BACKGROUND: The agreement signed by Nazarbayev allows for the annual transit of approximately 53 million barrels of Kazakh crude through BTC, with an eventual staged increase to 175 million barrels per year. Four companies with a combined shareholding of 55 percent in Agip KCO, which manages the giant offshore Kashagan project in Kazakhstan, also have a 15 percent stake in the BTC pipeline consortium. Accordingly, it is likely that most of the Kazakh crude supplied to BTC will come from the Kashagan field once it comes into production in late 2008 or early 2009. The agreement effectively secures the medium-term commercial viability of the BTC project in that it is now no longer solely reliant on throughput from the Azeri-Chirag-Guneshli (ACG) offshore complex, production from which is set to peak at 1.2 million barrels per day in 2010, before steadily declining to 400,000 barrels/day by 2022. The current capacity of the BTC line is 1 million barrels/day. With additional pumping stations, loops and the insertion of anti-drag agents, BP estimates that the line could take up to 1.9 million barrels daily, enough to incorporate both ACG and a significant proportion of Kashagan crude. The Kazakh government has now gained its third separate major export route to complement those running through Russian territory (principally the Atyrau-Samara pipeline and the Tengiz-Novorosissk Caspian Pipeline Consortium) and the newly constructed Atasu-Alashankou pipeline to western China. The policy of securing a range of export routes makes sound diplomatic and economic sense for Astana and is, in itself, politically uncontroversial. Simultaneously, shipping Kazakh oil through BTC would therefore appear to mitigate some of the energy insecurity felt both in the U.S. and among EU member-states over increasing reliance on Russia both as a critical source of hydrocarbon supplies, and as the principal transit route for the oil and gas exports of Caspian producers. However, the mode of transporting the oil from Kazakhstan’s offshore fields to the BTC pipeline is still yet to be decided and it is this consideration, which may form the battleground between the region’s principal political and commercial actors. Two major transit routes are being considered. French major Total (a stakeholder both in Agip KCO and BTC) is conducting a feasibility study on the formation of the Kazakhstan Caspian Transportation System (KCTS), a $4 billion, 800 km (500 miles) pipeline connecting the Kazakh onshore terminal at Eskene, initially to a loading terminal at the Kazakh port of Kuryk, and then across the Caspian seabed to Baku. The earliest date that this could become operational would be 2010-2011. Alternatively, six large capacity 60,000-ton tankers could be built to transport the oil, although the upgrading and construction of terminal facilities would also add significantly to costs. Given that the final decision is not due until late 2008, the certain winners in the short-term are likely to be existing medium-sized Azerbaijani shipping companies, which would carry the bulk of the early oil from Kashagan.

IMPLICATIONS: Deliberations over the mode of transportation to BTC are also likely to have serious political as well as cost implications. Despite the planned expansion of CPC’s annual capacity from 23 million tonnes to 60 million tonnes, capricious and unreliable Russian management of this transit route raises the spectre that some of the output from the more northerly Kazakh field at Tengiz, currently transiting through CPC, might eventually be switched to BTC. Moscow will be anxious to prevent this and may, as a result, raise a range of objections to the construction of a seabed route. In the unresolved dispute over the legal status of the Caspian Sea, the Russian government shifted to supporting a policy of de facto median line division in the late 1990s, manifested in the bilateral agreements on subsurface ownership made with Kazakhstan and Azerbaijan. While this gave Russian companies exploration and production opportunities in the Russian sector, it has also nullified any substantive legal objections that Moscow might have to the KCTS pipeline. Accordingly, the Russian government’s objections to a seabed pipeline have been framed in terms of its environmental risks, morally reinforced by President Vladimir Putin’s decision made in April 2006 to re-route the Transneft pipeline to the Pacific coast away from Lake Baikal. However, Moscow is also likely to seek a stronger formula that also incorporates a legal objection to the pipeline, perhaps on the basis of potential obstruction and damage to the surface caused by the construction and any potential fracture of the pipeline. This would bring Russia, by default, into concert with formal Iranian opposition to median line division, and also raises the spectre that Russia would carve out a role for itself as a self-appointed guardian of the sea’s ecological integrity backed, if necessary, by naval force. If the thought of Russia cleaving towards Iran or adopting a more forward posture in the Caspian region were an unwanted by-product of BTC expansion for US policy-makers, the prospect of Iranian oil being moved through an extended subsea line would cause even greater consternation. Mahmood Khaghani, a senior official in the Iranian oil ministry, raised this possibility on a visit to Baku in early June and, far from closing the door, Total’s Alain Przybysz, speaking in the same week, suggested that KCTS could be linked to Russian and Iranian offshore networks. Such an eventuality would negate over a decade of U.S. regional strategy. The likelihood of BP sanctioning the transit of Iranian oil through the BTC line proper is remote, but the European companies dominating the Agip KCO consortium (which do not include BP), might well decide to disperse Kashagan oil exports through a multiplicity of outlets, even those whose exclusion from the East-West transport corridor project is axiomatic to its existence.

CONCLUSIONS: Advocates of a pipeline extension of BTC across the Caspian Sea might therefore reflect carefully on both the technical, commercial and political consequences of such a project. Tanker traffic may be a more conservative transit mechanism but it is likely to be cheaper, more environmentally sensitive, involve greater local content and, crucially, engender a lower political risk to U.S. interests in the region. However, the calculation might be decisively weighted in favour of constructing a seabed pipeline by adding value to the project, most obviously in the form of a companion gas pipeline taking Kazakh and even Turkmen gas into the Shah Deniz complex and, ultimately, the South Caucasus (Baku-Tbilisi-Erzerum) pipeline due to become operational in 2007. While Russian opposition to the project would undoubtedly further intensify, the rewards for energy-deficient EU states in obtaining Caspian gas independently from the Russian transit system might make these risks worthwhile.

AUTHOR’S BIO: Michael Denison is a Lecturer at Leeds University and an Analyst for the Control Risks Group.