Iran (Caspian),0.1, 1%                  Azerbaijan,7.5, 15%
                            

                                       Kazakhstan, 39.6, 80%
Azerbaijan         Kazakhstan         Turkmenistan         Iran (Caspian)       Russian (Caspian)

Fig.  1. Caspian region remaining liquids reserves estimates (billion b/d;%) Total: 49.7 billion b/d).
Iran (Caspian), 11, 2%

                     Russian(Caspian),0, 0%   Azerbaijan 65, 14%                                                                                                                            
                       Turkmenistan, 230, 51%                                Kazakhstan, 153, 33%
                      Azerbaijan   Kazakhstan     Turkmenistan     Iran (Caspian)      Russian (Caspian)
3.    Possible routes to export Kashagan oil and gas

Successful exploitation  of  the  Kashagan will  depend on  the construction of   new   transport   pipelines,  capable  of   handling large volumes of  oil  produced in  a landlocked sea.  The  direction of   such  a   pipeline  remains  in   question,   and  thus   holds  the potential for fierce competition among regional and global powers (OGJ, 2002a, b).

Alternative routes that are  being considered (Fig. 3) and some concerns associated with each project are  as follows:


Fig.   3.  Map of the alternative routes  for Kashagan hydrocarbon resources.

This  691 km  route is  part of  the interconnected  Kazakh–Rus- sian  pipeline  system.  Expansion  work  that started in  1999  is completed in 2001  at a cost of $37.5  million. Kazakhstan increased oil  exports  via  the Russian route to 3,10,000 b/d  in  2002,  from a capacity of  2,10,000 b/d  in  2000.  Before   the  completion of  the CPC pipeline at the end of 2001,  Kazakhstan exported almost all of  its   oil  through  this  system. But,   since  Kazakhstan  desired more  independence from the Russian transit systems, it  favored the  development  of  transport  alternatives.  Still,  in  June   2002,  Kazakhstan  and  Russia   signed   a   15-year  oil   transit   agree ment  under  which  Kazakhstan  will  export  3,40,000 b/d  of  oil annually via  the Russian pipeline system. Russia’s trade ministry also    pledged  to   increase the  capacity  of   the  line   to   around

5,00,000 b/d.⁹   As the CPC project grows with Kazakh production, absolute volumes though  Atyrau–Samara  are  expected  to  grow,  but this pipeline will  become relatively less  significant.

3.2.    Caspian pipeline consortium (CPC) (route 2 on map)
The  CPC was formed to build a 980-mile-long pipeline system to transport oil from Tengiz, western Kazakhstan, to the Black Sea at Novorossiysk, Russia, and began to bring oil to world markets in the fall  of  2001.  The  governments of  Russia (Through  Transneft

24%  and  Rosneft-Shell 7.5%),  Kazakhstan (19%), and  Oman (7%) developed the CPC project in  conjunction with a  consortium of international  oil  companies.¹⁰  However, On  November 6,  2008, Russian company Transneft announced that it has bought Oman’s share in the CPC for around $350 million—half the starting price offer  from Hungary’s MOL and Kazakhstan (RIA Novosti). Another buyer for  Oman’s share was Kazakhstan, which holds 19%  in  the CPC. Russia’s  share is now  31%.

The   CPC Project upgraded the existing line   from  Tengiz via Atyrau and runs along the Caspian coast to join  in the north with the  Russian end of  the  line. The  system also   consists of  port facilities and a newly built line  from the northwest Caspian coast in Russia to  Novorossiysk. The  total  cost of  the  project is  $2.6 billion. The completion of both the expansion of CPC pipeline and ongoing  Tengiz  operations should add more  than $150  billion in combined GDP  to  the Russian and Kazakh  economies. The  CPC pipeline will  also  be used for transporting natural gas liquids from a production plant to be  constructed at Karachaganak by the KIO consortium.

Initial capacity of the CPC pipeline was 5,60,000 b/d. The  CPC pipeline  exported around 6,90,000 bbl/d of crude oil in 2007, and the consortium has  plans  for  a  $1.5  billion expansion project to increase the  pipeline’s peak capacity to  1.35  million bbl/d. With the completion of  the two pipeline spurs from  Kenkiyak  and Karachaganak to the CPC at Atyrau and the usage of additives, CPC transport  levels have  increased from around  6,00,000 bbl/d in

2005 to  a monthly peak of 8,00,000 bbl/d in February 2007.

The    pipeline  is   an    extension   of   the  existing   oil   transit infrastructure surrounding the  Caspian  Sea.  Newly constructed components  of  the line  run  from the  Russian town of  Komso- molskaya   straight  westward  to   Novorossiysk.  The   pipeline   is supplied with Kazakh oil through the Soviet-era links surrounding the Sea, which the consortium members have  refurbished.

In   September  2007  consortium members  reached   a  major milestone in agreeing to raise the transport tariff to $38/thousand tons  (mt) from  $30.24/mt, effective in  October 2007.  The  share- holders also  agreed to cut  the interest rate on CPC loans to 6%/year from the  previous rate  of 12.66%.  The  decisions followed several meetings among the project partners this year as they attempted to resolve financing issues, which have  held back expansion of the link.  Consortium members are  also  awaiting the formulation of the  Bourgas–Alexandropoulis pipeline route, which  would keep incremental  CPC  volumes  from   further   crowding  the  Turkish Straits.

Last    round  of   talks    was  held  in   Moscow   where  Russian Industry  and  Energy  Minister   Viktor  Khristenko  and  Kazakh Energy and  Mineral  Resources Minister  Sauat  Mynbayev were negotiating a  common position doubling the  CPC’s  throughput capacity in two stages by 2012 from 32 million to 67 million tons of oil annually. It is envisaged as part of the expansion of the CPC that an  extra 17 million tons of Kazakh oil will  be oriented to the Burgas–Alexandroupolis pipeline.  However, despite  the  Russian Ministry’s press statement on the issue,¹¹  neither Kazakh side nor

the  other CPC  consortium members  confirmed  that  deal was reached.

The  above-mentioned two projects represent the Russian route for   Kazakhstan.¹²     Russia   controls   nearly  all   of   Kazakhstan’s current  export routes.  Recently, the  industry  newsletter  ‘‘Petro- leum  Argus’’  reported  friction with Russian energy  officials over Kazakhstan’s demands  that  it   should   be   able  to   control  the volume and  destination of its  oil shipments through the Russian pipeline system. In other words,  the country’s influence has  grown to the point where it wants to play the oil market, as Russia does. A  Russian   official   reportedly   responded,  ‘‘If  they  want  equal treatment, they should start supplying oil to the Russian domestic market as our  producers do.’’ (Russian companies must sell  to the home market at a cheap subsidized price.) (Interfax, 2008).

