Baku, Nur-Sultan intent on oil reboot Review by Caliber.Az

The cooling of relations between Russia and Kazakhstan after the St. Petersburg Economic Forum is turning into new negative consequences. The Primorsky District Court of Novorossiysk suspended the operation of the Caspian Pipeline Consortium (CPC) marine terminal for 30 days under the claim of Rostransnadzor. Some experts believe that the restrictions on the operation of the CPC may last for a longer period. On the eve the President of Kazakhstan Kassym-Jomart Tokayev instructed the government to take measures to increase the capacity of alternative oil pipelines Atyrau-Kenkiyak and Kenkiyak-Kumkol. Against the background of the conflicts around the CPC, the prospects of transshipment of oil along the Trans-Caspian route to Azerbaijan and further to Georgian and Turkish ports have been updated.

The war in Ukraine, which has been going on for more than four months, and the sanctions pressure on Russia have played the role of a trigger that shifted tectonic faults in interstate relations and intensified interethnic, resource, transport, and other contradictions in the post-Soviet region. The situation is quite tense in the Central Asian region (CA), which until recently was an island of stability and development compared to the permanently conflicted South Caucasus or Ukraine, which has been at war since 2014. Recently, the border contradictions of Tajikistan and Kyrgyzstan have repeatedly escalated to clashes, the January riots in Kazakhstan almost turned into a civil war, and a similar, in fact, elite conflict manifested itself in the form of recent tragic events in the Karakalpak Autonomous Region of Uzbekistan. Moreover, external factors, including indirectly related to the Ukrainian-Russian confrontation, are superimposed on the long-standing internal contradictions in the Central Asian countries.

The states of the Central Asian region, including the member states of the Eurasian Economic Union (EAEU), have tried to distance themselves as much as possible from the situation around Ukraine while maintaining mutually beneficial economic ties with all parties to the conflict. However, the war and the sanctions regime rigidly changed the logistics schemes that had been established for years: the EU states decided to diversify the transport routes passing through the territory of the Russian Federation, which inevitably affected the Central Asian region. Among other things, the new EU energy policy was aimed at reducing and then completely abandoning Russian energy carriers in favor of increasing oil and gas raw materials from other sources, including Azerbaijan, Kazakhstan, and other Central Asian countries, where the new realities were accepted with full understanding. It is obvious that all this went against the Kremlin's policy of using the supply of hydrocarbon raw materials and fuel as an effective lever of influence on "disobedient" Europe.

The first signal indicating that Russia has powerful trump cards in the "transport rope" tug-of-war was the suspension of the CPC operation in March. The reason was that the infrastructure for pumping oil into tankers was broken - a storm had allegedly damaged high-pressure subsea hoses at the Novorossiysk terminal. However, no major storms were observed in the Black Sea at that time, and already then many western media claimed that the reason for the hiccups in the CPC operation was related to Moscow's attempt to change the independent course of Nur-Sultan, who prevented the creation of an oil deficit on the European market. In June, the CPC again temporarily suspended its operations, this time due to the discovery of mines and torpedoes left from World War II in the waters of the Novorossiisk port, and the process of defusing them was delayed until July 5.

The apogee of aggravation of Russian-Kazakhstan relations was the St. Petersburg International Economic Forum last month, where the president of Kazakhstan Kassym-Jomart Tokayev spoke in support of the territorial integrity of Ukraine, refusing to recognize quasi-state formations - the so-called "DPR" and "LPR", and was very skeptical to the idea of universal realization of the right of nations to self-determination, as it would lead, in his opinion, to complete chaos in international relations.

Apparently, the independent foreign policy of Kazakhstan played a significant role in the decision of the Primorsky District Court of Novorossiysk in Krasnodarsky Kray of Russia on Wednesday to suspend for 30 days the operations of the CPC sea terminal on the results of the check of the technical state of dangerous production facilities of CPC-R JSC made by Rostransnadzor. As a result, several documentary violations on the plan of liquidation of emergency oil spills were revealed.

The decision of Russian courts has not come into force yet, and according to the Ministry of Energy of Kazakhstan, on July 7 the export of Kazakhstan oil through the pipeline system of CPC was carried out in the normal mode. Moreover, due to the continuous cycle of the production process of oil production and pumping, the CPC-R consortium appealed to the court with a petition about the suspension of execution of the court decision, as JSC has already started to work with corresponding state bodies and departments of Russian Federation on the elimination of revealed violations. The consortium's petition specifically notes that immediate suspension of the pipeline system may cause irreversible consequences for the production process and may even result in the destruction of technical facilities.

Today it would be erroneous to speculate on the future of the pipeline consortium, but the expert community has already formulated a certain opinion on the observed processes. For example, Kazakhstani energy expert Nurlan Zhmagulov expressed fears that the situation with interruptions in the work of the CPC may take a long-term character because of possible plans of the Russian authorities to force Western companies out of the consortium (Kazakhstan's JSC NC KazMunayGas, as well as Chevron, ExxonMobil, Shell, and Eni have a total of about half of the participation in the CPC-R). According to Zhmagulov, he does not exclude the possibility of nationalization of the CPC pipeline, currently the only relatively independent pipeline system where the level of capital from "unfriendly" to Russia Western countries is so high.

