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Black Sea Energy and Economic Forum 2009
Speakers:
- Eric Watkins, Oil Diplomacy Editor, Oil & Gas Journal
- Vitaliy Baylarbayov, Deputy Vice President, SOCAR
- Kevin Bortz, Director, Natural Resources, EBRD
- Jennifer Coolidge, Managing Director, CMX Caspian and Gulf Consultants Limited
- John Roberts, Energy Security Specialist, Platts
October 2, 2009
ERIC WATKINS: Our general said yesterday to thank people for being here. After lunch is a difficult time. I know the difficulty myself because I really had to resist that bread. I know what it does to me in a conference like this.
Anyway, we are prepared to move forward with our discussion, which is session seven: Central Asia in World Energy Dynamics. And what I am hoping to do is give all of the speakers essentially one quick simple question.
As soon as I saw this phrase, energy dynamics, world energy dynamics, I thought I knew what it meant. But I realized that it is not a standard phrase. So very quickly, I just want to go around to all of the participants, just a minute-or-two answer to get their take on what this is and to a certain extent also the very simple question of just what do we mean by Central Asia? Which countries are involved?
So after that, we will then go into other questions, specific questions for each of these people who are tremendous experts at what they do. I am really looking forward to their answers. And I am genuinely looking forward to your questions. So to begin, Mr. Roberts?
JOHN ROBERTS: I am going to start by trying to say why I think Central Asia is important in a global context, but more specifically, in a European context. We know that the big demand for gas and oil is in India and China. That is where the growing demand is. But if you look at the bulk of pipelines and export routes, most of them head west. Even when you include the new pipelines going to China, the bulk of exports are still likely to head west. Why? Because the existing infrastructure goes through Russia.
I don’t think oil is a problem. Oil is a fundable commodity. If there are transit problems with states that make it difficult, essentially this damages the producer. It doesn’t really damage the consumer that much because the consumer is paying a global price anyway. It might, however, have some impact on levels of production upstream.
But I think gas is very different. And I am going to start with one very basic issue: the centrality of Russia and the triangular relationship between Russia, Central Asia and Europe. Why do I do that? Because if you hear European cries, they offer security of supply; if you hear Russian fears, they offer security of demand. And the Russians have a point. Let me give you the classic illustration.
I am now going to quote figures. And I hope this is about the last series of figures I quote. The European Union has, for some reason, chosen 2005 as its base year. In that year, total gas demand, 516 BCM of which 298 BCM imports, 218 BCM domestic production. BP figures are slightly different, but don’t worry. We are talking about relative assumptions here.
Until recently, what was the mainstream kind of European projection? Okay. Moderate prices, oil at $61 a barrel, demand would rise to 585 BCM. And if prices were much higher at $100, it would rise to 514 BCM. Whoops. That is not rising; that is falling. What does it mean, though, in terms of imports, which is the key issue that we are concerned with here? One hundred fifty-four BCM increase in imports at $61; 85 BCM increase in imports essentially replacing lost domestic production at $100.
Then we change to what might be termed the European new energy policy, the idea that we are energy efficient, that we are conserving, that we take great actions over the next several years to change our patented behavior. Suddenly, they come up with very different figures. If all the measures required are adopted, demand falls to 462 BCM even at $61 a barrel. That is an increase of 39 BCM in imports.
And if you really want the shocking figure, if oil goes to $100 and it is maintained at that in an average period, and we are talking up to 2020. Demand falls to 400 BCM and even imports fall by 14 BCM. So you are sitting there in the Kremlin and in Gazprom headquarters trying to work out what is European demand. And you have a range of 154 BCM-increase imports to a possibility of 14 BCM-decrease imports. And you wonder why they value long-term contracts. And you wonder why the EU is so against long-term contracts. And you think we have a real problem. And indeed, from a Russian perspective, they do.
So what do you get as a consequence, as a summation of this? You get people like Alexander Golovin, the chief Russian negotiator for the Caspian Sea, stating to Europe, do not expect that we will automatically be able to deliver to you the kind of volume you expect to import in the future. A warning that Russia itself, for some very good reasons as well as some difficult ones such as the Ukraine crisis, does not know what the market will be.
If we have an uncertain market, what is the way of making it more certain? Diversify supply. That is the whole basis of the EU’s predication of policy on the development of the Southern Corridor. If you have the Southern Corridor, you can bring in gas from the Middle East and in particular, from the Caspian. We heard yesterday from Nabucco Consortium, they actually are planning to start Nabucco without Caspian gas. The first gas through Nabucco is to come from Iraq. Curiously, the Reuters report did not mention where in Iraq. My own assumption is it is not mainstream, but Northern Iraq from the Kurdish regions.
But two years later, what happens? One of the world’s biggest current gas projects with luck should produce the start of its second phase, Shah Deniz field in Azerbaijan capable of producing what are we expecting, 14-16 BCM in that phase. Some of it, no doubt, will be used by Azerbaijan itself. Some will be used by Turkey, one assumes. Possibly some, a little might even go to Russia. But the assumption is pending difficult negotiations with Turkey on transit issues that quite a large part of it will head west and that it will be part of a key element that does two things. It provides a Caspian element for Nabucco. And for the first time, Caspian gas, which already reaches the European Union in Greece, will actually reach a diversification point in Europe at Baumgarten where it can go.
After that, if you get any gas going up to Baumgarten, then as demand fluctuates – and one would hope in this context if you are a producer – increases, you expand the line and you can get more and more gas going through.
Last final point, where does Turkmenistan fit in this? The fourth largest gas resource holder, a country facing very considerable problems and converting gas resources into output and regarded as a very major potential contributor to the whole Southern Corridor concept, a country with which Azerbaijan has said it is willing, indeed – I think one would almost say delighted – to serve as a reliable transit corridor.
Question that I asked this morning: How do you do it? Answer: Build a Trans-Caspian pipeline to the gates of Turkmenistan, in this case, a coastal destination around Türkmenbaşy. How to do it? We have been discussing that for 10 years. There are more realistic proposals now. It is still very difficult. But if you are Europe and the European Union, you have a nice little equation. On the one side, a European Union that wants to diversify demand – supply sources. On the other, a Turkmenistan that wants to diversify markets.
The logic is to put them together. So far, I don’t think anybody has a clear and final answer. But I do think it is possible to argue that partial answers are under serious consideration. Thank you.
MR. WATKINS: Well, thank you very much. The next person I would like to speak is Kevin Bortz who is with the EBRD. And actually, the question I have for him, I have written down since I didn’t want to forget it. When we talk of markets for Central Asian energy sources, we tend to think of the U.S. or Europe. And in this particular conference, our views have been mainly everything is going toward Europe. But what is the role of East Asian countries such as China or Japan or South Korea in terms of market? And do these countries present any problems for Europe or the U.S. regarding Central Asian supplies?