On  the surface, relations with Russia have  been  free  of  such complaints. On December 7, 2002, Nazarbayev met in Astana with Aleksei Miller,   chief   executive  of   the  Russian gas   monopoly Gazprom,  about boosting sales of  Kazakh gas  abroad. The  two countries were also  worked on plans to raise Kazakh oil transit by

50%   with  a   pipeline  expansion  project  started   in   late   2003  (Lelyveld, 2002).  However, problems  beneath the surface, which endured for the last 4 years, seem to be driving Kazakhstan to look elsewhere for its  future, including the projects like BTC.

Many experts suspect that modifications of existing routes, like the  established  Druzhba  system,  may   satisfy  investors  and importers, not only in Russia, but also  in Kazakhstan. The Russian pipeline   monopoly,   Transneft,   has   announced plans  to   begin merging the Druzhba system, which runs from Russia to Slovakia, with a pipeline called Adria  that terminates in Croatia. Connecting the  Adria  pipeline  to  Russia’s   Southern Druzhba system would require the cooperation of six countries (Russia, Belarus, Ukraine, Slovakia,  Hungary,   and   Croatia).  In   December  2002,    these countries signed a  preliminary agreement on  the project. Since then, however, progress has  been slow moving, while the transit states  wrangle over   the  project’s details  (including tariffs and environmental issues). Of  the  six  partners,  to-date, only three countries,   Slovakia,   Hungary,   and  Ukraine are   fully   ready   to implement the reversal (OGJ, 2002a, b).¹³  The  most recent to ratify the  necessary legislation, Ukraine,  approved in  February 2004. In  the meantime,  Kazakhstani oil  may only access the Druzhba system to  facilities on  the Baltic   Sea,  if  those  terminals do  not handle Siberian oil.

Among potential north–south  routes, it remains  difficult to foresee where feasible routes might  emerge. John   Roberts,  an editor with Platt’s  Global Energy  Information Services,  says  that as long as  the  United States  opposes  France’s TotalFinaElf north– south   pipeline   from  Kazakhstan  via   Turkmenistan   to    Iran, Kazakhstani oil  can  flow  either North, to  Russia,  or  West, to  the Black  Sea  and the Mediterranean. Washington is  not averse  to pipelines  via   Russia.  In   the  past,  the  United   States   strongly supported  a  Tengiz–Novorossiysk  major pipeline, and a  smaller Baku–Novorossiysk one (about  1,00,000 b/d or less). Yet, although the Russian state-owned pipeline operator Transneft has invested in  capacity upgrades,  unrest in  Chechnya and  elsewhere in  the

Northern Caucasus is detrimental to the viability of this option.

The  supergiant  offshore oilfield Kashagan, where  prospecting is   now   being  completed,   may  offer   a   last  chance  to   reduce Kazakhstan’s dependence on Russian transit, and the first chance to bring major volumes of Kazakhstan’s oil to the western Caspian shore  and from there directly to international markets. Kashagan will  be  a make-or-break test of Russia’s policy to monopolize the transit   of   oil   from  Kazakhstan.  And   that   monopoly  means controlling the lion’s  share of Caspian oil flows  (Socor,  2002).
3.3.    Aktau-Baku–Tbilisi–Ceyhan: (route 3 on the  map)
The   discovery at  Kashagan immediately  prompted  plans to connect the proposed Baku–Tbilisi–Ceyhan (BTC) pipeline with a route from the port of Aktau on  the Kazakh coast of the Caspian Sea. The entire route would have  a total length of about 2300 km, although the proposed pipeline route would only run from Baku  to  Ceyhan.  Kazakhstan ‘‘politically supports’’ the BTC route,  and proponents of the BTC pipeline believe that the likely absence of robust routes through both Iran and China will  probably make this the  most   commercially  and  politically  viable  route  for   vast reserves of Kashagan oil.

At   a   September  2002   conference  off   the  coast   of   Greece sponsored by  the Hellenic Foundation  for  European and Foreign Policy  (ELIAMEP), the consensus among participants was that the Caspian Basin  could probably support only  one more main export pipeline beyond the  existing CPC  pipeline,  and that a  second pipeline could complement a major natural gas  pipeline to create a stable transport system for the region’s fossil fuels. That  descrip- tion   fits   quite  well  with  the  BTC  and  parallel   Baku–Tbilisi– Erzurum natural gas  pipeline project (Lelyveld, 2002).

Most crude shipped through the BTC pipeline is  expected to come from Azeri   fields for  about 10  years. Then around  2015, officials expect crude  from  Kazakhstan’s offshore Kashagan field to dominate shipments.¹⁴

In  order to  facilitate exports  of  oil  from Kashagan  during the next  decade, Kazakhstan is  developing  an  internal  ‘‘Kazakhstan Caspian Transportation  System’’  (KCTS), which will   include the construction of a 5,00,000 bbl/d pipeline from Eskene in western Kazakhstan to  the port of  Kuryk.  From Kuryk   and the current nearby working port of Aktau, oil will  be shipped via barge across the  Caspian to  the BTC pipeline. Current  trans—Caspian ship- ments are  expected to  double at Aktau to  around 4,00,000 bbl/d, and will  augment a new 7,60,000-bbl/d oil terminal at Kuryk,  just south of the Aktau port. KazMunaiGaz has  not yet decided on the exact site  for the port. Expansions of the oil terminals in Baku  and Kuryk   and the  pipeline’s construction could cost at  least $1.5 billion. Kazakhstan has  also  taken an interest in sending oil via rail  (and the port of Batumi) to the Black Sea and then onwards  to the reversed Odessa–Brody pipeline (EIA, 2008a–c).
3.4.    Kazakhstan–Turkmenistan–Iran: (route 4 on the map)
A proposed pipeline from Kazakhstan to Iran  via Turkmenistan has been discussed. The pipeline would have  a crude capacity of 1 million b/d,  have  a length of 1600 km,  and require  $1.2  billion in investments.   Although this  route  is   one  of   the  shortest  and cheapest, US opposition and sanctions against Iran  are  likely to keep  this  project  shelved for   some   time.  The   destination  of exported oil and gas is also another determining factor, depending on whether it is targeted towards  Asia or Europe.

3.5.    Kazakhstan–Turkmenistan–Afghanistan–Pakistan (and India): (route 5 on the  map)
Eastern and southern routes for  both oil  and gas,  such as  the oft-invoked route  across Afghanistan,  are   being considered by parties  involved in  the  Caspian hydrocarbon development, but many  experts doubt that Afghanistan or  South Asia  could  offer  investors assurances of political stability (OGJ, 2002a, b).
3.6.    Kazakhstan–China: (route 6 on the  map)
The    613-mile-long,   813 mm,  and   2,00,000-bbl/d   capacity pipeline from Atasu, in  northwestern Kazakhstan, to  Alashankou in   China’s   northwestern  Xinjiang region  is   exporting   Caspian oil  to  serve China’s growing energy needs.  PetroChina’s ChinaOil is  the exclusive buyer of  the  crude oil  on  the Chinese side and the  commercial  operator of  the pipeline is  a  joint venture of CNPC  and  Kaztransoil. In   addition  to   around   85,000 bbl/d  of Kazakh crude  that  flowed through   the  pipeline during  2007, Gazpromneft  and   TNK–BP  have   received  around  12,000 bbl/d each  in  allocations for  their crude oil  exports  during  the  first quarter of 2008.

