeline: Turkmenistan – China?? Kazakhstan-China??

32. Export pipeline Turkmenistan – Afghanistan?? • Goes on since the early 1990-ies. • In 2006 UAE proposed exploration of Yashlar gas deposit (reserves: up to 550-760 bln cubic meters?) with further export via Afghanistan and Pakistan. Annual throughput capacity – 30 bcm. • Stability in Afghanistan??

33. The Black Sea Region: New Gas Production Zone?? • US oil company Anadarko (Georgia): The Black Sea gas potential is larger compared to the Caspian (potential reserves of the Georgian shelf are put at 1,3 bln mtoe)

34. Export pipeline Turkmenistan – Europe?? • Discussion goes on for 10-15 years. In 2004-2006 new schemes preliminary estimated at US$5 bln were proposed. New options provide for linking Baku-Tbilisi-Erzurum and/or Nabucco/GUEC with Turkmenistan and Kazakhstan: - Kazakhstan and Turkmenistan – Azerbaijan – Georgia – Turkey – Europe - Kazakhstan and Turkmenistan – Azerbaijan – Georgia – Ukraine - Europe • Huge investments into new explorations are required, especially after 2010 • Turkmenistan gas output is contracted by Gazprom (until 2010) and since recently by China. • Results of international audit of Turkmenistan gas reserves are not publicly available • Legal Status of the Caspian Sea and Turkmenistan – Azerbaijan bilateral relations • Competition from • the Blue StreamII pipeline Russia-Turkey ?? • the Nord Stream pipeline Russia-Europe?? • + Algeria?? • + Iran?? • + Norway??

35. Export pipeline Turkmenistan – China?? Kazakhstan – China?? • April 2006 gas agreement Turkmenistan – PRC: Gas pipeline is to be run on January 1, 2009. China contracted up to 30 bcm of gas annually for 30 years • Selling prices were not set • Gas will be supplied from new (unexplored) deposits • China obliged to reach agreements with transit countries Uzbekistan and Kazakhstan • Kazakhstan - China talks opened in 2004. The first stage with annual throughput capacity of 10 bcm to be completed by 2009. By 2012 annual throughput capacity increase to 30 bcm • Is there a gas available? • Kashagan gas is out of the equation until 2010 (at least) • Karachganak gas is contracted by Gazprom

37. Ukraine: natural gas puzzle • Fundamental factors: • share of net import in gas consumption = 70%; • up to 2005 cheap gas from Russia and Turkmenistan (in 2005 buying price = about US$50 per 1000 cubic meters; for Europe selling price=US$180-240); • Transportation leg from Turkmenistan is shorter • payments for Russian gas were technical (=payments for Russian gas transit to Europe) • Outcomes • strong incentives to re-sell cheap gas at European markets (non- transparent gas schemes, stealing of Russian export gas) • inefficient economic structure (gas accounts for about 50% of primary energy supply; very high energy consumption per unit of GDP) • Challenges • who is to pay politically for the inevitable gas price increase (possibly 3-4 folds increase) with the consequent GDP drop??