The New York Times: Central Asia on Front Line in Energy Battle

Sergei Karpukhin/Reuters
Lukoil workers inspecting gas lines at a new Uzbek field.

By ANDREW E. KRAMER
Published: December 20, 2007

BUKHARA, Uzbekistan — In the scrub brush desert south of this ancient Silk Road town, the natural gas wellheads are built on modest concrete platforms about the size of basketball courts. Because the gas is naturally pressurized, pumps are not needed to bring it to the surface. Pipes simply kiss the ground and gas pours through them.

Executives from Lukoil and Russian and Uzbek officials inaugurated the latest Central Asia gas field on Nov. 29. The field is estimated to hold 400 billion cubic meters of natural gas.
The issue is where the gas goes from there.

After the breakup of the Soviet Union, the United States and its European allies sought to ensure that Central Asia’s enormous oil and gas wealth would flow through pipelines bypassing Russia. It was the latest version of the Great Game, the 19th-century contest between Imperial Britain and Czarist Russia for dominance in the region. Lately, however, the West is falling behind, as a torch lighting ceremony last month made clear.

Executives from Lukoil, the Russian oil company, and government officials from Moscow had come to inaugurate the latest Central Asia gas field to come online. Developed by Lukoil, the Khauzak field is estimated to hold 400 billion cubic meters of natural gas, which Lukoil has sold in advance for the next 32 years to Gazprom, the Russian natural gas giant.

Coming as some political developments in the region had renewed Western companies’ hopes of doing business in Central Asia, the Nov. 29 ceremony — held before a planeload of Moscow-based journalists flown in for the occasion — seemed tailored to remind the world of Russia’s lead in the new Great Game.

“We have a good head start and we will use it,” Russia’s first deputy prime minister, Sergei B. Ivanov, said from a makeshift podium above the red sands of the Kyzylkum desert.

The Bush administration has identified Central Asia as a promising alternative to the volatile Middle East as a source for oil and natural gas. As American officials pursue a policy of encouraging energy exports that bypass Russia, they are also trying to pry open Central Asia to Western oil investment.

Russia is countering by raising its investment in Central Asian fields and pipelines.

Much is at stake. Russia is the world’s largest natural gas producer and a major supplier to Europe. It relies on Central Asian supplies to meet these commitments.

“The Russians are very keen to fight their corner in Central Asia,” Jonathan Stern, a natural gas expert at the Oxford Institute for Energy Studies, said in a telephone interview.

“The Russians are not just cozying up” to Central Asia’s autocratic leaders to achieve their aims, Mr. Stern said. “Russian companies have put their money where their mouth is.”

Flush with cash from their own oil boom, the Russians are investing heavily in new development, posing a challenge to Western companies like Exxon Mobil, Chevron and ConocoPhillips that are eager to expand their Central Asian operations.

After an investment of $3.5 billion, the Lukoil project will tie together three natural gas and gas condensate fields by 2011 to produce 11 billion cubic meters of natural gas a year for export.

In the three years since Lukoil signed the production sharing agreement with the Uzbek government for Khauzak, Uzbek politics have taken a sharp turn in Russia’s favor, shutting Western oil majors out of Uzbekistan.

In May 2005, President Islam A. Karimov’s troops opened fire on a mixed crowd of escaped prisoners, gunmen and antigovernment demonstrators in a square in the Fergana Valley town of Andijon, killing hundreds in what human rights groups say was the worst massacre of street protesters since Tiananmen Square in 1989.

The episode led to deep strains in diplomatic relations with the United States. Even before the shooting, human rights groups accused Uzbek authorities of abuses, including two incidents in which political prisoners were reportedly boiled to death in an Uzbek prison. Prospects for a Western role in the country’s natural gas industry waned.

In contrast, Russian President Vladimir V. Putin visited Mr. Karimov in Uzbekistan after the Andijon shootings and endorsed his justification.

In 2006, Lukoil expanded its presence here in a consortium with the China National Petroleum Corporation, Petronas of Malaysia and the Korea National Oil Company to explore a natural gas deposit beneath the dry bed of the Aral Sea estimated to hold more than one trillion cubic meters of gas.

And in neighboring Turkmenistan, Mr. Putin secured an agreement in May to expand natural gas exports via a branch of the Central Asia-Center natural gas pipeline, which runs along the eastern shore of the Caspian Sea, north toward Russia. It was the most significant energy deal in that country this year. And this summer, crews from China, another country ascendant in Central Asia, began exploration drilling for gas on the eastern bank of the Amu Darya river, according to Mr. Stern, the Oxford Energy analyst.

To be sure, in the 1990s European and American companies made great gains in Kazakhstan — which has emerged as the leading commercial power in Central Asia. Chief among those gains was Kashagan, the largest oil find in the world since the discovery of Alaska’s Prudhoe Bay in the 1970s. But the deal has been mired in dispute, with Kazakh authorities forcing a renegotiation of terms with consortium partners Eni of Italy, Exxon Mobil and ConocoPhillips of the United States, Royal Dutch Shell and Inpex Holdings of Japan.

Kazakhstan has also turned its attention to the east, planning a natural gas pipeline over the Tian Shan mountains to the neighboring Chinese province of Xinjiang, a snub to American and European companies and governments. The West supports a western route under the Caspian Sea, via Azerbaijan, Georgia and Turkey, and on to world markets — threading the pipes through a narrow corridor between Russia and Iran to plug into the Central Asian oil and gas fields.

The BP-operated BTC oil pipeline and a parallel gas pipeline now stop in Azerbaijan, on the western shore of the Caspian, and the grand project seems to be stalled there for now.

The next step is to build the trans-Caspian leg, which Russia is blocking through a mix of political and business strategy. The Russians are buying up much of the natural gas production capacity to make the Western plan commercially nonviable because of a lack of available gas. With the help of Iran, they are also contesting the legal status of the Caspian Sea that the oil and gas pipelines would pass under.

Moscow is also offering guarantees of support to the Central Asian potentates if a Ukrainian-style domestic uprising should take place, leading to a change in government, something the United States and Europe cannot do.

In one encouraging sign for the Western majors, the death last spring of the longtime leader of Turkmenistan, Saparmurat Niyazov, has brought a modest political thaw and heightened expectations of new oil and gas concessions. During the rule of Mr. Niyazov, who gave himself the name Turkmenbashi, or Father of all Turkmens, and who had commissioned golden statues in his likeness, Turkmenistan had mostly dropped off the agenda of Western oil companies.

So it was no surprise that Western companies rushed to sponsor this year’s Turkmenistan Oil and Gas Conference in Ashgabat last month; Chevron, ConocoPhillips, Baker Hughes, Schlumberger and Statoil were among the sponsors, though no deals were signed.

Sharing the upbeat mood, Samuel Bodman, the United States secretary of energy, delivered a speech on Nov. 15, noting “opportunities are opening that could not have been imagined even a year ago,” according to an Energy Department transcript.

Still, as Mr. Bodman spoke, a few hundred miles away, across the Kyzylkum desert in Uzbekistan, Russian engineers were welding the last pipes into place at Lukoil’s field. At the Nov. 29 opening ceremony, the pipes glistened with fresh paint and hissed with natural gas flowing northward toward Russia.

http://www.nytimes.com/2007/12/20/business/worldbusiness/20gas.html?_r=1&oref=slogin&pagewanted=all