KEVIN BORTZ: Thank you. First of all, what is the definition of Central Asia? Everyone thinks of Kazakhstan, Turkmenistan, Uzbekistan. But in my definition, I would also reach a little bit further West and include Mongolia and don’t forget Kyrgyzstan and Tajikistan. And I think – I agree with John when he was talking about the real issue is gas, not oil. Oil will make its way to the market. That is not the issue.
But another element of all this in the energy dimension is coal. And in Central Asia, there are significant amounts of coal in Mongolia. And as was alluded before, there are real issues with the triangle and the Pacific Rim has huge demands for coal. And what does that mean for Central Asia? And you have huge demands also for the gas, as John has just told you in all the figures. I think the real problem is do the players have problems with how everything is being developed in Central Asia?
And the problem from my perspective is there are big questions. There are big problems. A lot of it stems from the political stability of these countries, most of them. Mongolia is the example of a true democracy. The others, big question mark. What happens in 5, 10 years from now? And also, the question of transparency. This is a big problem. John was saying Turkmenistan is willing, but you have to get the gas to the markets to whether it is east or west. You have to develop the upstream. And big question for Europe, for the United States, for myself as a potential financial institution is, is there an even playing field for all potential players?
The companies, IOCs, who are coming from Europe or from North America, are going to be looking to want to work in countries such as Turkmenistan where you have to develop these reserves to produce the volumes of gas that are necessary for Europe. But can they compete? Is it an even, transparent playing field for them to do that against other investors who are coming in who don’t have the same levels of transparency or the same operating practices or the same environmental concerns? Does that put a lot of companies at a disadvantage? And will they actually then be able to go and develop these reserves that are necessary to fill these pipelines?
These are a lot of big questions. It is a lot of questions for the upstream companies. It is a lot of questions for potential financial institutions who could be financing them. And so political stability and transparency are big issues here. Thank you.
MR. WATKINS: The next person I would like to speak is Dr. Jennifer Coolidge. And I have to confess. I have seen Dr. Coolidge in the corridors around here talking with all sorts of interesting people. And most of those people are listening to her. That is quite a thing to say about anyone, I think. I also took the liberty of doing my due diligence on her consultancy. And I was pleased by far to see exactly their point of view, which is not to be a consultancy sitting in Los Angeles or New York or London or maybe even Paris, but to have people on the ground.
So I would like her to tell us what it is like on the ground in Turkmenistan at the moment. What are the things that are happening? What is likely to happen? And where is Turkmenistan heading?
JENNIFER COOLIDGE: Thank you. I will start by thanking the organizers for inviting me to speak here. But also, in terms of your original question about energy dynamics, which some of us have sidelined, I think what I would like to start with is this disjoint. And I focus primarily on hydrocarbons, so I am going to focus on that. But this disjoint between producers and consumers and pipeline companies. And for at least 5 years now, we have been in an intense pipeline discussion, where various pipeline companies are constantly promoting their ideas.
But really, as John said, we have the consumers downstream thinking okay, where are the gas molecules? Are they there? And now increasingly with decreasing demand growth prospects, do we need those molecules? Or how many of those molecules do we need? And then we have the producer states on the other side saying, well, where are the markets? Actually, if we produce this gas as in the case of Turkmenistan, is there a market in Europe? Will they deliver a pipeline like the Chinese have? Can they function in that same sort of state command controlled economy way?
So I would just like to highlight that disjoint that we are forever focusing on the middle bit, the pipeline bit, but the two endpoints are much more crucial to nail down. And a pipeline won’t happen until it is commercially necessitated and viable. So in terms of global energy dynamics, I think the interrelations between producers, consumers and in the case of pipelines, those transit states and the pipeline companies are crucial to understand.
Thank you for your introduction. I will talk a little bit about what has happened in Turkmenistan since March because I see that as a crucial turning point. There have been very drawn out and difficult negotiations between Turkmenistan and Russia since March on pricing. And I think even two or three days ago, Russia announced it would buy no more gas from Turkmenistan in 2009. So about two-and-a-half weeks ago, the Turkmen president announced that they would be taking a timeout from negotiations with Gazprom. Approximately 10 days later, he announced that they would start negotiations again. And two days after that, the Russians announced we won’t buy any more gas in 2009.
So to back up to what had happened in March, difficult negotiations and after a mission to Moscow by the Turkmen president, which focused on volumes, on pricing and on the issue of sovereignty and control – monopoly control by Russia over Turkmenistan’s gas export routes. On April 4th, those meetings were – March 24th. On April 4th, the Turkmen on their government Web site posted, I would consider, the most strong statements since the complete shutoff between ’97 and ’98 on their Web site on April 4th, talking about a threat to their sovereignty, talking about monopoly control of their gas, talking about wanting to be able to determine their own pricing regimes, talking about wanting to be able to determine volumes that would go in different directions.
And then four days later, there was a significant explosion on the CAC-4 pipeline over the night of April 8th to 9th this year. And so since then, 157 wellheads have been shut in in Turkmenistan. Eight percent of the gas that was previously flowing to Turkmenistan – from Turkmenistan to Russia is currently flowing now. That means an equivalent of three-and-a-half to four BCM per year is flowing to Russia now through the CAC-3 pipeline.
I don’t know whether the Russian statements of several days ago mean that that will stop as well. But it became a very urgent situation, in my opinion, for Turkmenistan to diversify actively. And so we have seen an increase in the agreement for China that it was actually inked, that 40 BCM would be delivered through the eventual China pipeline.
And we have seen a recent increase in the capacity of pipelines to Iran from an initial pipeline, which could carry 14 BCM, Korpezhe-Kurt Kui, which has currently been carrying between seven and 10, to the construction currently ongoing of a new six BCM pipeline from Dovletabat to Sarakhs. So a total of 20 to Iran, plus a contract to Petropars of Iran to develop a 10 BCM phase at South Yoloton.
And then we have seen certainly a lot of negotiations with various delegations from Europe. The Romanian president himself, the prime minister and president of Georgia, the president and prime ministers of Turkey, the duke of York and multiple others have engaged since this explosion in April, which seems to me – and this I quote from John from several months ago, “a technical solution to Russia’s oversupply problem.”
It was stated by a Turkmen official at a meeting in Paris that this explosion was like a vacuum bomb effect that basically the Turkmen needed 72 hours notice in order to have supplies shut off at the Uzbek border, but received between 12 and 18 hours notice from the Russians. So this is the picture that is developing.
