Central Asia Europe & Eurasia Geopolitics & Energy Security Oil and Gas Russia

EnergySource

October 23, 2018

Pulling east: The gravity of China’s Belt and Road in Eurasian energy

By Amb. Robert Cekuta

Uncertainties about the global oil market, apprehensions concerning Europe’s reliance on Russian natural gas, and an evolving geopolitical situation in Eurasia call for renewed focus on the Caspian Basin. Engaging the region, however, will be different than in the years following the Soviet Union’s collapse. At the time, the idea in Washington and other capitals was moving oil and later natural gas west out of countries in the region, preferably without crossing Russia or Iran. Today, China looks at the region’s hydrocarbons as part of its Belt and Road Initiative (BRI). Moreover, Russian and Iranian ambitions—and the way the United States and the West address them—have direct impacts, including on how readily the region’s hydrocarbons can be made available to world markets.

Estimates put Caspian Basin hydrocarbon reserves at around 48 billion barrels of oil and 292 trillion cubic feet (8.3 trillion cubic meters) of natural gas. Kazakhstan’s Kashagan oil field, the region’s largest, has an estimated 13 billion barrels of recoverable reserves. New studies and technologies could boost oil and gas output as they have in other established provinces.

Years of western diplomatic engagement have paid off, for example, with the construction of oil, and now gas, pipelines to move the region’s hydrocarbons across the southern Caucasus to world markets. Azerbaijan, for instance, has been a major supplier of Israel’s oil needs. Production has started in Azerbaijan’s Shah Deniz II field and the pipelines across Georgia and Turkey are filling as part of the $40 billion Southern Gas Corridor. Total and BP are pursuing new hydrocarbon projects in Azerbaijan.

But further progress is not a given and new above-the-ground factors demand attention and engagement.

Current US and European Union (EU) attention on the Southern Gas Corridor project centers on the final bit of its last leg, the Trans Adriatic Pipeline (TAP), and the on-going delays in completing the pipeline’s landing in Puglia, Italy. A combination of environmental concerns, domestic Italian politics, and a rumored dash of outside money designed to exacerbate tensions have combined to delay progress. Diplomatic engagement by the US, the EU Commission, and others is aimed at pushing things ahead while recognizing Italy’s political dynamics, but the situation in southern Italy confounds movement.

The Caspian Basin’s developing realities demand the West broaden its field of vision and engagement. 

China looks to diversify its oil and gas supplies, both in terms of origin and route of delivery. With over 80 percent of its oil imports passing through the Strait of Malacca, China seeks to cut its dependence on this route. Tensions with the United States over freedom of navigation and China’s extensive territorial claims in the South China Sea are important factors in Beijing’s BRI ambitions and add another component to the regional and global energy security mix. The terms arranged for the pipeline China built to import natural gas from Turkmenistan—whose natural gas deposits are the world’s fourth largest—likely play to China’s advantage, a frequent suspicion and complaint when Chinese companies, government, and institutions finance and build BRI-related projects.

China is certainly a growing factor in the Caspian energy picture, but Russia and Iran are present, pursuing their own aims. The agreement on the Caspian signed in August 2018 after twenty years of negotiations is indicative of the factors at play; some questions get resolved but others are left open. The agreement delineates territorial waters in a way that trims back Iran’s claim that it should have 20 percent of the Caspian. It may clear the way for Turkmenistan and Azerbaijan to proceed with the long-discussed TransCaspian gas pipeline, if the two can reach agreement to build it. However, it also precludes any militaries other than those of the five littoral states from being present in the Caspian, a provision that favors Russia and probably pleases Iran, as those countries continue to exert pressure on the other states on the Caspian and in the region more broadly. Caspian Basin countries have long had to handle these dynamics, but sanctions and other US policies will make for difficult choices.

Sanctions the United States are expected to impose on Iran on November 4 will likely be much more stringent than those the Obama Administration put in place. Under Obama, the United States was willing to work with China, Korea, India, Japan, and others to see a steady decline in their purchases of Iranian oil; given the Trump Administration’s continuing talk of “maximum pressure,” expectations are that the United States will take a “cut off all purchases of Iranian hydrocarbons or else” approach. Existing swap and other arrangements, along with any import dealings, will likely come under harsh scrutiny. Iran will apply its own pressure on Caspian states to blunt the US sanctions and to show its own public that Iran will not be cowed.

Meanwhile, Russia continues to put pressure on the Caspian states to further its regional ambitions and its use of hydrocarbons as a foreign policy tool. Moscow is building Turkish Stream, a pipeline supplying gas to Turkey and perhaps the Balkans, which bypasses Ukraine. That pipeline could also compete with new gas supplies from Shah Deniz II and builds on a history of Russian actions that have discouraged oil or gas pipelines from the eastern side of the Caspian if they do not cross Russian territory. Again, despite the August agreement, it is an open question whether a long-sought pipeline bringing Turkmen gas westward will go forward, even though that country would certainly benefit from the increased revenue.

It is time for Washington is to show the countries of the Caucasus and Central Asia that it recognizes the factors at play in the region and that it will engage consistently to help our partners there manage them. If the US wants their help on energy, sanctions, and other matters, the countries of the Caspian Basin need to feel the United States wants a productive, mutually-beneficial, on-going relationship with them.

Amb. Robert Cekuta is the former US ambassador to Azerbaijan.

Image: NASA astronaut Scott Kelly captured this earth observation of the Caspian Sea on July 27, 2015 while onboard the International Space Station (photo by NASA, Scott Kelly/Wikimedia Commons).