The    source  of   Kazakh  oil   for   the  pipeline   comes  from CNPC’s   Aktobe  field   and   from    CNPC   and    KazMunaiGaz’s Kumkol   fields.   Securing  long-term  crude  oil   supply  for   the pipeline’s capacity  is  the current priority,  so  plans  to  expand the pipeline to  4,00,000 bbl/d are  now   of  lower concern.  The quantity of  crude oil  supplied to  China through this route will  still   represent  only a   small  percentage  (i.e.   less   than   5%)  of China’s  expected  oil  demand by  the time  the  project reaches completion.

The   first stage   of  the  project was completed in  2003  and runs westward across Western Kazakhstan  from the oil  fields of the Aktobe region to  the oil hub of Atyrau near the Caspian Sea. This    line    will   be    reversed  when  all   stages  are    complete. Construction began on  the second section of  the  Kazakhstan– China pipeline in late September 2004 and was completed during

2006.  Crude oil reached the Chinese side on July 29, 2006,  around two  months  behind  schedule, and   was  then  pumped  to   the Dushanzi refinery. Pricing issues were the main reason behind the delay,  but China and Kazakhstan eventually came to  a  compro- mise. The  final stage  of  the project,  scheduled to  be  complete around 2009,   will  connect Kenkiyak  and  Kumkol  at a  cost of around  $1  billion, will   connect the first two sections,  and  will  theoretically double the pipeline capacity  to  4,00,000 bbl/d. The project will   complete a  transport network linking the huge oil fields of  the  Kazakh sector of  the Caspian Sea  basin directly to western China.¹⁵   The  speed of  this final leg  will  in  part also  be dependent on the availability of Kashagan crude oil (EIA, 2008a–c; Stratfor, 2007).

On the other hand, many experts do not rule out the possibility of  construction of  a  pipeline  connecting the Caspian Basin  with China’s Pacific  Coast. However, some  of  them like  John  Roberts, hold the view that a pipeline from Kazakhstan to China would be extremely costly and unfeasible, given the lack  of enough volume commitments from  the Kazakh Government. Such  a  pipeline, in order   to   reach  China’s Pacific Coast, would need  to   extend

5500 km   and  would cost  upwards of  almost  $10  billion.  (The

BTC  route runs 1760 km)   According to Roberts,  available oil  in Kazakhstan could pump 4,00,000  barrels of oil a day through such a pipeline, but it would take a million barrels a day  to  make the project enticing for  investors. He  calculates that  Russia would have  to  participate to deliver this volume, necessitating a  three- way pact between Russia,  Kazakhstan, and  China. Such   multi- lateral  projects,  Roberts   says,   are    difficult  to   negotiate  and implement (OGJ, 2002a, b).
3.7.    By-pass  routes via Bulgaria and  Ukraine (route 7 on the  map)
In January 1997, Bulgaria, Greece, and Russia agreed on  a plan to  build an  oil  pipeline linking  the  Bulgarian Black  Sea  port of Burgas with Alexandropolis on the Mediterranean coast of Greece. The proposed 178-mile, underground pipeline would allow Russia to export oil through the Black Sea while bypassing the Bosporus. However, a  wide  range  of  technical and economic disputes has stalled the $700 million project. Primarily, there are no discernible sources  of financing for  such a pipeline, and there is not enough oil  commitment  from the  producing countries  of  the Caspian Basin to make the pipeline feasible.¹⁶  Although Russia, Greece, and Bulgaria  signed   a   memorandum   on   the  commencement  of pipeline construction in  November 2004,   the countries did  not complete a memorandum of understanding (MOU)  by the end of

2004.  Greece continued to lobby for construction of the pipeline, and the final MOU was signed in April 2005.  In 2006,  Russia was granted a 51% stake in the pipeline project. In response to Russian involvement, the Bulgarian state-controlled gas  monopoly Bulgar- az  and the  Universal Terminal  Bourgas  (UTB)  proposed to  co- create a Bulgarian corporation that will  control a minimum 24.5% of the remaining 49% of the Burgas–Alexandroupolis oil pipeline. Greece  and Bulgaria accepted the  new conditions, despite  the project originally stated that the three partners would share equal

33% stakes in the pipeline. On March 15, 2008  in the presence of President  Putin  three  countries  finally   signed  an   agreement (Intergovernmental  Agreement) to  construct  the  pipeline. How- ever   no   concrete  action  was  taken  since  then.   According to Greece’s development ministry, Greece could profit between $30 and  $50   million  per   year   from  the  pipeline.¹⁷    According to environmental  NGOs   active  in   both  Greece and   Bulgaria  are  arguing that this profit margin is far less than the environmental damages to  be  inflicted by the pipeline.

A second route to  by-pass  the  Turkish Straits is  the Albania– Macedonia–Bulgaria  Oil   pipeline,   alternatively  known   as   the AMBO pipeline.  The  AMBO project would take 4  years, linking the Bulgarian port of Burgas on the Black Sea to the Albanian port of Vlore on the Adriatic with an 890 km (550-mile) pipeline worth

1.2  billion dollars. The  pipeline capacity would be  7,50,000 bpd. Even  though the plans for  this  project  were designed in  1996, large US petroleum companies, Exxon  Mobil and Chevron Texaco, have dismissed AMBO claims that they have  considered a role  in the venture, saying that it was ‘‘far too early’’ for such a decision.¹⁸

In  December 2004,  AMBO announced that front-end engineering and design (FEED) on  the pipeline  would be  completed in  2005 (which is done so) following the December 28, 2004  signing of an MOU  by  ministers from  Bulgaria, Albania, and  Macedonia. On January 31, 2007,  the Republic of Macedonia, Bulgaria, and Albania signed a  trilateral  convention on  the construction of  the Balkan pipeline AMBO. This  document has   been ratified  by  the Parlia- ments   of   all   three  countries  and   governs  the  construction, operation,  and    maintenance    of    the   pipelines  (Stojanovska, 2007).^19,20 Construction is expected to begin in 2008 for operation within 3 years.

A  third by-pass option would be  the  Odessa–Brody pipeline. The chief components of Ukraine’s strategy to bring oil bypassing the Bosporus across its  territory are  the $750 million Pivdenny oil terminal and the  5,00,000-b/d  Odessa–Brody pipeline.  Ukraine already plays   a  major role   as  a  transit country for  Russian oil exports  to  Europe, and the  country is  hoping that  the  Odesa– Brody   pipeline  will   help  Ukraine   reap   tariffs  for   Caspian  oil exports, as well.