Now, President Berdimuhamedow has had recent meetings in New York. And I think that the questions I asked earlier of the Turkmen delegation point to the important issues going forward. Right now there is a production and investment disjoint. We can talk all we want about pipelines or building a pipeline to the Turkmen shore. But I believe the reality is that sometime next year, Turkmenistan will resume some level of exports to Russia, be they in the range of 20 or 30 BCM per year instead of 42 to 50.
And so by the time a Nabucco or Southern Corridor pipeline may be feasible, there still won’t be this surplus of gas that there is right now. So it is crucial to develop the onshore reserves in the East of the country.
Now, I alluded in my question to the necessity for an IOC or for Europe and an IOC or the U.S., Europe and a consortia of IOCs to take the risk in investing in the pipeline. And in return for that, they would need to receive some sort of assurance that they would receive bookable reserves, even if they were to receive an onshore contract, as it were.
So I think that is where we are right now. And so I would encourage everyone, as Steve said yesterday, to continue focusing on the development of onshore resources in Turkmenistan and to assist the Turkmen government in fulfilling that. And I think the pipeline discussion is a secondary discussion to that discussion. So I think the time more than ever is now because of the timeline I have laid out of events that happened since March. So I think the window is open. And I think I will finish there and we will go on to the other side of the Caspian.
MR. WATKINS: The other side of the Caspian, indeed.
Mr. Vitaliy Baylarbayov, unfortunately, didn’t have his little biography put into the notes for the conference. And he has very kindly asked me to – given me the details that he would like me to read to you. He has got tremendous experience. And I think that we all know that with the collapse of the Soviet Union that Azerbaijan played a key role in the beginning of the opening up of this Caspian region and Central Asia all together. And Mr. Vitaliy Baylarbayov has had a lot to do with that himself.
As he says here, he has more than 30 years experience in oil and gas. He has participated in all – and I am going to underline this – all major negotiations for Azerbaijan. That is the – ACG fields, the BTC, the BTE, Western –
He is a member of many international associations and not least is a Ph.D. in economics. And what he is going to be doing today is telling us about how Azerbaijan, which has spearheaded the movement for this development, is functioning today, how in particular it is going to connect with Romania and other developments that are on the horizon.
VITALIY BAYLARBAYOV: Or any other questions which you may have in addition to those which were already mentioned. First, it is, of course, a privilege to speak to the auditorium after lunch, where all of you are in a better mood. And now our task is better keep to this mood and not making you sleepy. I will try to.
And I will start from the point that I represent here and at this podium, in particular, the position of the producer, the position which was very well-presented by Mr. Kakaev at the previous panel. And in many ways, we share their view, which is for the producer, it is important to have an interruptible, stable, firm, transparent access to the international markets. For the producers, it is, of course, preferable to be connected directly to these markets.
And some producers prefer to have those connections exactly at their border. Some producers prefer to initiate some projects, which may not end up at the borders, but at the borders of others by this serving, helping, assisting others in developing their economy, satisfying their interests and establishing long-term relationships.
A lot of people here quoted Dinu Patriciu already. I will also refer to his first-day statement, where he said that he hates pipeline. I am very different. I love them. I love them all, as many as I can touch, as many as I can participate in. And Eric kindly listed some of the projects, primarily pipeline projects, but there were also projects in the negotiations of which I have participated.
At that time, we created the slogan, which we many times repeated at the different conferences. Happiness is multiple pipelines. This is happiness of the producers to have as many bridges connecting them with the rest of the world as they can. And Turkmenistan is not the only country which wants it and successfully following this kind of part. We also do. We also do with regard to the projects we already implemented with the great assistance and partnerships from the side of Georgia and from the side of the Republic of Turkey. We hope to see more. We hope to establish the further pipeline, the relationships with those and the other countries.
On the same basis, we established those, which is freedom of transit, preservation of the title for the hydrocarbons in transit, transparency of the relationships, full predictability of the relationships for the whole duration of our contracts. And we are not only doing that with already existing partners, but we are trying to establish this with others.
Coming back to the issues you mentioned, where we are in Azerbaijan with regard to the latest developments. First, it is already 15 years since we successfully signed Azeri-Chirag-Gunashli production sharing agreement. We recently celebrated that in Baku. And that is our very significant achievement. This contract so far produced more than 150 million pounds of crude and about 14 billion cubic meters of gas. That is big stuff, really big.
Most of this was exported to the international markets. There was a pipeline already mentioned. All of them are successfully working, whether they are going across the territory of the Russian Federation or the across the territory of Georgia and Turkey. And that is another achievement, which we see as a really important one.
We are trying to keep good relationships with our neighbors. We are trying to promote peace and stability in our region. We are in favor of peace and stability in the Caspian Sea. Those are the priorities, which we see ourselves and tasks for ourselves. Very good cooperation, transparent cooperation with our neighbors. We are developing this type of cooperation with Kazakhstan. With Eric’s permission, we will come back to this later. That is an issue, which I would like to highlight in more depth.
And we would like to see those relationships with others with Turkmenistan, obviously. With Georgia and Turkey, we would like to increase the scope of our cooperation. We would like to expose ourselves, if you wish, to the European markets with regard to the deliveries of our gas. Our oil is already there, almost everywhere in all of the major ports of Europe and the United States. And at least in America even, we are supplying to Argentina and we are supplying to Asia. We are supplying to the Asian markets. Our oil – oil is almost everywhere. We want our gas to be in as many destinations as possible. Europe is a prime destination for many reasons.
But we follow the dynamics well-described by John right now. And because of that, we not only concentrate our interests on just one destination, one export route with regard to our gas. We are in support, as I said, of as many pipelines as possible. If we are talking about gas, the same for oil, obviously. We are in support of Nabucco. That is strategic, important pipeline. We are in support of ITGI, of Trans-Adriatic pipeline, so-called TAP project.
We are very good supporters upon European pipeline, Constanta-Trieste pipeline, which can deliver our crude to the center, the very center of Europe. And that is why we are providing support to other connections as well. Other bypasses without any exceptions where those bypasses are going across the territory of Turkey or across the territory of Bulgaria or territory or Ukraine or territory of Romania. We will provide the full support to each and every pipeline project, which can connect us as a producer – significant producer, not the major one. We are currently producing, for your information, about 27 BCM of gas per year. Only 10 years ago, we were producing eight. We are planning to produce 50 by 2020.
That is absolutely real plan if we will have those accesses to the information. We are planning to produce not less than 50, probably 50, 60 million pounds of crude within a significant period of time, most likely until 2020. If there will be further discoveries in Azerbaijan, this will last even further. So we would like to keep our existing pipelines full. We would like to see more pipelines being implemented in the region. And we truly and strongly believe that major conditions for that are peace, stability and cooperation. That is what we are promoting. Thank you.