A somewhat different opinion was expressed by a Russian expert, researcher of the Institute of Economics of the Russian Academy of Sciences Alexander Karavayaev, who believes that some misunderstanding in the relations between Moscow and Nur-Sultan will not turn into serious economic consequences. "The current situation is a consequence of Kazakhstan's objective position in the Eurasian space, its complex structural dependence on the Russian oil export infrastructure. Today, due to a number of external circumstances, Russia is forced to revise its export strategy, protecting it as much as possible from Western sanctions and simultaneously pressuring buyers of raw materials and fuel in unfriendly countries in order to have the greatest impact on global markets. And since Kazakh oil exports from Novorossiysk is going simultaneously with Russian supplies, Moscow is trying to correlate the export policy of the two countries," Karavayev noted, emphasizing that no one in Russia has set a goal to punish Kazakhstan by stopping the work of the CPC pipeline, Russia just expects the understanding from an ally in the EAEU on the issue of coordinating export supplies.

One way or another, but the sustained operability of the CPC pipeline with an annual throughput capacity of 67 million tons of raw materials is of paramount importance for Kazakhstan since this 1,511-kilometer pipeline is used to deliver over two-thirds of all Kazakhstani export oil, mainly from the Tengiz and Kashagan fields. It is extremely important that the loss of profits from oil exports through the CPC has a negative impact on the state budget of the republic and can lead to the freezing of a number of expenditure items.

Not surprisingly, the next day after the announcement of the court proceedings on the environmental liabilities of the consortium in Nur-Sultan an emergency government meeting was held, during which the head of state instructed the national company KazMunayGas to work out the best options for the Transcaspian route in order to diversify supplies of Kazakhstani oil with the involvement of Tengiz field investors in this work. Kassym-Jomart Tokayev also ordered to take measures to increase the capacity of the Atyrau-Kenkiyak and Kenkiyak-Kumkol oil pipelines through which the excess produced oil will be delivered to refineries.

"Diversification of oil routes is not a matter of one day, we are talking about long-term plans, and these steps are not dictated by political motives. Russia has been and remains our strategic partner and ally, no actions detrimental to its interests will be allowed. We hope that no such actions will be taken against Kazakhstan as well," a spokesman for the president of Kazakhstan Ruslan Zheldibai commented on the results of the meeting.

Kazakhstan's position is very pragmatic and realistic, and it is obvious that the republic cannot refuse the services of the CPC in the short term, since it is unfeasible to instantly disperse 67 million tons of oil along the alternative corridors.

Nevertheless, it is necessary to diversify the routes of oil transshipment, and last week the potential areas were discussed at the meeting of the Public Council under the Ministry of Energy of Kazakhstan. "Alternatives for the current, medium, and long-term perspective were presented, with scenarios for transshipment of oil in the direction of Iran, as well as transit through Azerbaijan, Georgia, and Türkiye," Karavyaev said. According to the expert, the Energy Ministry is studying the possibility of transferring 1.5 million tons of oil from Aktau port to the Baku-Tbilisi-Ceyhan (BTC) pipeline this year after repairs of the Sangachal Terminal's line, and about 1.5 million more tons by the railroad route via Azerbaijan to Georgia's Batumi port in autumn. In the mid-term perspective (2023-2025) through the above-mentioned routes, as well as by connecting the Baku-Supsa oil pipeline and swap supplies via Iran, transit could be increased to 20 million tons or even more.

However, the Russian expert stressed that implementation of all these projects will require substantial investments in route infrastructure, expansion of tanker fleet, pipeline capacity, agreements with operators, solution of tariff issues, etc.

Nevertheless, it is possible that in case of further tightening of anti-Russian sanctions and lack of progress in negotiations on the CPC some of the volumes may be redirected to Azerbaijan - to the BTC pipeline system. There is also a possibility of rail-ferry transshipment to the oil terminal in the port of Kulevi (owned by SOCAR) or to the Batumi Oil Terminal owned by Kazakh investors. Before the 2014 energy crisis, Kazakh exporters actively used these terminals (3-4 million tons per year passed through Batumi alone), but over the past eight years, crude shipments have dropped to zero.

Such an experience in the past was very productive, and its resumption is quite realistic since today's high oil prices offset all the logistics costs and tariffs for pipeline transit. However, the practical implementation of turning Kazakh tankers to the South Caucasus will require a number of approvals. In particular, heavier Kazakh oil may worsen the quality of the BTC blend at the Ceyhan terminal, hence a number of compensatory tariffs need to be agreed upon. On the other hand, Kazakh exporters expect to sell their oil from Ceyhan on their own. In its turn, Azerbaijan expects to buy oil from the moment it is loaded on a tanker in Aktau and then sell it by itself. The option of transshipment of oil via rail transport also has certain difficulties, primarily due to the wear and scarcity of tanks. In addition, today a considerable part of the tank-car fleet is involved in transporting Turkmen oil products in the direction of Georgian ports. Finally, it is necessary to solve the problem of transferring a number of Azerbaijani tankers back to the waters of the Caspian Sea, which during the 2014-2018 energy crisis and reduction of oil transit in the Caspian Sea were transferred to the Black and Mediterranean Seas. This task in the conditions of the Russian-Ukrainian war and the probable excuses of Moscow concerning the passage of the Volga-Don Canal by tankers is not so simple.

Nevertheless, the above-mentioned problems can be overcome to a great extent and in case Kazakhstan takes a corresponding decision the pipeline, port, and railway infrastructure of Azerbaijan will easily cope with the transfer of an extra 2-3 million tons of oil annually.