With   concern  over  the  Turkish   Straits   ability   to   handle increased tanker traffic, Ukraine decided  to  build the  Pivdenny terminal  and  Odesa–Brody  pipeline to  lure  Caspian region oil exports   to   transit Ukrainian territory. The  400-mile pipeline, which  Ukraine constructed with  its   own  funds  completed  in August 2001,  which became operational in December 2001,  to the northwestern  Ukrainian city  of  Brody.  The  pipeline was initially intended to load Caspian Sea oil from the newly completed Black Sea   marine  terminal,  Pivdenny   (or   Yuzhniy),   and  to   carry  it northward through  the Ukrainian system on  to  Europe with an initial  capacity of  roughly  3,00,000 b/d.  However, for  approxi- mately 3  years the pipeline has   been  mostly dormant  because Ukraine was unable to secure oil supplies from Caspian Sea  area suppliers. Russia suggested that the pipeline be used in reverse, to move oil from Russia southwards to tankers in the Black  Sea and onwards   to   world  markets.  Since   January  2003,   Russian  oil companies  have    used   the  last  32-mile  leg   of   the  pipeline (in  reverse) for these purposes.

Faced with the possibility of losing direct access to Caspian Sea region oil, European governments have voiced their opposition to the reversal project in newspaper articles and public statements. Leading Caspian Sea  region producer, Kazakhstan, has  also taken counter-measures. In  July  2003, for  instance,  the country agreed to  construct a 32-mile pipeline parallel to  the segment currently being used in  reverse  to  transit  Russian  oil.  However,  in  late September 2003,   the Ukrainian government  announced that in

2004,  the pipeline will  be  used in  its  originally  intended  south– north direction to  carry 1,80,000 b/d of Caspian Sea  region crude to Europe. In 2004, the government pledged that its final intent for the pipeline would be for it to flow  from Odessa north to Brody.  In the meantime, the Ukrainian state oil  company UkrTransNafta, effectively reversed that  decision, declaring that it had accepted an   offer   from  the  Russian–British company  TNK–BP  to   ship

2,00,000 b/d  from  Brody   south  to   Odessa  (in   reverse).  On   a temporary basis, in  September  2004,  the  first tankers shipped from Odessa with  Russian crude  oil,  and the  pipeline’s initial capacity  level was  roughly 97,000 b/d.  Since   these   shipments remained very limited and new regime came into  power after the so-called ‘‘orange revolution’’ in Ukraine, Viktor Yushchenko, the new President has  finally decided in April 2005 to use  the pipeline in the direction originally intended.  European Union and World Bank  announced that  they will  financially support the extension of  the  pipeline  from Brody   to   Gdansk,  Poland.  A  preliminary agreement was signed between  Azerbaijan,  Georgia, Lithuania, Poland, and Ukraine, and a Kazakh deputy minister in May  2007  to  begin working on  a multinational agreement.

However, there  are  multiple reasons why  the  extension may not  be    currently    feasible.   The   primary  hurdle  is   securing, commercial guarantees of Caspian oil, especially in light of recent developments with Kazakhstan  apparently agreeing  in  exchange of  CPC expansion, to  send oil  via  the  Bourgas–Alexandropoulis pipeline and BTC routes. Azerbaijan will  be sending most of its oil through the BTC pipeline. Also, the European Bank  for Reconstruc- tion  and  Development (EBRD)  has   stated, it  may make more  economic sense to construct the extension further to Wilhelmsa- ven,  Germany, where it would avoid the crowded straits  off  the Danish and  Swedish coast. Additionally,  industry  players have publicly stated that Caspian crude oil will  be  unlikely to displace cheaper Urals  blend crude oil  from Russia at central European refineries. Finally, the refinery at Plock  would have  to be upgraded to  accommodate the lighter quality Caspian crude.

The   energy summit in  Kyiv,  attended  by  heads  of  state  and government from Caspian, Black Sea and Baltic  countries on  May

22  and 23, 2008 revitalized the   Odessa–Brody–Plock–Gdansk pipeline project for Caspian oil. In the ‘‘Joint Statement Regarding the  Euro-Asian Oil  Transportation  Corridor’’ (EAOTC)  signed by Azerbaijan,  Georgia,  Lithuania,  Poland,   and  Ukraine,  leaders acknowledged the  importance  of  the decision of  the  Ukrainian side to use  the Odesa–Brody oil pipeline in the originally projected direction. This  has  become possible thanks to  rapidly developing oil   transport   routes  from   Azerbaijan  to   Georgian  maritime terminals. There, the oil can  be  shipped to  Odessa by  tankers for pumping to  Poland through the pipeline.

Azerbaijan has  become key  to  this European pipeline project. Although the European Union has long declared it a priority, and the United States  has  also  supported it declaratively,  Azerbaijan can  make it a reality in its  triple role  as oil producer, transporter, and investor.

On May 16, 2008,  the State Oil Company of Azerbaijan Republic (SOCAR) inaugurated its  export  terminal in  Kulevi,  near Poti on the Georgian Black Sea  coast. The  terminal will  handle 5 million tons  of crude oil and oil products annually from 2008  to 2010, 10 million  tons  annually  from  2010   onward,   and  potentially  20 million tons  in a follow-up stage. The  expansion plans anticipate oil  input from  Kazakhstan, in  addition to  those from Azerbaijan. The Kulevi  terminal  marks Azerbaijan’s emergence as an  investor in  oil  transport  and infrastructure  projects outside the country. According to  Prime  Minister Artur Rasizade and  SOCAR head Rovnag Abdullayev at the inauguration, Azerbaijan is prepared to supply  oil  volumes  from  Kulevi   for  the  Odessa–Brody–Plock– Gdansk pipeline project.

Azerbaijan also  transports oil by railroad  en  route to Georgian maritime terminals. Those volumes originate partly in Azerbaijan itself and partly in Kazakhstan, where some producer companies ship their oil across the Caspian Sea to Baku  for transshipment by rail to Kulevi  and Batumi on the Black Sea. High prices for oil allow profitable  transportation  by  railroad, making this route far  more  attractive than it was during the era  of  low-priced oil.  This  new situation also  markedly improves the prospects for Caspian oil to reach the Black  Sea and Odessa directly.