MR. WATKINS: Well, peace, stability, yes. As the oil diplomacy editor of the Oil and Gas Journal, my job really takes up two things. One is conflict – what causes conflict – and conflict resolution. That is really what I focus on. That is what interests me. The rest of everything doesn’t really matter too much. And one of the reasons I accepted the invitation to come here and which was really an honor – they brought me all the way from the Pacific Coast and they are the Atlantic Council – is the fact that it was an opportunity to come back to a region I visited a few times in the past.
For me, what I see happening here is a tremendous amount of potential for development of the region. But also, I am seeing a lot of things that look like conflict. We can say that these are intentional or not intentional, whatever. The question is there are pipeline explosions. There are pipeline shutdowns. There are negotiations where pipelines can’t be built, where ships have to be built instead.
So the overriding question that comes up at least for hydrocarbons traveling toward Europe is how secure is this region as a producer? And how secure is this region as a transport corridor for Europe? And I am going to toss that cap to this young man here to talk about, in particular, the Transcaucasus.
KEVIN BORTZ: Well, I will start. I think there has been a good track record since the last 10, 15 years. EBRD has been involved with the Northern Western pipelines with BTC, with the South Caucasus pipelines. And they have worked quite well. And when those deals were being put together, they were very difficult. There were a lot of questions from every angle. And everyone keeps asking me what has happened. What is the status of them today? And I say very successful. You don’t read about them in the papers. They are up. They are running. They are doing what they are supposed to.
Once in a while, there is a technical problem. Once in a while, there are shutdowns or shut-ins. But the main thing is they are up and running. And I think it is a very, on a whole, stable corridor. The producers of the upstream oil and gas includes companies from a wide variety of areas. You have Russians. You have many other countries from the Caspian Sea who are participating in the upstream. You have the Japanese. You have the Americans. You have the Europeans. And so far, they all have a common interest is to get the hydrocarbons out. The pipelines are up and running. So from that perspective, we continue to support as many pipelines as possible through that corridor is the way to go.
MR. WATKINS: Also, one of the reasons I came is because of the – it is an anniversary. It is just about a year or so since we had the disruption that took place through Georgia, the conflict with Russia. And Russia is a name that always comes up. It has come up a lot here. And unfortunately, we don’t have an official delegation of Russians to speak. That is very unfortunate.
Another name that comes up is Iran. Iran has just come up as a major corridor now for Turkmenistan. These two countries, Iran and Russia, come up over and over again. And it is very interesting to me personally to try to understand what looks like a North-South dynamic with Russia and Iran, not necessarily working together, but working independently together with the East-West dynamic that is here.
But I think maybe Russia gets a bad press. If the aim is to work towards peace in the region, then I think really what everyone has to do is try to work with Russia. And I am going to ask John again maybe to repeat of what he said a little bit before about what is the best way to work with Russia? Does Russia deserve its bad press? What can we do to work peacefully with Russia? I should ask also this, perhaps. What is it the Russians really want?
MR. ROBERTS: I am not sure I know what the Russians really want. It is quite conceivable that there are large numbers of people in the Russian energy industry that do not know what the Russians really want. If I had to summarize it in a simple epithet, I would assume that Prime Minister Putin wants a continued system of control, by which I mean state’s direction of industry and Russian direction of all aspects of the exports chain rights to the final consumer. This is where you run flat up against European competition and open-market principles.
What do they want, though, in terms of the international relations aspect on the upstream side? Access to Central Asian resources as and when it suits them. If it doesn’t suit them now, they don’t want to have it, but nor do they necessarily want anybody else to have it. They remain strictly opposed to concepts like a Trans-Caspian pipeline. And they were clearly upset by the development of Chinese pipelines. And there have been some indications that they haven’t been too happy about sales to Iran.
What is to be done, which is, of course, the great Soviet question? Lenin asked it, I think, years ago. The answer is how do we treat Russia? Russia sometimes seems to wish to have a privileged position. Well, the people who most want privileged positions are, of course, children. Every child wants to be treated better. You have to learn to treat Russia as a grownup. Russia is one of a member of different communities. It has rights and it has responsibilities. It has obligations. And I think you have to hold it to them. And the biggest single problem that I could see in this context is not – concerns Georgia and the fact that last September in the agreements with Sarkozy, which were the best that the EU could do to rescue a precarious situation, Russia undertook certain obligations.
It has not fulfilled them and chose not one sign of fulfilling them concerning military thinning out, withdrawal, presence of observers. And this puts it in direct confrontation, one would have though, with the European Union. So to turn the question on its head, maybe one should be asking what should the European Union be doing with regards to negotiations in Russia on the broad front when it is so snubbed by Russia on the narrow, specific front, one of the first examples of the projection of quite specifically EU military operatives into an area.
I think this poses very much challenges for what kind of an EU there is and what kind of relations it has with Russia. I will stop there.
MR. BAYLARBAYOV: Eric, may I?
MR. WATKINS: Yes.
MR. BAYLARBAYOV: Thank you very much. I tend to disagree with John on this point. And again, I invite you to exchange opinions maybe later. Again, I would refer to our own experience. And I would firstly say that most of the problems of the, to a certain extent, historical nature we are having now were inherited by us from the former Soviet Union. I would refer to the problem of delimitation. I would refer to the problem of Nagorno-Karabakh conflict and occupation of 20 percent of our territory by the neighboring Albania. I would refer also to the conflict, which we are all commencing upon, Abkhazia, Ossetia. All of this has its own roots in the former Soviet Union.
In attempting to resolve that and build the proper relationships with one of the major players with one biggest country in this CIS, so-called Commonwealth of Independent States, newly independent states, still very young independent states, you need to treat Russia as a serious partner, as a partner with whom you can have, can establish the right and cooperative dialogue. And with this regard, I would again refer to the experience we have with them as a country as an oil and gas company. We are developing on very serious basis. And we never – I would like to underline that – we never saw any violation from the Russian Federation side of any agreement we have with them, whether this agreement relates to the activity of the northern route pipeline or sales of the gas.
Yes, we were not happy with the prices offered to us back in 2007. Yes, we were not. And we didn’t sign a contract with them. We were buying gas from them for a quite significant period of time, about 5 years. And we are now starting to supply our gas to the Russian Federation, again, on the basis of good cooperation, good agreement, commercially viable contract, which we agreed with them back in June of 2009.
Treat them as a partner. That is my advice to all of those who want to discuss this issue. As a very serious partner, as a very powerful partner. I don’t know which place in the world they have with regard to their power, but definitely it is one of the leading places. So advice from our side is work with them as a partner. Try to defend your own interest. Never sacrifice them for whatever reasons, if those reasons are political or economical. And you will get the best result. And you will have very reliable relationships.
