Russia Sanctions Jeopardize Access to Central Asian Energy Resources

As the Obama administration and the European Union rush to embrace energy poor, bankrupt Ukraine, deepening ties between Russia and China, as evinced by the recent $400 billion Gazprom-China contract have effectively ended the West’s opportunity to expand their footprint in the Caspian basin, a key tenet of successive U.S. administrations since the 1991 collapse of Communism in the USSR. Russian President Vladimir Putin hailed the deal as an “epochal event,” boasting that it is “the biggest contract in the history of the gas sector of the former USSR and Russia.”

Of the energy riches of the states surrounding the Caspian – Iran, Russia, Azerbaijan, Kazakhstan and Turkmenistan – only Azerbaijan has managed to strike substantial deals for western export of energy, while Iran remains hobbled by 35 years of U.S. and international sanctions. China, with Russia’s apparent blessing, has secured for the foreseeable future exports volumes of Kazakh, Turkmen and Uzbek natural gas.

On May 31, in news barely covered in the Western press, state-owned China National Petroleum Corp. (CNPC) announced that its Line C of the Central Asia-China Gas Pipeline became operational, shunting Turkmen gas via Uzbekistan to Xinjiang. The 1,140 mile-long Line C, jointly constructed by CNPC and its Central Asian counterparts, runs parallel with Lines A and B, starting from Gedaim on the Turkmen-Uzbek border, entering China at Horgos, Xinjiang, to link up with the Third West-East Gas Pipeline. Line C construction began in September, 2012, and the overall welding work of the pipeline was completed at the end of 2013. Upon completion of all its supporting facilities by the end of 2015, Line C will reach its design capacity of 25 billion cubic meters annually, by which time the overall delivery capacity of Lines A, B and C of the Central Asia-China Gas Pipeline will hit 55 bcm/a, equivalent to approximately 20 percent of China’s natural gas consumption.

Nor is that all – on March 4 in Dushanbe, Trans-Asia Gas Pipeline Co., a CNPC subsidiary, signed with Tajiktransgaz to establish a company to manage construction of Line D of the Central Asia-China Gas Pipeline, building upon intergovernmental agreements the Chinese government signed in September 2013 with Uzbekistan, Tajikistan, and Kyrgyzstan. Preparations for Line D began after the 2011 signing of a gas supply agreement between China and Turkmenistan. When Line D becomes operational, the annual throughput of the Central Asia-China Gas Pipeline will surge to more than 80 bcm.

It is the rising threat of sanctions against Russia in the wake of the Crimean crisis that produced the alliance between Russia, the world’s largest energy producer, and China, the world’s largest energy consumer. Such a deal had been in the discussion stage for a decade, with Gazprom apparently baulking at Chinese price demands. The escalating confrontation with the EU provided a hothouse environment for Moscow and Beijing to strike a deal. Gazprom has promised to drill new gas fields in Siberia, construct a new 2,500-mile pipeline and ship 1.3 trillion cubic feet of gas each year to CNPC.

What most observers fail to understand is that the growing strategic proximity of Russia and China extends to Caspian hydrocarbons as well. Only Azerbaijan is firmly in the Western orbit, using the 1,093-mile-long, 1.2 million-barrel-per-day Baku-Tbilisi-Ceyhan (BTC) oil pipeline. The BTC pipeline transports oil from Azerbaijan’s offshore Caspian Azeri-Chirag-Guneshli oil field, via Baku’s Sangachal Terminal, across Georgia, to Turkey’s deep-water Mediterranean port of Ceyhan. Kazakh oil exports are tied to the Caspian Pipeline Corp. (CPC) line, which terminates in Russia’s Black Sea Novorossiisk port. Iran is still beyond the pale because of sanctions and Turkmenistan’s export options are limited to Iran, northward to Russia and eastwards to China.

What is significant about the Russian-Chinese hydrocarbon trade is that Gazprom has effectively ceded market control of Central Asian natural gas to China. After the 1991 collapse of the USSR Moscow’s trump card was the fact that it controlled the Truboprovodnaiia sistema Sredniaia Aziia-Tsentr (the Central Asia-Center, or SATS, pipeline system.) Russia’s natural gas monopoly Gazprom controls the SATS complex of pipelines, which run from Turkmenistan via Uzbekistan and Kazakhstan to Russia. The SATS eastern branch consists of SATS-1, 2, 4 and 5 pipelines, which were built between 1960 and 1988. Construction began after the discovery of Turkmenistan’s Dzharkak field, with the first SATS section coming online in 1960, while SATS-4 was commissioned in 1973. Simply put, after 1991, Central Asia’s only opportunity for energy exports was controlled by Russia, which was determined to obey its new-found capitalist mantra of “buy cheap and sell dear,” paying Central Asia a fraction of the gas’ market price and then exporting it to Europe, pocketing the difference. The Kremlin’s isolationist policy along with Russia’s tightfisted low prices led Turkmen President Sparmurat Niyazov in March 1997 to halt gas exports and to remind the Kremlin of Ashgabat’s other options. Later that year he opened the $195 million, 124-mile, 8.4 bcm Korpezhe-Kurt Kui pipeline to Iran, Central Asia’s first gas export pipeline to bypass Russia, creating the region’s first southern export pipeline.

The notable subtext then of the Gazprom-China deal is that Gazprom has essentially liberated Central Asian gas exports from Russian control to allowing them to increase their exports to China, as Gazprom prepares to ramp up its production in eastern Siberia to provide the Chinese market.

And those Central Asian reserves are significant. In May 2011 the respected British audit firm Gaffney, Cline and Associates released a report on Turkmenistan’s gas reserves noting that the South Yolotan natural gas superfield, discovered in 2006, contains reserves of more than 20 trillion cubic meters of natural gas, enough to satisfy European demand for more than 50 years and making it the second largest gas field ever found. It should be noted here that when in 2006, following the field’s discovery, Niyazov claimed that the discovery boosted the country’s reserves up to 24 trillion cubic meters of natural gas, his claims were taken as mere braggadocio, with BP calculating them at slightly more than 1/10th that amount.

Ashgabat was subsequently flooded with Western energy firms, but the terms they offered were sufficiently hardball capitalism and ludicrous projects like the TAPI pipeline that that Turkmenistan decided to go… with China. As effectively have Uzbekistan and Tajikistan.

Accordingly, part of the collateral “blowback” from strident U.S. policy over Ukraine has been to drive Russia and China closer together, and essentially to abandon Central Asian energy to fueling the Chinese economy.

Not the most foresighted foreign policy initiatives.