In   February  2008,   Kazakhstan’s state  oil  and  gas  company KazMunaiGaz purchased the  Batumi  oil  terminal outright from the Danish-led Greenoak  Group and its  partners.  Greenoak will continue to   manage both  the  oil   terminal  and  the  recently modernized port of Batumi for  KazMunaiGaz. The terminal, with a  capacity of  at least 15  million  tons/year of  crude oil  and oil products, can  also  become a  point of  origin for  oil  deliveries by tanker to  Odessa and the pipeline to  Poland (Socor, 2008a, b).
4.    Predicting export route(s) for Kashagan article’s scope to  fully  explain the model of  prediction, since it requires  extensive  statistical   work  and  separate  assessment/ explanation  (a  full  explanation  of  the model and basic assump- tions  on   actors  in   the  Caspian Basin,   applicability  of   it   are  discussed  and  tested   at  Babali,  2006),  for   the  sake  of   the argument, however, the model used is explained briefly here.

The    original  Bueno  De   Mesquita  (de   Mesquita,   2002;  de Mesquita and Newman, 1985)  model of  predicting international relations is  modified in  an  attempt to  develop another model based on  certain  factors to  predict which possible export  route will   be  chosen for  the  Kashagan oil.  Mesquita’s ‘‘game   theory analysis’’ is  used as  the  basic method of  analysis in  the model. The   ‘‘game   theory  analysis’’    provides  the  closest analogy to the  situation  in   the  Caspian basin, and  the   proper  tools  to predict some  policy outcomes.  The  analogy used in  Mesquita’s model is a game in which actors simultaneously make proposals to  each  other about how to   resolve  a  policy issue  and  exert whatever pressure they can   to  get   their  rivals   to  accept their proposals. Proposals consist  of  suggested new  positions on   a continuous policy  of  each actor’s preferred option (de  Mesquita,

2002).

When alternative courses of action and various viable options are pitted against each other, the array of forces of the competing interests, influences  which  interest  (if  any)  will  win. Of course, this  array depends on  more  than just the relative  power  of  the actors involved.  It  also   depends on  each  actor’s willingness  to spend  influence  on   the   issue  in   question  (salience)  and  the intensity  with  which  it  prefers  one  proposed   settlement  to another. Each  actor has  a  total  number of  potential ‘‘votes’’ that is  equal  to  its  salience scores multiplied by  resource/capability scores  (Votes ¼ saliency  scores  x  resource  scores)  (de  Mesquita,

2002; Babali, 2006) Calculation  and  explanation  of  these judg- mental scores are needed for final evaluation which will  be based on  experts’ overall  assessment  (see footnote 19)   regarding the resource and salience scores for each actor and prediction will  be made based on  the results of  applying these assessments to  the original Bueno De Mesquita (BDM) model.

As it was explained by  Bueno De Mesquita, before embarking upon prediction activity and likely scenarios, one has  to determine where the median vote stands on  the scale of actors. To do  this, one has  to first look  at the official positions of the actors in terms of  their preferred routes. There are  basically ten major actors in total  in  the  Caspian  region: Russia,  United  States,  Companies, European Union, Turkey,  Iran,  Azerbaijan, Kazakhstan, China, and Turkmenistan.

It  is  clear from the  above table that the median  vote (bulk of  the actors’ preferences) is  between  Turkey (7)  and Russia (5) and closer to Turkey.  This is more  about the general position held with regard  to overall Caspian energy resource export  routes. However,  the prospect for  any  proposed route to be  chosen for Kashagan  exports, depends  on   actors’  ability to  form winning coalitions.

5.    Most likely scenario: BTC connection
When we  look  at the de-facto coalitions that are  already in place  in   terms  of   cooperation  or   declared  priorities  for   the possible export routes  (Table 1),  it becomes obvious that with the  coalition of  Turkey,  Azerbaijan, United States, and  European Union, the  BTC route will   be  the winner  among  the  Kashagan export routes (based on  votes calculated for each actor according to  the formula  given above and  based  on  judgemental scores attributed   by   the  experts). The   rival   coalition  would  include Russia, Kazakhstan, and  Turkmenistan (based on  the countries’
Table

Actors	Actors’officialroutepreferences—officially consideredroutes
	Russia	Turkey	Iran	Pakistan–India	Bulgaria–Ukraine	China
Russia	X				X
US		X
Companies	X	X	X	X
E.U.	X	X
Turkey		X
Iran			X
China						X
Azerbaijan		X
Kazakhstan	X	X	X		X	X
Turkmenistan	X	X	X	X

Russian  route).  However, companies will   hold the  key   in  the selection  of   the  main  export  route   for  the  Kashagan  field. Therefore, companies  may  change the  outcome  of  the export route selection process.

As  Turkey and the United States  secured solid  commitment from the  Kazakh government for  the  Aktau–BTC option  (with signing  of   Intergovernmental  Agreement  between  Azerbaijan and Kazakhstan in  June  2006), even the companies  may  not be able to  change the outcome. Although  not yet plainly seen on the  horizon, with  the   increased  likelihood  after  the  Baku– Tbilisi–Erzurum natural gas  pipeline’s realization in  2007, possi- ble   Turkmen  commitment   would   make  this  coalition  even stronger.

Delays  in  Kashagan also  make this option more  viable every passing  day.  Kazakh Energy  Minister  Sauat  Mynbayev in  May

2008  announced that the consortium members  are  looking to further  delay  the  start  of   production  from  Kashagan deposit to   2013   (Xinhua   Financial  News,    2008).   Delays  in   the   field benefits Kazakhstan in  both ways. Kazakh  government find the opportunity  to   pressure   consortium  and  increase their  share and also price of oil increases. Delays also  makes Kazakh reserves more    valuable.  By   2013,   subsea  gas   pipeline  can    be   built between Azerbaijan and  Turkmenistan,  so  Kazakhstan is  con- sidering  its  own subsea oil  pipeline to  join   BTC. Although the timing and plans have  not been finalized,  Kazakhstan wants to have  a  new,  $1.5  billion, 750 km  (466-mile)  pipeline, to  be  built along its  western coast on  the Caspian, that would feed into BTC (see footnote 20).

Iran  is  the number one choice of companies (because of pure economic reasons—shortest route,  already  in  place export facil- ities, etc.),  based on cost effectiveness, but is out of the picture for the foreseeable future for obvious political reason.

In  fact  BTC and the development projects of  Kashagan field are  very much complementary in  nature. Experts say  Kashagan oil  can   fill  the  pipeline when  the  Azerbaijani fields begin to show declines in  output early in  the next  decade  (Cohen, 2002). Total    available  capacity  on    the   BTC  pipeline  is   slated  to increase through  technical means  (chemical agents,  additional pumping capacity) to  approximately 1.5  million bpd  or  some 75 million  tons  annually.  That  can  provide  a  westbound  outlet  (as opposed  to   a   Russian   one)  for   part  of   the   production   from

Kashagan.