Yes, crises occur. They occurred in the past as we discussed yesterday. They probably will occur in the future. The nature of those crises is sometimes historical, sometimes of the nature in the energy sphere, in particular, relationships between transit countries and producing countries trying to get certain benefits from the monopolistic positions they have obtained historically. We are also dealing with the same type of problems who understands this kind of problems.
Producer may have problems with the transitors, with the transit countries. But all of those should be resolved in a cooperative manner. This is diplomacy. This is energy diplomacy. Something comes to the mind. Someone once said that war is too serious thing to be left in the hands of the military people. I would rephrase it. Oil and gas is also very serious to leave it just in the hands of the oil men. I, myself, I am an oil man. But I fully realize that oil and gas business is also energy diplomacy, which has many aspects, which involves many levels into those discussions, environmental aspects, political aspects, geopolitical aspects. All of this, I believe, is extremely important. So that is my response.
MR. WATKINS: Well, thank you very much. We like that kind of response. We want this – we can’t have everyone agree all the time.
One country that is around the Caspian that is in the region is Iran. And very little has been said here. I don’t know how much can be said. But Dr. Coolidge mentioned Iran as now working with Turkmenistan as a kind of safety valve for Turkmenistan. And the question, of course, that has come up is these new negotiations that have begun with Iran and how does Iran actually fit into the situation that we are talking about here with Central Asia, the dynamics? And above all, what looks like the future of Iran within this region in terms of energy dynamics? I am just going to put that to anyone who would like to take it up. John?
MR. ROBERTS: Iran ought to be one of the major motors of energy development in not just the region, but in the world as a whole. It has been and continues to be a very major oil exporter. And saving the appalling prospect of catastrophe should remain that for a long time to come, although it does have constraints on the oil output due to its problematic investment policy and its very severe rates of domestic consumption and inefficiency.
That applies even worse to the gas industry. Here you have a country that is holder of the world’s second largest gas reserves, that has been for the last 10 years a net importer that is increasing its dependence – no, dependence is the wrong word, but increasing its net import quite substantially. And why?
Very simply, most gas producers or the countries we conceive of as gas producers are, in fact, oil producers who produce gas as a byproduct. Oil is relatively simple to sell once you have got it out of the ground and put onto the market. Gas is much more complicated, requires much longer-term contracts to keep people happy by and large.
And so what happens? If you are an oil producer, you use gas to maintain the pressure in the oil fields, as a substitute for oil as a domestic fuel at home and to promote your own industrialization, fertilizer, petrochemical industries, the like. These are very sensible policies. But if you add into that a stupid policy, which is very low domestic prices for fuel, it is a recipe also for wasting energy. And it is not just Iran. It is much of the Middle East, which is why the Middle East is the fastest growing area in gas consumption in the world and is, of course, in consequence amongst other things, been increasingly heavy polluter in the world.
So what is to be done? How does one change the Iranian attitude? Extraordinarily difficult. At least in Russia, you have a concept of discussing open-market reforms and the advantages that Russia can gain from that. And you can actually have a debate on that. Even if one considers the discussions in Russia to be metaphorically theological, in Iran, they are literally theological. What is one allowed to do? What is one not allowed to do? It is very difficult to see Iran playing a productive role in global gas issues.
And I will give you one reason quite apart from the nuclear. In 2002, 2003, the Iranians kept saying in a few weeks’ time, we will sign agreements for the development of LNG plants. Then it became a few months. Then it said a year. And then the nuclear issue finally became the core issue why Iran would not develop its energy resources. It would not develop its LNG projects. It would still like to do so, but the Western companies interested now find that with the impact of sanctions, they cannot commit themselves to do so.
So if it is the Iranian environment, the bureaucratic environment, the business environment that prevents the development of LNG before there was a nuclear crisis, think how much tougher it is now. We would love to see Iran play the role that its reserves deserve in global energy markets. But it operates, though it may not understand this itself, by voluntary tying one if not both hands behind its back.
MR. WATKINS: Well, all right. On that prospect, I am going to turn my question – I actually have two last questions, if you will indulge me. Kazakhstan is a country also that doesn’t seem to be here officially. There is certainly no one from Kazakhstan here. But it is a major producer. Its production is going up. And it is beginning to make arrangements with Azerbaijan for a transport system. Is it the Caspian transport corporation – shipping? Can you tell us a little bit more about this?
MR. BAYLARBAYOV: Sure, with pleasure, again with pleasure. Kazakhstan is definitely one of the major regional Caspian region producers. Their plan is in about 10-15 years’ time to produce as much as 150 million pounds of crude per year. That is a big amount. Apparently, they are producing about 60, John, right, about 60 million pounds per year, out of which about 50 they are exporting using different routes.
Kazakhstan as energy producer proved themselves already. And a number of times stated that their desire is also similar to the desire of the others to diversify their export routes. This multi-vectoral kind of aspect in their policy they successfully implement by sending their crude through the territory of the Russian Federation, building a missing link for the pipeline to China and developing the option or as more properly should be called, Kazakhstan Azerbaijan Caspian transportation system; i.e. the transportation of the crude produced in Kazakhstan across the Caspian through Azerbaijan to the international markets.
We are working with them directly. Two countries are also binded by the intergovernmental agreement signed back in 2006 already in June. That is a lengthy process, obviously. But this process, which is extremely complicated one – it is a complex task to organize such a transportation is on very successful path. And I am glad you asked me this because I can disclose something, which is not yet in the press because it has just happened two hours ago in Baku, where president of Kazakhstan, Nursultan Nazarbayev is at this moment.
In addition to those agreements we signed before, we signed today three further agreements. The first one directly relates to the Kazakhstan Azerbaijan Caspian transportation system establishment KazMunaiGas and SOCOR long-term visibility study for the Trans-Caspian portion of that; i.e. for the terminals and the tankers between them enabling us to establish shuttle anchor system between the two shores.
The second one is also, in my opinion, extremely important. This was in regard to the usage of our existing infrastructure in Baku or around Baku for the benefit of the Kazakhstani producers. We have quite a lot of capabilities in Azerbaijan with regard to the offshore installation construction. We have a lot of drilling capacities. And all of this will be used by the Kazakhstani producers for their benefit.
The Azerbaijani parliament, by the way, adopted special law with this regard, which takes out the relief – provides the relief with regard to the taxation of this type of operation. So we are making all this way for the Kazakhstani producers’ access to our infrastructure much easier.
