The Relationship Between Central Asian Energy Markets and 3SI

On June 5th 2019, US Secretary of Energy Rick Perry took part in speaking at the Three Seas Initiative (3SI) Summit in Ljubljana, Slovenia and acknowledged that the United States recognizes the importance of diversifying and securing energy markets for its European allies. He specifically acknowledged Germany, Lithuania, and Poland for investing in energy infrastructure projects such as the construction of new import terminals and the expansion of existing ones, before mentioning the Southern Energy Corridor and its ability to connect the vast hydrocarbon reserves of the Caspian region to energy markets in Central Europe. His speech highlighted 3SI’s ability to create a North-South energy corridor in Europe that connects to the Caspian region via the Southern Energy Corridor. Facilitating this connection would increase and diversify the imports of natural gas and oil products to Europe. More importantly, this initiative will incentivize a greater push for the development of a Trans-Caspian Pipeline, which would open up Central Asian energy markets to Europe as well.

Trans-Caspian Pipeline

The Trans-Caspian Pipeline would be a subsea pipeline, running 300 km from the city of Turkmenbasy, on Turkmenistan's west coast, through the Caspian Sea, and on to Baku in Azerbaijan, where the Baku-Tbilisi-Ezurum Gas Pipeline begins. Originally this project was proposed by the United States in 1996. With an estimated cost of $2.5 billion dollars, it would have the capacity to export 30 billion cubic meters of gas per year. A Trans-Caspian Pipeline system would play a crucial role in allowing Central Asian states to take full advantage of their hydrocarbon reserves.

Blomberg, T. (2018). Trans-Caspian Gas Pipeline

Kazakhstan and Turkmenistan have some of the largest on and offshore oil and gas fields in the world. Combined these two nations have 52 trillion cubic meters in proven natural gas reserves and 72 billion tons in proven oil reserves, but are geographically constrained to exporting through Russia.

UNCLOS & Subsea Pipelines

The UN Convention on the Law of the Sea (UNCLOS) provides legal rulings on subsea pipelines. If these international laws were applied to the case of the Caspian Sea they would allow Azerbaijan, Turkmenistan and Kazakhstan to legally construct a Trans-Caspian Pipeline. UNCLOS Part VII Article 112 asserts that subsea cables and pipelines are permitted both on the high seas and along a coastal state’s continental shelf. All states are permitted to lay lines past the continental shelf because the deep seas are defined as a global commons and no one state has sole ownership over these waters. Littoral states may lay pipelines and cables within their own territorial waters as they wish. If another state is proposing to install a pipeline or cable within another state’s territorial waters, then this development is up to the discretion of the state that claims jurisdiction over these waters. The coastal state is within its full right to regulate the course of this infrastructure and implement fees associated with transportation.

Geological Intelligence Services. (2017). Caspian oil and gas in a world of plenty

Production Sharing Agreements

While Azerbaijan, Turkmenistan, and Kazakhstan are all resource wealthy, they are also experiencing a prolonged period of economic crisis. Their economic recovery is pinned to the success of their respective energy sectors. Due to the fact that they have not recovered financially yet, they need help financing energy projects, such as the construction of pipelines, storage facilities, and developing gas and oil fields. For this reason most of these states have signed Production Sharing Agreements (PSA). These contracts allow them to receive funding from corporations such as BP, Total and Chevron as well as from institutions like the World Bank and the EBRD in order to build and develop energy projects in exchange for a share percentage. While all foreign military presence is strictly prohibited within the Caspian Sea, PSA’s allow corporations to engage in exercising soft power on behalf of the West.

Azerbaijan’s energy sector is backed heavily by corporations interested in connecting hydrocarbon reserves from Central Asia and the Caucasus, to Europe via Turkey. In 2017, an amended PSA was agreed upon between SOCAR, Azerbaijan’s state owned oil company, and corporations such as BP, Chevron, and ExxonMobil, to help further develop the Azeri-Chirag-Gunashli (ACG) offshore oil fields through 2049. The upstream development of ACG must be matched with midstream upgrades to pipelines and storage facilities in order to meet heightened production capacities.