In   addition, most of  the companies who  maintain  majority stakes in the Kashagan consortium of Agip KCO also  hold majority share in BTC’s parent operating consortium AIOC. Four members of  the BTC Co. group also  have  stakes in  Kashagan

6.    Some concerns about the likely scenario and issues that can affect development efforts
6.1.   Russia–Georgia war  and  viability of trans-caucasus transit corridor for Kazakhstan
Although Kazakhstan has  officially announced plans to arrange delivery of its  oil to the BTC oil pipeline via Azerbaijan and on  to Georgia’s Black  Sea  port of  Batumi, traders  expressed fears after the  Georgia–Russia conflict about  the  efficiency of  the  trans- Caucasus routes and about possible future pressures from Russia.

Kairgeldy Kabyldin, CEO of Kazakhstan’s state-owned KazMu- naiGaz, speaking with journalists about the strategy of developing oil  export  routes said on  October 9,  2008  ‘‘KazMunaiGaz is  a business structure, so  we  do  not make political assessments  of these  kinds  of   events.  I  would  not  say   today  that  risks   of [transporting oil  via]   the  trans-Caucasian corridor  via  the BTC pipeline have  increased due to the Russian–Georgian conflict. We will  not change our plans for using this corridor. On the contrary, the transit of Kazakh oil in this direction would lend an element of stability in the region. This is because you know that any country signing international  transit  agreements guarantees the stability of oil supplies and the freedom of transit. The  rest is an  issue for politiciansy Let us here separate the issue of the conflict from the issue of  the transit and transport  of  oil  along the  Baku–Batumi corridor and the  BTC  pipeline. We  are  planning to  use   the BTC pipeline, which currently carries 37–40 million tonnes of oil/year and whose annual throughput  capacity is  50  million tonnes of oily  and Kazakhstan still  has  plans to  build refinery in  Ceyhan, Turkey’’  (Watkins,  2008).  He  said his  country is  also  eyeing  the Baku–Supsa pipeline, which can  transport 10 million tonnes/year of oil and which has  already been idle  for 2 years.

On  a  confirming note,  effective from November  1,  Chevron’s subsidiary  TengizChevroil has  significantly  augmented  oil  ship- ments from  Kazakhstan, via  Azerbaijan and Georgia, to  interna- tional  markets.  This   development  adds  to   the   evidence  that Kazakh business  confidence  is   returning  to   the  Azerbaijan– Georgia transit  corridor,  in  the aftermath  of  the Russia–Georgia war.

As a result of the conflict in  Georgia however, Azerbaijan and Turkmenistan   are    now    considering   exporting  more    of   their hydrocarbons via  Russia even if that gives  Moscow leverage over them while  some Western countries that want to  punish  Russia are   discussing  allowing exports  via  Iran,²¹   and  still   others are pushing to resolve the Nagorno–Karabakh issue in order to allow the export of oil and gas  via  Armenia.

As  of  now,  neither the countries of  the region  nor  any  of  the major outside powers have   reached  any  final decision, but the mere discussion of  these possibilities changes not only the geo- economics of the region but also  the geopolitics of the world. This situation  creates the  real  possibility  that old   allies may find themselves at odds, while old enemies may start cooperating with each other,  possibilities that none of  them could have  imagined prior to the Georgian crisis.

Such   unimagined development occurred between Turkey and Armenia. Turkey’s  President Abdullah Gu¨ l, upon the invitation of Armenian President Serzh Sargsyan visited Armenia on September

6  to watch the 2010  World Cup  qualifier  soccer  match between their  national teams,  which  provided a  unique opportunity  to explore establishment of diplomatic ties (does not exist between the two countries since the Armenian independence in 1991) and cooperation opportunities.

Some analysts have  argued that this rapprochement will  create a  sea   change in  the usually hostile  relations between the two countries and will  make  Armenia a  new potentially interesting transit  partner for  regional energy and infrastructure  projects to increase  viability  of   Trans-Caucasus   corridor.  Some  other  ex- pressed cautious optimism for the prospects. The sudden thawing in relations may not be  as sudden as it may  seem.
6.2.    Problems with  BTC connection and CPC rivalry
In   parallel with  the  prediction  made  above,   most  Turkish media and political establishment circles also  expected that when the BTC started to  pump oil  in  July  2006,  Kazakh oil  will  begin flowing in the pipeline, as well; if not right away, soon afterwards. After  all,  the BTC’s capacity of  1  million barrels/day (50  million tons/year) was  designed  largely on  the premise that Kazakh oil would be  part of the flow  stream.

Despite  all   the  hype  about  Kazakh oil,   Kazakhstan’s  full participation in  the BTC still  remains little uncertain because of the fact  that Azeri side still  reluctant to give Parliament’s approval to the IGA signed in June  2006  on the ground that if the Kazakh oil with lower quality  is  permitted  to  the  BTC route will  eventually hurt  the  superior  quality  Azeri   oil’s  high  revenues. Even   the Kazakh oil  has  been barged across the Caspian in  the volume of

80,000  barrels/d to  be  pumped into  the BTC as  of  November 1,

2008,²²   to  what extent the volumes will  incrementally allowed to be  increased by Azeri  officials is not clear yet.

Kashagan  early production  (‘‘early   oil’’)  is  expected  to  start between late   2011   and 2013,   and the  consortium must  soon decide on a suitable export route for this oil. A temporary solution for early oil is needed, leaving the decision for a more  permanent solution,  involving pipeline(s),  for   a  later  date.  One  way  and apparently the best way to transport early oil is to use  tankers and barges from Aktau to Baku. To facilitate this alternative, the United States  has already financed projects aimed at  upgrading  port facilities at  Aktau and  Dubendi, the  latter a  tiny   port on   the Apsheron peninsula in Azerbaijan.

The    Aktau–Baku  surface  transport   solution  for   early  oil, however, faces  competition  from the  CPC,  which Kazakhstan is also  considering. The CPC’s capacity is at present 6,00,000 b/d,  and

will   eventually  be   expanded  to   1.34   million b/d  by  2015.   As production  from Karachaganak’s  gas-condensate field increases and other Kazakh fields go on-stream, need for an excess capacity may  appear to  be  urgent than expected. If this  materializes, the CPC’s capacity expansion  could  be  expedited  to  accommodate early   oil  (probably as  much as  2,00,000 b/d) from Kashagan. If excess capacity continues, the CPC could readily receive early oil from   Kashagan.  In   either  case,    the  CPC   would  pose  serious competition to  the  Aktau–Baku surface transport alternative. If the  CPC   alternative were  implemented   (‘‘Russian   solution’’), Turkey  would   be   the  obvious  loser,   both  strategically  and economically. To  a  lesser  extent, Azerbaijan and Georgia would be on  the losing side,  as well.

A compromise solution, splitting Kashagan’s early oil between BTC and the CPC, is not out of the question. That  could mean that BTC would receive  some  1,00,000 b/d initial contributions from Kazakh sources.