And the last one in this list of the documents, which was signed today, probably of interest and definitely having something to do with the topic you just discussed is a memorandum of intent of the two companies with regard to the construction of the new pipeline, Baku Black Sea. This is something, which we now can introduce not simply as an idea, but as a project, which we all will be pursuing in the normal stages starting the legal, commercial, technical aspect options for such a pipeline. Then moving to the stage of the visibility study. And all of this – and from that into the detailed engineering, et cetera. And all of this work will be done jointly by KazMunaiGas and SOCOR on equal share basis.
What kind of oil we are talking about? It is about 20-30 million tons of crude at the initial stage, primarily from the Kashagan field in Kazakhstan, which could well be supported by the crude from the other fields, Tengiz, Karachaganak and the rest of the onshore-producing assets of the Republic of Kazakhstan. And on the later stages, we are thinking of 50-60 million tons of crude, which also could be transported to across the Caspian and placed into the existing Azerbaijani infrastructure and/or new infrastructure; i.e. the pipeline which I just mentioned.
The Jihan pipeline was our first priority. We will be supplying to it most of the crude we ourselves are producing. And the free capacity, if there will be any, will be provided to our Central Asian counterparts and partners. And our other pipelines, all of them which we have as part of the crude, could also be used by them, if there will be appropriate agreements with the host countries, if they will be appropriate for the producers in Kazakhstan terms, as well as obviously Trans-Caspian portion of that, which, as I mentioned, is already on the way.
This also, in our opinion, adds a lot into our desire to demonstrate our capability as not only producer, but transit country. That adds a lot into the stability and improvement of the situation in our neighboring countries. In Georgia at the first place, we would like to see – and we see actually growing, stable, very serious partner in Georgia. And this role will be increased, we are sure, with those energy projects we are trying to launch now.
So answering that, our developments with Kazakhstan are increasingly on the fast track going ahead. We would welcome interest of those who would like to participate, transport their crude through this infrastructure, whether existing or the future one. And I believe this is something what, again, proves our readiness, our interest in not only having pipelines coming to our doors, but building pipelines coming out of our doors.
One aspect which I didn’t mention yet. We are taking the world energy dynamics. We are considering very seriously options of taking our gas not only into, say, East to the West, but from West where we are to the East to the markets, which could become consumers, buyers for our gas. This issue is also between us and KazMunaiGas at the moment at a very, very initial stage. But that is an opportunity with their plans to connect their gas production with China as a first place, which could also be of great value to us.
MR. WATKINS: Well, thank you very much.
MR. ROBERTS: Can I ask a couple of quick questions?
MR. WATKINS: I guess you could do that.
MR. ROBERTS: Very simply, what is the timeframe for these agreements roughly envisaged? And when you were talking about a pipeline across through the Caucasus to the Black Sea, did you have any specific terminals in mind such as Kulevi, Batumi or Supsa?
MR. BAYLARBAYOV: Thank you very much.
MR. ROBERTS: (Chuckles.) I am putting my journalist hat on quickly. (Chuckles.)
MR. BAYLARBAYOV: Timelines are the timelines, which are actually envisaged for the development of Kashagan, but not the early stages of that development, which we all hope to see starting in 2013. But if we are talking about pipeline, it, of course, will be needed later, say, between 2015, 2020.
And only in the case, there will be resources committed to the route and exceeding the existing free capacities of our neighboring countries’ infrastructure. So obviously, the issue of the new pipeline, which is extremely important because it adds confidence to the concept of the Trans-Caspian transportation itself, is extremely important. But it is not something which we will start building immediately or which we will start building if there will be no proven guaranteed committed resource to that.
The second one was the ports. Yeah, of course, our ports or terminals where we are already, which we are owning already, as Kulevi always will be our preference. But the choice of the Black Sea destination obviously will be done based on the additional studies’ results. We are not intending to say right now that this pipeline will be laid in the Baku-Supsa Corridor. While at the same time, it seems like very logical solution. The corridor exists. Certain land acquisition was made. There was already experience working with the Georgian government. There is very good understanding. So it could be well-laid in the same corridor if there is such an understanding.
We cannot predict anything before we will go into relevant discussions with our Georgian counterparts, of course. But as far as our preferred destinations, Supsa is one of those. Kulevi is also one of those. Batumi, that is an issue, which should be discussed. Terminal in the heart of the resort city is something from the ecological perspectives, which needs to be the case. Again, if you will give all this in the hands of oil and gas people, we will obviously turn all this resort into oil and gas terminals. But this is not something which we are supposed to do.
MR. WATKINS: Well, for those of you who noticed I hesitated when John asked if he could ask a question, it is because he works for Platts, our competitor, for the Oil and Gas Journal. I didn’t want – you know, he is leaving a little bit early.
MR. ROBERTS: I think it is common information. (Chuckles.)
MR. WATKINS: Now I know what he is going to do. Anyway, we are right up to question time from the audience. And so please anyone who has a question. Yes?
Q: Good news on the agreement with Kazakhstan. But can you tell me what Azerbaijan plans to do with the – can you hear me?
MR. BAYLARBAYOV: Yes.
Q: Okay. Can you tell me what Azerbaijan plans to do with the income from the oil sales as far as infrastructure in the country? And also, where the Nagorno-Karabakh issue stands, which would really be, I think, beneficial to the whole Caucasus to get that solved.
MR. BAYLARBAYOV: Could you please introduce yourself?
Q: I am Chuck Wald from the Atlantic Council board.
MR. BAYLARBAYOV: Starting from the second, which is, for us, extremely important, Nagorno-Karabakh settlement. This is something, which is in all of our hearts. This definitely will be resolved. We are doing everything we can to get it resolved, preferably in a peaceful manner and continuous discussions on this matter prove that the resolution could be achieved.
Still it is one of those inherited problems and unfortunately a problem which persists. But despite its existence, we are successful in what we are doing in Azerbaijan because we live in ceasefire, not, unfortunately, peace with our neighbors. That is something which we are greatly suffering from. We have refugees. It is already 20 years that those refugees are refugees. They live without their homeland. And that is a problem. Yes, we already established them. We have for them houses. We have for them land allocated. They are working. A lot of the problems have been resolved apart from what? They want to live on their own land. So this should be resolved.
As for the first part of your question, the answer could be very long. What we are doing with our revenues. Firstly, our revenues from all of the PSAs, all of the foreign contracts of the PSA type, which Azerbaijan has, are accumulated in the oil fund of the Azerbaijan Republic. This is initiative again, which we are very proud of, initiative which was well-supported and now well-spread over neighboring countries. There are oil funds now – revenues funds in the other countries of the Commonwealth of Independent States and in Kazakhstan and in Turkmenistan. The level of organization is different. Ours is working under so-called transparency initiative launched by Mr. Blair 10 years ago and accumulating all the money we have.