Russian Countermeasures

UNCLOS legal provisions and PSA’s undermine Russian interests in the Eurasian energy market. Both push an agenda of sovereignty for Central Asian energy markets, and aim to provide gas and oil exports, from this region to Europe, through an alternate transport route that bypasses Russia all together. Russian policymakers realize that the development of a Trans-Caspian Pipeline, and the influence of Western corporations via PSA’s, jeopardize its monopoly over energy exports to Europe from Central Asia, which is why the regional power is deeply concerned about the legal status of this body of water. They are opposed to any legal ruling under UNCLOS which would allow for the development of subsea pipelines through the Caspian Sea. Russia predominately chooses to engage in bilateral discussions with other Caspian states, rather than multilateral agreements, as a way of maintaining a level of uncertainty around the legal status of this body of water as it pertains to the creation of a Trans-Caspian Pipeline. This practice allows Russia to engage in negotiations regarding maritime delimitations without having to make any concessions regarding subsea cables and pipelines. Russia is willing to negotiate maritime boundaries because their share of the Caspian Sea, under UNCLOS, holds inconsequential hydrocarbon reserves. They are more concerned with keeping the status of the Caspian Sea in legal limbo, in order to block alternative energy transit routes, than they are with claiming maritime territory in the region.

In addition to prolonging concrete legal agreements regarding the Caspian Sea, Russia also has the ability to influence regional conflicts. The former Soviet Republics that make up Central Asia and the Caucasus still hold close economic and social ties to Russia. The collapse of the Soviet Union created new borders, which has in turn resulted in ongoing conflicts amongst different ethnic groups vying for sovereignty. These flashpoints have the ability to impact oil and gas pipelines running through their respective regions. The most recent outbreak of the South Ossetia Conflict in 2008 resulted in Russia annexing a 1.5 km section of the Baku-Supsa-Pipeline. The Nagorno-Karabakh Conflict between Armenia and Azerbaijan presents similar implications for energy transportation. Armenia’s occupation of the Nagorno-Karabakh region in Azerbaijan has left a relatively small gap for pipelines to pass through. The “Ganja Gap” is a sixty mile wide chokepoint that houses three vital oil and gas pipelines. By using the Nagorno-Karabakh as a proxy, Russia could potentially disrupt the Baku-Tbilisi-Cehyan, Baku-Supsa, and South Caucasus Pipelines, which are all responsible for transporting hydrocarbon reserves to Europe.

Three Seas Initiative Implications

Regional policy initiatives, like the 3SI in Europe, make energy security a paramount part of their platform, due to Europe’s dependency on Russia for natural gas. Increased investment from 3SI nations looking to secure the stable production and transportation of energy products from Central Asia will undoubtedly put added pressure upon Russia to tighten their grip on energy exports.

In order to push forth this agenda, 3SI nation states must continue to be proactive in developing and upgrading midstream and downstream infrastructure responsible for transporting, storing, and converting hydrocarbon products. In addition to upgrading their own infrastructure, European governments and Western multinational corporations should continue to exercise soft power by funneling foreign direct investment into these upstream Caspian nation states. 3SI nation states must also lend assistance in mediating security concerns regarding the aforementioned ethnic conflicts in the Caucasus in order to ensure that disruptions to key pipelines do not occur. From a practical perspective, the development of subsea pipelines through the Caspian would benefit a much greater population by allowing Kazakhstan, Turkmenistan and other countries further east, such as Uzbekistan and Tajikistan, to truly open up their energy markets to the West. These nations desperately need to diversify their sources of energy production, and it would also allow Azerbaijan to become a key transit state as well as a major hydrocarbon producer.

Ultimately, this region has the ability to change the dynamics of the Eurasian energy market but has been relatively ignored by the West. While the geopolitics of the Caspian Sea have not received the necessary attention from the international community in the past, the 3SI will force Europe to increase its focus towards this region in an effort to secure a viable energy corridor. Increased pressure from international actors, such as nation states and multinational corporations, could prove to be a key factor that shifts the power imbalance in this region, and helps to establish a concrete legal framework, allowing for the creation of a Trans-Caspian Pipeline.

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