Beyond early oil,  the transport  of  Kashagan  crude,  depending on (recoverable) reserves possibly as high as 10–12 billion barrels of oil, will  require construction of one or more pipelines. A trans- Caspian sub-sea  pipeline  connecting  Kashagan   to   BTC,  while favored  by   the  United States,   currently   stands  little  chance, because the oil companies does not fully  support the idea. Russia is against such a pipeline; purportedly on ecological grounds.  Not surprisingly, Iran  is opposed, as well.

Regardless of  which pipeline route(s) is  (are)  selected, huge financial stakes, colored by  geopolitical  considerations, will   be involved in the export of Kashagan oil. The financial stakes will  be further magnified by  virtue of  the fact  that  Kashagan also  holds significant gas  reserves linked to oil production. The export game will  be interesting to watch—certainly no less  interesting than the one witnessed with Azeri  oil and BTC.

6.3.    Environmental issues  at stake

The  world’s attention  is  attracted  to  the Caspian  by  regional rivalries  over   the  highly competitive   issues  of   oil   extraction, transportation   and  profit   sharing,  and  occasionally by   ethnic tensions.  However, there  is  another,  equally important,  danger about which politicians and oil-interests generally remain silent, namely the destruction  of  the Caspian Sea’s  unique ecosystem. This  is  due to  a lack  of  respect  for  overall regional development and the  former Soviet Union’s long-term violation  of  generally accepted environmental norms. The  present  rush of  Western oil companies and a lack of control over oil exploration operations in most of  the  Caspian littoral states only exacerbate  the situation. Soviet degradation  of  the  environment  in  the  Caspian region created  massive economic  distortions  and  mammoth  environ- mental problems, which are  posing great challenges and difficult choices both for governments and the companies. The question is whether states will  use their resources to rectify current problems or   invest   in   the  future. The   Caspian  governments,   including Kazakhstan optimistically hope that they can  do both: a balanced ecosystem and lots of oil, which sounds too optimistic.

For  years, ecologists have  given warning that the development of Kazakhstan’s oil deposits in the Caspian threatens the sea’s flora and fauna. The  Caspian basin is  also  a  seasonal habitat for  birds migrating from Europe and Asia, such as the flamingo and the rare  white-tailed   eagle.  It   is   also    home   to   about  4,00,000    seals and—crucial to caviar—production–more than 90% of the world’s sturgeon live in the Caspian. Over  a period of four weeks in May

2000,   about  4000   seals  were  found  dead  on   the   shores  of

Kazakhstan.²³    Their deaths might be  connected to oil  drilling at the  massive Kashagan field. Local  environmentalists  blame an international  oil   consortium that  drilled its   first  well   in   the shallow waters of Kashagan. Another possible culprit is hydrogen sulfide gas,  a  by-product at the  nearby  Tengiz oilfield, which  is released into  the air. The waters of the Ural  and Volga  rivers that flow   into  the  Caspian, which  are   polluted with  heavy  metals, could also  be  to  blame.

This  large-scale environmental and ecological  damage under- lines the need for  international cooperation and some kind of an authority to  enforce compliance with appropriate environmental norms in the Caspian Basin.  However, as the negotiations on legal issues surrounding the  Caspian Sea  are  intermingled with  the resolution of  environmental  concerns, the ongoing  dispute over access to  resources  presents a  major obstacle to  the  effective management of such problems, particularly at the regional level.

Both  Iran  and Russia oppose the construction of trans-Caspian pipelines and they objected to oil and gas development projects in the Caspian on environmental grounds.  The accusations that both Iran  and  Russia are   using environmental issues to  block   other countries’  exploitation  of   the   Caspian,   however,  complicate matters. In particular, the fact  that Russia is still  by far the largest polluter   of   the  Caspian Sea   and  that  its   favored regime   for environmental  protection, which is  the joint  control of  the sea, would  also   yield  Russia  a   greater  proportion  of   oil   reserves, undermines its  sincerity. While Russia does  not  mention  any environmental problems that might be caused by the Nord Stream gas pipeline project between Russia and Germany under the Baltic  Sea,  assertive  environmental  concerns expressed in  the Caspian Sea further diminishes its  credibility on  this ground.

International efforts, on the other hand, are  being spearheaded by   the  United  Nations  Environment   Program  (UNEP),   with assistance from the United Nations Development Program (UNDP) and the World Bank.  Together these institutions have launched a Caspian initiative to  coordinate the preservation of the Caspian’s ecosystems at both a technical and legal level.  However, given the reluctance to commit substantial funds to solve these and similar environmental problems on  the side of Caspian governments and international oil companies, these initiatives are  far from creating tangible solutions. Continued economic  development,  improved regional cooperation, and the implementation of modern technol- ogy   will   be   required   in   order  to   improve the  state  of   the environment in and around the Caspian Sea in coming years.
6.4.    Re-nationalization and corruption issues
The   most important  problems that may hinder  oil  develop- ment in Kazakhstan are  linked to corruption and the government’s eagerness to  re-negotiate the existing production sharing agree- ments in  order to  secure more  concessions from  the  companies. Last   years  saga  between  Kazakh   Government  and  AGIP-KCO partners over  increasing  the KazMunaiGaz shares are  testimony of this new  trend.

The    corruption  issue  in   Kazakhstan—which in   most  part applies to  the investment and  development of  the  giant  Tengiz oil  field—delayed  the development of  the bigger Kashagan field for  at  least 3  years, which is  expected  to  drive exports  over  the next  10   years. It  is  not certain fully   yet,  how the  corruption scandals may  hamper future foreign investment (Krastev, 2002).

In   November  2002,   the  US-led TengizChevrOil   consortium shelved  a   $3   billion  expansion   project   after  arguments  with KazMunaiGaz about funding and tax  revenues from the deal. The dispute deepened on 4 December 2002 as a Kazakh court upheld a fine   of  11  billion tenge ($71  million)  against  TengizChevrOil for open  storage of  hydrogen  sulfur  extracted from its   export  oil. Company officials have  argued that the  government  knew from the start about the sulfur and storage plans.²⁴  Kazakhstan, in early January 2003  mended its  rift  with  the investors and reached an agreement without  changing the original contract. On  the other hand new tax  code was enacted and implemented since  January

2005,  which is highly in favor of the Kazakh government.

Foreign companies see  Tengiz and Kashagan   examples  as having less   to  do  with environmental  pollution or  contractual obligations  than  with   the   business  environment,  which  has  suffered from Kazakhstan’s efforts to  pressure them into renego- tiating terms of their contracts. The  more troubling trend is that the Government gets what  it  wants at the end. On  October 31,

2008,    as    mentioned   above  the   AGIP-KCO    consortium  was restructured, the PSA updated,  and  the KazMunaiGaz share has  been doubled to 16.81%, now  reaching equality with the shares of other major IOCs in the project.