Part of this money is allocated to support the Azerbaijani economy. Part is kept for the future generation. Part is spent on the same refugees to improve their living conditions. But all of this, how these funds are accumulated allows us to keep clear and transparent way of developing Azerbaijan into the modern country.
Part of that, by the way, is spent – again, we used that yesterday with John at the breakout session – to train the future generation. And we are spending money from the fund. It comes to the president’s fund. And the president provides the grants with an opportunity to study abroad. And they then come back and they work for the country. They work for the country, by the way, not only for the state of Azerbaijan, but also for the private enterprises.
Absolutely, occasionally, we have one example of those guys today in this auditorium. I didn’t know that he would come, but he is here, so he can better address this issue than I do. But this is also one of the aspects of the spending of the oil fund, which is properly audited. The non-governmental organization has access to all of the information related to the fund and transparency initiative clearly is something which we recommend those of the CIS countries, producer countries – not only CIS funds – to join if they have a desire to accumulate this oil.
MR. WATKINS: Yes, ma’am? And again, just a little reminder. Could you identify yourself and where is your question –
Q: Julia Nanay, PFC Energy. It is a question for Vitaliy again. It is the Baku-Supsa pipeline. At what point is it possible for Kazakhstan to use that pipeline for their oil from Kazakhstan? And is that a pipeline that eventually reverts to SOCAR? And then finally, just a little bit about your investment climate and contracts and how things operate there.
MR. BAYLARBAYOV: How much time do we have?
MR. WATKINS: It is for you. Oh, we are okay on time. We have another 15 to 20 minutes.
MR. BAYLARBAYOV: Okay, Baku-Supsa pipeline, as an asset, if you wish, is Azeri and Georgian asset. So if it will be reverted, it will reverted not only to Azerbaijan, but to Georgia as well, A.
B, other shippers can access the capacities of this pipeline only after those capacities will be relieved by AIOC. AIOC, Azerbaijan International Operating Company, operator of the Azeri-Chirag-Gunashli field is, in fact, owner of the full capacity of this pipeline, which is about 150,000 barrels per day, currently carrying 100,000 barrels per day of the crude to the Black Sea. It is in full AIOC’s capacity to decide whether they want to give up portion of this capacity to someone or just to keep it for themselves.
This is one of the reasons also – at least, reasons, which needs to be taken and will be taken into consideration when we will be making further decisions with regard to the construction of the new Baku-Black Sea pipeline. So in fact, the answer is at the moment, zero capacity of Baku-Suspa is available for the external shippers.
MR. WATKINS: Yes, the lady toward the back.
Q: The investment climate –
MR. BAYLARBAYOV: Oh, investment climate. Sorry. I do not know. It is for those who is working in Azerbaijan, for people like you who is lost in this auditorium somewhere to comment on our investment climate. We have a special one. That is only one thing which I can say.
Since it was extremely difficult in ’94 and even after ’94 to build up a system of laws, which will fully satisfy the expectations of the foreign investors, we decided to go the other way. We established a form of the contract, which we in general follow, changing certain terms of that, which are further ratified by our parliament and becoming a law of our country. Those contracts and privileges provided to the operators, shareholders and their contractors and subcontractors are stable and guaranteed by the state.
And those include special regime of taxation, special regime of exports and import, custom duties or relevant stuff related to the currency and imports and exports out of the country, disposal of the production, treatment of the people who are living – foreign people who are living in our country. In no instances whatsoever, those regimes were changed for any of the 26 signed and 14 working – not all of the PSAs signed are working – in our country. In no instances we heard a complaint from any of the foreign companies and then firmly stating that ready to accept any comments from the foreign companies working in Azerbaijan that we changed any of those conditions.
That is one of the aspects we strongly believe of our success and our relationships with those countries, which again recommend strongly to others to accept if they wish to. Respect your work. Respect your signature. Respect your promise and obligation, which has been contractually promised.
MR. WATKINS: Do we have the microphone?
Q: My name is Irina Paliashvili, Ukrainian Legal Group. Does Odessa-Brody pipeline have any serious chance to belong to this discussion? Thank you.
MR. WATKINS: Would anyone like to take that up?
MR. ROBERTS: Odessa-Brody is a classic example of developing a piece of infrastructure without having firm commitments as to what will go into it. It is also a piece that is a classic example of something that is in it blindingly logical. Why not connect Odessa to Brody to a point at which it can tap into a pipeline system serving the rest of Europe? It is logical once you do that. But logic does not prevail against practical politics. And practical politics says that at Brody, if it is going to terminate there, the oil has to go somewhere and it has to go into a Russian-control pipeline system that does not want to take receipt of oil put in at Odessa.
So until one can develop a pipeline beyond Brody to connect it up to North European markets in Poland or even in Germany the project has no chance of practical success unless there is a radical change of opinion by Russia, which one doesn’t expect. Is there a possibility that that can happen? There was. I am not sure that there is. There was when one had a booming self-confidence in Kazakhstan and, indeed, in Azerbaijan that it would be worthwhile developing a whole chain of downstream resources moving into petrochemicals, moving into refineries, buying overseas assets, and then trying to put Kazakh oil and Azerbaijani oil into a system right away by whatever means to reach final markets. And thus, learn about being significant players not just in the upstream, but in the downstream.
But we live in a changed world. Tighter constraints are money for investment. No money for big overseas projects like this. And, of course, a very different market in Europe from the one we were looking at a couple of years ago. So right now I don’t see it happening. I think it will be put on the backburner. But if economies recover, markets improve, greater revenues accrue to oil-producing states, it might be revived then. But in the short term, no.
MR. BAYLARBAYOV: Can I comment on that?
MR. WATKINS: Yes, of course.
MR. BAYLARBAYOV: Sorry for the interference. I happen to be director – one of the five, actually, directors of the joint venture which is joint venture between Azerbaijan, Georgia, Lithuania, Ukraine and Poland dealing with the development of the so-called Eurasian transportation corridor; i.e. the usage of Odessa-Brody in this averse direction. So I am the director of this venture and I am well-aware of what is going on.
I agree with John’s statement. I agree with John’s statements that to build someone without the resource base, without the committed resources means risking your money, risking the capability of the asset you are creating. And Odessa-Brody is a classic example of that.
But at the same time, there are efforts to turn this into viable pipeline into pipeline, which can serve actually its initial purpose. And we are behind those efforts as well with, by the way, 24.75 percent participation in that exercise. Why we are there? The same reason as I described before. Pipelines bypass from the Black Sea to the markets are something which we are greatly welcoming. I mentioned one European one. I should probably mention Odessa-Brody as well.
