Central Asian Oil & Gas Development: Alternative Infrastructure Solutions Vladimir Milov Carnegie Endowment for International Peace Washington D.C., October 23 rd, 2007

Why the search for oil & gas transit alternatives is vital for Central Asian nations? Dependence on the Russian transit monopoly Kazakhstans challenge: how to evacuate additional oil if the oil production grows from 1.5 mbd to 3 mbd by 2015? Turkmenistans challenge: how to diversify gas exports, ensure direct access to consumers other than Russia, and ensure fair level of gas export prices?

Kazakhstans oil production surging… * Projection of the Kazakhstan government

…but how this new oil will be evacuated? Atasu-Alashankou oil pipeline to China: first stage completed, expansion expected Shipments of oil via Baku-Tbilisi-Ceyhan pipeline remain an option At the same time: No real progress with CPC expansion – transit through Russia remains a problematic option Questions rise with regard to the consequences of the recent Kazakh government attacks on foreign investors (the Kashagan consortium)

Potential alternative routes of evacuation of new Turkmen gas Trans-Caspian gas pipeline Trans-Afghani gas pipeline Caspian gas pipeline via Kazakhstan and Russia Various options of gas supply to/via Iran Turkmenistan-China gas pipeline

Unresolved Caspian dispute can effectively block the construction of any Trans-Caspian pipelines Bargaining among Turkmenistan and Azerbaijan on Kyapaz/Serdar, Azeri/Khazar, Chirag/Osman fields continues No progress achieved at the summit of the heads of Caspian littoral states on October 16 th, 2007, in Tehran Very hard to imagine a common position between Turkmenistan and Azerbaijan can be reached any time soon Trans-Caspian gas pipeline remains a dream.

Caspian pipeline Caspian gas pipeline also remains a dream. Despite massive media coverage of the trilateral Russia-Kazakhstan-Turkmenistan summit of May 12 th, 2007, no real progress on the pipeline construction has been observed ever since Governments of the three countries were supposed to come up with specific agreement on pipeline construction by September 1 st, 2007 – but that still didnt happen In fact, hardly any negotiations are taking place Turkmen gas supply guarantees to Russia (50 bcm/year) expire at the end of 2009 Currently, an issue of severe gas supply price increase apparently will dominate the agenda of Russian-Turkmen gas relations Map: East European Gas Analysis

Turkmen gas: more and more expensive for Russia * Monetized equivalent of a price used in barter transactions ** As suggested by Turkmen President G.Berdymukhammedov in September 2007

Other alternative options for Turkmen gas supplies Trans-Afghani pipeline remains controversial both on security, resource base and economic grounds Trans-Iranian pipeline probably would work, but the United States would most likely do their best to block its construction

Turkmenistan-China gas pipeline: the most realistic to- date alternative for Turkmen gas Fundamental link with upstream access (right bank of Amudarya, other fields) makes the project advantageous to China as compared to the Russian gas pipeline project Project not plagued with complicated geopolitics as compared to other competing projects China is capable of resolving problem issues of gas transit via Kazakhstan and Uzbekistan Although price issue is still unresolved, the project has good perspectives for moving forward Above: picture of symbolic first section of Turkmenistan-China gas pipeline laid on August 30th, 2007

Big questions surrounding the development of Turkmen gas production Remaining lack of clarity on resource base Will the opening of upstream sector to foreign investment ever happen? Is Turkmenistan seriously considering a breakaway from a Russian gas transit monopoly, or simply using this threat to push Russia to agree for a higher gas purchase price?

Conclusions Central Asian countries are very close to the potential break-up of the Russian oil & gas transit monopoly However, the net winner appears to be China, not the European market Successful development of the upstream oil & gas production in Central Asian countries is challenged by either worsening attitude to foreign investors (Kazakhstan) or the lack of its openness to foreign capital (Turkmenistan)