BACKGROUND: The supergiant Karachaganak condensate and gas field, onshore in northwestern Kazakhstan was discovered in 1979. Production began in 1984. After Kazakhstan became independent, BG (formerly British Gas) and Agip acquired rights to negotiate its development. In 1995 they became joint operators of the field (later becoming ENI), and Gazprom also joined the group. Two years later Texaco, now part of ChevronTexaco, acquired a 20% share and Lukoil took over Gazprom\'s 15% share. Also in 1997 a definitive Production Sharing Agreement was signed. In the Soviet era, the gas that was produced went over the Russian border to Orenburg. BG acquired a 2% stake in the Caspian Pipeline Consortium (CPC) when the latter was restructured in 1996. Liquids from Karachaganak began to flow through the CPC pipeline in early 2004 through a pipeline constructed to Atyrau. The field is estimated to be capable of producing 200,000 barrels per day (bpd) of oil. With Karachaganak oil now in the pipeline, CPC is ramping up its capacity to a half-million bpd, and Karachaganak will be the second largest supplier to the CPC. In recent years, the gas has gone to Orenburg and travelled through the Russian pipeline system to the final consumer, more than half of it to Azerbaijan. The company KazRosGaz, a joint venture created in 2002 by Gazprom and Kazakhstan\'s KazMunaiGaz extracts raw gas from the Karachaganak field and processes it at Orenburg. In 2003 the quantity processed was 5.5 billion cubic meters (bcm) out of 9.5 bcm total Karachaganak gas production, and 7 bcm is the figure projected for 2004 out of 13 bcm total. The third phase of development of the Karachaganak gas field, which is about to begin, seeks to increase production but an additional 8 bcm. But raw gas from Karachaganak has high sulfur content, so it cannot meet contractual specifications as to export quality. This, together with additional propane and butane in the gas, makes for economic losses to the operators, who have long sought to ameliorate the present situation, particularly since they plan to more than triple the current gas production level by the time Karachaganak peaks.

IMPLICATIONS: Consequently, the operators have for some time been studying a project to build a gas processing plant on the Karachaganak site itself. Such a plant would take sulfur out of the gas and stabilize the condensate. In its first stage it would treat about 4 bcm of gas per year. The plant would then expand to handle larger amounts of gas as production increases in the future. The project on the Karachaganak site, which the Kazakhstani government would appear to prefer if all other things were equal, would eventually be able to process up to 10 bcm annually. Perhaps not surprisingly, the Gazprom executive team believes such a project to be ill-considered. The deputy chairman of Gazprom\'s board, Aleksandr Riazanov, has called it \"rather expensive and currently not market-effective.\" Gazprom is in the very final stages of formulating a counterproposal to process an additional 8 bcm at Orenburg, equivalent to the projected increase in Karachaganak\'s gas production during phase three development about to being. According to Gazprom, such an expansion of Orenburg could be accomplished in a maximum of two years at one-quarter of Riazanov\'s estimated cost of construction the plant at Karachaganak. The Karachaganak on-site project, on the other and, is unlikely to begin construction before 2007. Current forecasts of Karachaganak\'s gas production see it holding fairly steady, rising to only 15.5 bcm by 2006, 18.9 bcm in 2007, and eventually to 23.7 bcm in 2010. Not all of this gas is produced for consumption, however. Roughly 6 bcm is slated to be pumped back into the ground in order to maintain proper pressure. So there is not enough to feed both Orenburg and the Karachaganak on-site plant. To send the planned gas to Orenburg would require significant expansion of the plant there as well as construction of two new gas pipelines from Karachaganak. Gazprom hints at wishing to become part-owner of any pipeline built from Karachaganak not to Orenburg and even to form a joint venture to expand and modernize Kazakhstan\'s gas pipeline system. This would give it the right to put its own gas through Kazakhstan\'s system. Gazprom offers Kazakhstan the opportunity to become part-owner of the Orenburg plant. Although certain industrialists in Kazakhstan are not uninterested in this prospect, it is not certain whether the political authorities would favor such a plan. Also, if Gazprom does not want to finance Orenburg\'s expansion by itself, this implicitly raises the question how it would finance the more costly Karachaganak plant or its involvement in Kazakhstan\'s pipeline systems.

CONCLUSIONS: Gazprom appears to have an appetite for the pipeline systems of neighboring states. A few years ago it become proprietor of much of Ukraine\'s network in settlement for financial debts. If Kazakhstan sends much more gas to Orenburg or accedes to Russian participation in its own national infrastructure, then it could find that infrastructure commandeered, to the exclusion of Kazakhstan\'s own production, by those same Russian companies for transmission to Russia of gas from Turkmenistan, which are slated to increase significantly in the future. On the other hand, if Kazakhstan is able to find other financing for its own pipeline expansion, then it could finally have a card to play when bargaining with Russia in the future, since Turkmenistan\'s gas exports to Russia rely upon transit across Kazakhstan\'s territory.

AUTHOR’S BIO: Robert M. Cutler http://www.robertcutler.org is Research Fellow, Institute of European and Russian Studies, Carleton University, Canada.