We support this if it will be commercially feasible. How it would be made commercially feasible? How one European could be made commercially feasible? How one European could be made commercially feasible? How could it be made commercially feasible? Only if the governments of the transit countries will realize that they need to create a special plan for those pipelines. They need to provide shippers, owners of the cargo in transit with special treatment, special regime, special guarantees. The same relates to Odessa-Brody.
As for the practical measures, there are some. And obviously I fully understand and fully agrees with what John just said. Odessa-Brody itself is nothing. It ends up in Brody. But if it will be connected with is friendship, which is druzba in Russian, system of the pipelines operated by the Polish state transporter, then it could become viable. There are many pipelines, druzba pipelines crossing territory of Poland, some of which could be used. But we, ourselves, we see this pipeline as a pipeline which could actually work with some technical additional efforts working both directions.
And that is very interesting if we will be able to implement, again, as for practical measures. Polish ministry of economy and development made recently a decision of the allocation to this project of the 120 million Euros from the European funds granted to Poland for the development of the Polish infrastructure. This does not mean that money is sitting in a bank account. There is a lot of work, which still needs to be done to get access to this money. But this money has been already made available if we will be able to prove to the European institutions, to the European commission that what we are doing, what Poland is doing is the right stuff.
And I already explained to you what I believe is the right stuff to do is have Odessa-Brody to work in both directions to allow Ukraine to benefit from both flows of Russian crude going across the territory of Ukraine to the port of Odessa and for the Caspian crudes, which as I also explained, will come to the Black Sea from Azerbaijan from Kazakhstan hopefully from other Central Asian producers all in the Black Sea. So where all this all will go to the pipelines, to the routes, which will be able to provide this favorable and proper conditions.
Do we have those conditions at the moment? No, we don’t. So that is an initiative, which belongs to those who has the right to decide how to create the plan.
MR. WATKINS: Okay. I think we have time for about three more questions. The gentleman here?
Q: Thank you. I have one quick comment to John and a question for Vitaliy. Quick comment to John on Iran. I think you are a bit too gloomy about Iran. As far as I know, from my visits to Iran and my discussion with the Iranians, the very issues that you address are on the table. And the government and the parliament are discussing energy waste, energy inefficiency and the need to address that also for exports.
But my question to Vitaliy is, as you probably know, the G-20 has underlined once again how important oil-market transparency is to counter oil price volatility. We coordinate as IEF the Joint Oil Data Initiative. And you guys in Azerbaijan are doing quite a good job. But how are the prospects of the rest of the region following that to provide much better and more complete and more timely monthly oil data to JODI because that would help the region and it would also help the whole world and the global oil market.
MR. BAYLARBAYOV: I can try. Would you like to –
MR. WATKINS: While John is preparing. Go ahead.
MR. BAYLARBAYOV: What I can say about prospects? We are sharing all we have with our neighbors. We are sharing all what we have with others also. If I am not mistaken, it was in Qatar recently there was a conference with regard to this and energy transparency initiative. We were one of the first countries to join that – or one of the first countries to demonstrate that this is very successful. And this experience is shared with our colleagues in Kazakhstan primarily, with our colleagues in the Russian Federation. Those who would like to join the initiative can join it. All the framework is there. People know what to do.
We are using – by the way, it is not our own creation. We were using Norwegian experience. We were using other countries’ experience for that. It is just a matter of desire of those who want to do that. And again, I said already that in Kazakhstan, such forum already exists. In the other countries, it might be established. If this is a question whether they will join the energy transparency initiative or not, we are supporting them joining. That is all I can say.
MR. BORTZ (?): This goes back to my opening statement that that is one of the things that is harming the region, different countries having foreign direct investment is the lack of signing up for EITI. And the bank has been working with many countries to try to have them sign up. And we were working in the early days with Azerbaijan, with World Bank and others to support the effort. Kazakhstan has signed up to it. But we were working for Turkmenistan, Uzbekistan and other countries to try to broaden it.
MR. WATKINS: Yes, sir? I think we can go with one more question. This gentleman.
Q: Hi, Ian Hague, Firebird Management. My question is about the Trans-Caspian ideas for pipelines. From time to time in the past, we have heard that there are various international legal obstacles to a major project between the riparian states. What is the – if you can speak precisely, what is the nature of these obstacles? And can they be overcome in a short timeframe? Or is it something that could require a lengthy negotiation?
MS. COOLIDGE: Okay. Well, we have had statements by the Turkmen and Azeri presidents that such a pipeline or such an agreement could be made bilaterally. And, of course, then we have had statements from Russia saying in disagreement, basically. So I think John is just completing his book about Caspian pipelines right now. But I think that the main issue is okay, so after a certain set of statements, then we saw recent naval exercises in the Caspian between Iran and Russia.
And I think to look at things in a broader context, every time the West or IOCs in conjunction with the West put forward suggestions for pipelines bypassing Russia or Iran and, in most cases, Russia, then Russia will come out with different alternatives either redirecting existing reserves or potentially using new reserves.
But I would ask, you know – and I am going a little bit backwards here with this answer. I would say in all those multiple Russian proposals, is there the money to do them? And then, is Russia’s bark, as it were, worse than its bite? I mean, will there be – if there is an eventual Trans-Caspian pipeline built, which, as I said before, I think will only happen once there is dramatically increased investment and production in Turkmenistan, at least from the Turkmen point of view. I am not talking about the Kazakh perspective.
You know, then would Russia or Iran send a gunboat? Would this happen? What would need to happen in order to avert this? Would Russia be a partner in such a project? The other question that I was going to bring up when we were talking about Iran is that okay, did any of us see the end of the Soviet Union coming? Not so clearly. Right now we are in the very beginning of a phase of engagement. But I do think sometime in my lifetime we will see a situation where Iran is open to foreign direct investment. And then, Turkmenistan and Russia will see an enormous amount of competition for their gas exports to Europe.
So you know, which way will gas go? I guess I would just like to at least finish my comments by saying I think we get too stuck in thinking in our own comfort zone. We ask the old questions. And I think we have to begin asking the new questions and the harder questions about what are the paradigm shifts that are going to come in the future and not forget that those are possibilities. So I think a lot of things could happen. But we have had statements from both the Turkmen and Azeri presidents saying they believe that this is possible.
Now, what Russia or Iran would do remains unclear. And how things will progress with U.S.-Russia relations and U.S.-Iran relations, this is all part of the triangle – and Europe, of course.
MR. WATKINS: Well, I think we have come right up to the end of our time. I want to thank you all for being here. I want to thank very much the panelists for making me look so sharp. And above all, I want to thank very much the Atlantic Council for bringing us all here together and the Romanian foreign ministry, too. Thank you very much. (Applause.)
Transcript by Federal News Service, Washington, D.C.