Azerbaijan’s state oil company SOCAR and Kazakhstan’s state monopoly KazMunaiGaz (KMG) this month signed an agreement moving Caspian energy projects for Europe forward as they set out the main principles for a transport system to convey Kazakhstani oil across the Caspian Sea for entry into the Baku-Tbilisi-Ceyhan (BTC) pipeline and subsequent re-export to world markets.

Development of Caspian energy projects for Europe

This agreements represents a step forward in the realization of the Kazakhstan-Caspian Transportation System (KCTS) that, while long discussed, has become Kazakhstan’s response to Russia’s unwillingness and/or inability to implement the long-promised doubling of the capacity of the Caspian Pipeline Consortium (CPC) line.

The CPC line takes oil from the Tengiz deposit in northwest Kazakhstan across southern Russia to the port of Novorossiisk on the Black Sea, to be loaded onto tankers for transit through the Turkish Straits. But it is also entirely possible that the oil could come from the offshore Kashagan deposit now under development, or even from both. The new document is said to specify quantities of 500,000 barrels per day (bpd) by 2012, rising to 750,000 bpd later.

This bilateral agreement was signed on the side of a larger meeting in the Azerbaijan capital, Baku, this month, which saw another significant pact in which it was agreed to supply Georgia’s natural gas consumption requirements for five years. This agreement represents Azerbaijan’s declination of Russia’s recent commercial offer for purchase of all of Azerbaijan’s gas production. While the commercial basis of the offer was excellent, Azerbaijan President Ilham Aliev averred non-commercial interests that must be considered.

The recent Baku meeting marked the second anniversary and fourth ministerial-level follow-up to the November 2006 Baku Initiative, itself a follow-up to a 2004 conference that, in the words of the European Commission (EC), “set the stage for a new cooperation” among the EC, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Turkey, Ukraine and Uzbekistan. Russia was present in 2004 and 2006 as an observer but did not respond to an invitation to send a representative to the most recent meetings.

Caspian energy projects for Europe: Their political and economic origin

It is noteworthy that the original initiative in 2004 preceded Russia’s ostentatious and highly publicized severance of gas supplies to Ukraine at the start of 2006, a move affecting to varying degrees member states of the European Union and which drew mass and elite attention in Europe to the precariousness arising from dependence on Russian energy supplies. In 2006, Russia supplied 40% of the EU’s natural gas consumption and 30% of its oil consumption.

These proportions are at present projected only to rise, particularly as the EU implements its policy decision of a few years ago to increase for environmental and ecological reasons the proportion of natural gas in its energy consumption mix.

As a result, the EC also adopted, prior to the most recent Baku meeting, a project for a “supergrid” that would permit member states to share electric power generated from different sources, including wind farms in the North Sea, solar energy in Spain and the projected Nabucco pipeline from Central Asia through Turkey to Central Europe.

The difference between this “supergrid” policy initiative and certain other EU policy initiatives in the past is that although the framework is a collection of proposals, these do not appear to be exclusively nationally driven and therefore unrelated. The inchoate European response to president Ronald Reagan’s Strategic Defense Initiative in the early 1980s, when the French-inspired Eureka program had little to do with Germany’s preferred European Defense Initiative, is one of the more egregious examples of this sort of failure to coordinate.

Stumbling blocks to realizing Caspian energy projects for Europe

At the same time, the fact that a grand, seemingly integrated design is set out by Eurocrats in Brussels does not guarantee its realization. Proposals to construct Trans-European Networks (TENs) in transport, energy and communications have been around since the policy idea first took hold in the 1980s. Since their implementation depends on autonomous policy decisions by the EU member states, some of these proposals are implemented and others are not.

Over the past two years, Russia has moved swiftly to set up obstacles to the realization of the Nabucco project, seeking to block it and other Caspian energy projects by proposing its own “South Stream” pipeline. This would branch westwards from the Russia-Turkey Blue Stream pipeline under the Black Sea. It has played the national interests of EU members off against one another and sought to entice European energy companies into special relationships that would prevent the all-European cooperation necessary to realize Nabucco from solidifying into concerted action.

At present, Turkey appears to be a stumbling block, independent of Russian moves. According to press reports, Turkey as a transit country for potential Nabucco gas is insisting on purchasing, at prices below market, a portion of all gas transiting via Nabucco, for domestic consumption. Former Azerbaijani president Heydar Aliev, the current president’s father, was able magnanimously to forgo transit fees in order to seal the deal with former Georgian president Eduard Shevardnadze for construction of the BTC back in the late 1990s. However, it is doubtful that his son is either willing or able to accord such a privilege to Turkey.

A key question is where to find the capital for investment in the construction of such (“Euro-Caspian”) Caspian energy projects for Europe. This is a matter now affecting energy investment worldwide, and it has yet to be resolved in the case to hand. This will depend, among other things, on the future evolution of world energy market prices.

[A version of this article was first published in Asia Times Online, 28 November 2008.]