These incidents were sort of a wake-up call  for the companies. Neither  Tengiz nor   Kashagan deals  were  not considered as  the settlement of  these  issues; instead, they were regarded as  the start of  a  period in which they will  face  similar accusations  and demands in  the future and may be  changing  the operators with those who would be  more  willing to  compromise. The  evolving government  attitude  towards foreign energy-sector investment, coupled with the corruption issue, means investors  may have  to worry more  in  the future about how  the government will  treat their  contracts. As  Martha  Brill  Olcott, senior associate at  the Carnegie Endowment for International Peace  back in 2002 asserted rightfully,  ‘‘The question of  the  re-nationalization of  oil  and gas assets is  now  becoming a  bigger issue. It  is  becoming apparent that the government will  try  to own a majority, rather than just a part, of future energy deals. The sanctity of contracts has  been a problem,  and  this   means  it  could get   worse.’’   (Olcott,  2002; Berniker, 2003) From the Kazakh side,  it is not yet certain whether officials realize the  fact   that,  with  further  delays in  the  two projects (Tengiz and Kashagan), the country’s astonishing growth in oil exports could soon come to  a halt.

Diversification  of economy and market-based rules needed for sustainable energy growth.

Kazakhstan’s growing petroleum industry, which accounts for roughly 40% of the government’s revenues and more than half  of its   export revenues,  has   driven the  country’s recent  economic growth. There is however the growing danger of possible ‘‘Dutch Disease’’,   or   over-reliance  on   the oil  sector.  Large   influxes  of foreign currency can  distort exchange rates and ultimately hinder growth  in   the   non-energy  sector.  More  investment  into   the country’s non-oil sectors required to keep  economic  growth in the next  decade sustainable. In  an  effort to  reduce Kazakhstan’s exposure   to   price   fluctuations  for   energy  and  commodities exports,  the  government  created the  National   Oil   Fund    of Kazakhstan.   However,  global   credit   crunch  has    forced  the Government to  allocate  significant amounts of  Fund’s  money to the banking system and financial market of the country.

Many   pseudo-democratic and  economic reform   laws   were passed during the last decade in the Caspian region the notion of
legal   accountability  and  transparency  does  not   exist  fully. Kazakhstan is no exception to this fact. So far, legal accountability became an  empty principle, especially with the Kazakh President Nazarbayev’s diminishing power and succession clashes between various clans. Now Kazakh ruling elites could manipulate from the top down, as they found necessary. Satisfying the lust for welfare on  the  part of  the governing elites (corruption), while  satisfying popular needs, requires  a very difficult and sometimes impossible balance. In  the next  decade  it  will   become clearer where the Caspian  countries  and societies will   begin to  gravitate:  toward greater transparency or  toward more  corruption. In  this respect, the leaders of these countries, more so Kazakhstan is at a decisive time  in  its   administration;  either it will   move toward  greater transparency and reform or further consolidate and corrupt power in  the hands of  small  group of  people. It  seems that they have tilted towards the latter.

However, one  must  has   to  acknowledge  that  recent multi- vector and well-balanced foreign policy between Russia and the West  has    rewarded   Kazakhstan  with  the  Organization  and Security and Cooperation in Europe term presidency for  the year

2009–2010.  With that accomplishment Kazakhstan  became the first former Soviet republic to  head the organization. There is no successful model outside  of  the European context (Norway) that was roughly analogous to the Caspian region. Should Kazakhstan uses this historic opportunity  to  expedite  its’  internal reforms with the Western involvement and support, it may have  a chance to    create   a   unique    and   successful  Caspian  resource-based development model for whole Caspian. Whether Kazakhstan will  rise  to the challenge remains to be seen. Failing in this regard will  give   an   impetus to  the  danger of  Dutch disease and further corruption with ultimate result of failed economy.
7.   Conclusion
Kazakhstan is firmly moving towards to become primary energy actor in the region. Exploration of the Kashagan oil field  was led  to make Kazakhstan the biggest new  energy source of the basin  and has   drawn  significant  foreign interest  in   their  oil   industry.  If Kazakhstan’s very ambitious oil export plans are not backed by real export  growth  and  viable  routes,  they  will   be   useless  for the country.   Kazakhstan cannot  wait.  Among   the  possible   various export routes  for Kashagan  oil,  BTC route  which may  not be  the most logical  or cost effective  one,  based  on  the predictive model  used and a  winning coalition explained will  likely  be  the chosen route  for its’  most viable   and  strong  complementary  nature  for Kashagan production plans  and for its geopolitical attractiveness for Kazakhstan and for Western countries.

The   most important  problems that  may  hinder  oil develop- ment   in   Kazakhstan  are   linked  to   the  corruption  and  the government’s eagerness  to  re-negotiate the existing production sharing agreements in order to secure more concessions from the companies and re-nationalize some of the fields. Huge problems arose with foreign investors pose a threat to put Kashagan further on  hold.  Government however needs to  understand that as  an emerging developing  energy industry, Kazakhstan  needs to  have ChevronTexaco and  other  investor  companies in  Kazakhstan. To keep them in  the  country and to  have   them contribute  to the development of  the industry at the optimum level,  Kazakhstan needs to have  transparent and law abiding energy legislation and operation  rules with long-term predictability.

With the new  discoveries of enormous oil and gas deposits in the  Caspian basin, a  renewed  geopolitical  offensive is  on   the course to  upset  the  delicate political landscape of  the region as well.  The size  of the new discoveries accelerated the international haggling over  the selection and  construction of  pipeline export

routes.  With  huge  estimated  reserves,  Kashagan   returns   the region to the top of the geopolitical agenda for the world’s major powers.

The Caspian Basin and Central Asia are the only non-OPEC areas, together with Russian oil production, where the United States and Western  powers  can  use  low   oil  price threats against  OPEC by increasing   production

 levels.   Kashagan  oil,   with   its’   abundant reserves is therefore so important from a market perspective, both for Kazakhstan as well as world oil supply security.

The   key   to  Caspian energy security is  political.  However, a strong, vibrant  regional economy will  emerge as  the result of political stability. Stable countries will  seek peaceful solutions to common   problems.  Peace  in   the  region, especially  in   Trans- Caucasian ‘‘de-frosted’’ conflicts must be achieved before the full potential economic takeoff  can  occur in  the Eastern parts of  the Caspian too.

In the final analysis, however, regional instabilities (de-frosted conflicts and the  legal status  of  the  Caspian Sea  and environ- mental  concerns)  will   not  stop  the  development  of   Caspian resources,  but  they could well   slow it down.  Oil  and gas  can enhance security in  the  Caspian only   if  its  states can   achieve multiple  export  routes  that  do   not  depend  solely on   transit through the  territory  of  their competitors. Therefore, opening a westbound outlet for Kashagan’s production  through the BTC and Azerbaijan–Georgia corridor is becoming a major issue of energy security for the West and Kazakhstan.