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

The Great Oil Game

Local and regional factors: 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

Caspian Oil Exporters: Oil output, mln barrels/day Kazakhstan Azerbaijan Caspian-4 1995 0,412 0,185 0,839 1996 0,462 0,183 0,886 1997 0,518 0,968 1998 0,520 0,229 1,040 1999 0,604 0,277 1,183 2000 0,709 0,283 1,287 2001 0,805 0,299 1,413 2002 0,948 0,303 1,595 2003 1,032 0,309 1,693 2004 1,193 0,312 1,840 2005 1,208 0,446 1,954 2006 1,331 0,603 2,226

Share in incremental world oil supply, % 2003 2004 2005 2000-2005 OPEC 69,3 68,8 118,1 37,4 Former Soviet Union 35,4 28,2 63,5 65,5 Russia 31,2 23,5 37,7 52,2 Caspian-4 4,0 4,7 26,6 13,0 Kazakhstan 3,2 5,1 8,1 9,9 Azerbaijan 0,1 22,5 3,0 Turkmenistan 0,7 -0,3 0,8 Uzbekistan 0,0 -3,8 -0,7 Other -4,7 -81,6 -2,8 including Angola 6,1 2,8 9,8 7,0 Sudan 2,2 8,8 3,6

Caspian-4 in world oil supply in 2005 Rank Share, % Saudi Arabia 1 13,5 Russia 2 12,1 USA 3 8,0 Iran 4 5,1 Mexico 5 4,8 Kazakhstan 18 1,6 Azerbaijan 31 0,6 Turkmenistan 41 0,2 Uzbekistan 45 0,1

Caspian-4 in world oil reserves, % Сhange in reserves 1998-2005 Rank Current reserves 2005 World 100,0 OPEC 70,7 75,2 Former Soviet Union 25,5 10,2 Russia 14,3 2 6,2 7 Kazakhstan 11,2 3 3,3 8 Azerbaijan 0,0 0,6 20 Turkmenistan 46 Uzbekistan 45 Iran 33,6 1 11,5 Nigeria 10,3 4 3,0 10 Qatar 8,8 5 1,3 14 Libya 7,4 6 9 Sudan 4,7 0,5 21 Angola 3,8 0,8 19

Reserves to production ratio, years 1998 2000 2002 2004 2005 USA 10 11 12 Azerbaijan 83 67 62 61 42 Kazakhstan 128 92 107 84 80 Norway 9 8 Russian Federation 25 24 21 Turkmenistan United Kingdom 5 6 Uzbekistan 13 Iran 71 105 89 93 Iraq 145 119 155 157 173 Saudi Arabia 75 76 68 66 Algeria 20 18 17 Angola 15 22 27 Sudan 60 54 46 China OPEC 73

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))

Azerbaijan: A country of one large deposit Azerbaijan: A country of one large deposit? oil output by source in 1995-2010 mln ton mln barrels per day AIOC Other Total 1997 0,1 9 9,1 0,002 0,181 0,183 1998 2,4 11,4 0,048 0,229 2000 5,1 14,1 0,102 0,283 2002 6,1 8,94 15,04 0,123 0,180 0,302 2004 6,57 8,98 15,55 0,132 0,312 2005 13,23 8,97 22,2 0,266 0,446 2006 21,3 8,75 30,05 0,428 0,176 0,603 2007 33,4 42,15 0,671 0,846 2008 52,3 61,05 1,050 1,226 2009 52,5 8,65 61,15 1,054 0,174 1,228 2010 56,5 8,5 65 1,135 0,171 1,305

Azerbaijan – Georgia – Turkey Pipeline annual throughput capacity – 50 mln. ton Officially run in May and October 2005 First tanker with Azeri oil set sail on June 2, 2006

China: increasing dependence on oil import (share of import in apparent consumption, %) 2005 actual (BP) 2010 2015 2020 World Energy Outlook , International Energy Administration US, 2005 (baseline) 51 60 65 70 OPEC 2003 53 67 Institute of Energy Economics, Japan, 2005 45 63 Institute of Econometrics and Techno-Economics, Chinese Academy of Social Sciences, 2004 32-38 45-59 Author, 2006 52-56 67-75

Exposure to the vulnerable Middle East & North Africa Risk Geographical structure of oil import in 2005, % USA Europe China Japan import from Canada 16 Mexico 12 2 South & Central America 21 3 8 Former Soviet Union 44 1 Middle East&North Africa 39 42 82 West Africa 14 5 17 Other Africa 4 Asia Pacific 18 10 All Other 7 TOTAL 100

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

Deficit of export capacity?

Pipelines in operation Projection of oil production and export in Azerbaijan in 2005-2015, mln.ton 2005 (actual) 2010 2015 Pipelines in operation Baku – Tbilisi - Ceyhan 0,556 up to 50 Baku - Supsa 6,9 8(up to10) 8(up to 10) Baku - Novorossiysk 4,34 4(up to18) 2(up to 18) Railway via Georgia (Batumi) 2,2 3-4 Total potential export capacity 13,3 up to 66 up to 64 Production 22,2 61 65 Internal consumption* 8,9 10 12-15 Export 51 50-53 Deficit(-)/Excess(+) of export capacity +14 - +15 +11 - +14 * - oil products are partially exported

Projections of oil production and export in Kazakhstan in 2005-2015 (mln. ton) 2005 (actual) 2010 2015 Oil pipelines in operation Atyrau – Samara 15 20 Caspian Pipeline Consortium 24,5 48 48-67 Kazakhstan – China - 10 Railway and oil tankers via Aktau (and Kuryk) sea ports 8,9 12 via Russia and to China by railway 6,2 6 Total potential export capacity 54,6 96 109 – 138 Production 61,9 70/90 120-125/140-145 Internal consumption* 7,3 10-15 Export 60/80 105/130 Deficit (-)/excess(+) of export capacity +36/+16 +4-+33/(-21)-(-2) New and possible pipelines Aktau – Baku – Tbilisi – Ceyhan 7 Kazakhstan – Iran ? Kazakhstan – Odessa - Brody Deficit (-)/excess (+) of export capacity +43/+23 +24-+53/(-1) -+18 * - oil products are partially exported

Non-cooperative win-loose game 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

The Great Gas Game

Caspian Gas in 2005 Russia 47,8 1 21,6 Iran 26,7 2 USA 19,0 Qatar 25,8 Share in world reserves, % Rank production, % Russia 47,8 1 21,6 Iran 26,7 2 USA 19,0 Qatar 25,8 3 Canada 6,7 Saudi Arabia 6,9 4 UK 3,2 UAE 6,0 5 Algeria Kazakhstan 3,0 11 Turkmenistan 2,1 12 2,9 Uzbekistan 2,0 13 1,9 19 0,9 25 Azerbaijan 1,4 24 0,2 44 Caspian-4 9,1 5,2

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

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

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??

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??

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)

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 Stream II pipeline Russia-Turkey ?? the Nord Stream pipeline Russia-Europe?? + Algeria?? + Iran?? + Norway??

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

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??