President, Moscow Center for Public Law Studies

Many observers, speaking of the May 2005 commissioning of the Baku - Tbilisi - Ceyhan (BTC) pipeline, referred to it as a blow against Russian interests, meaning that the new route "bypassing Russia" may be used for transportation of a major part of oil produced in the Caspian region, thus making Russian pipelines "unnecessary". To a certain extent, this is already taking place, as Azerbaijan leaders refused to use the Baku - Novorossiisk pipeline. If Kazakhstan follows the lead of Azerbaijan, refusing to transport its oil via Russia, Russia's losses will be even more tangible. This may be the result of utilization of the Odessa - Brody pipeline, built in 2001.

Ukraine has built the Odessa - Brody pipeline at its own expense, without international investor participation, without

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even having concrete obligations from oil companies as to filling the pipe. It appeared to be an economic gamble (costing about half a billion dollars), for it is as yet a single operating pipeline leading from south to north. Oil usually comes to Europe via east-to-west pipelines. This is why the new Ukrainian pipeline stayed idle until in the autumn of 2004 Kiev accepted the TNK-BP company's proposal about using it for transportation of Russian oil in the reverse direction, towards Odessa.

At present, the 674-km long Odessa - Brody pipeline has an annual throughput capacity of 9 to 14.5 million tons that can be used to transport oil to Western Europe. The Yuzhny oil terminal located in the port of the same name next to Odessa is an important integral element of its infrastructure. It is believed in Kiev that the throughput capacity of the pipeline may be expanded to 40 million tons per year, making it part of the so called "Eurasian oil transport corridor", which has been specially designed to route Caspian oil "around Russia". Oil is supposed to pass through Ukraine to Poland, and further on to Germany. Warsaw has already expressed willingness to assist establishment of "Sarmatia" joint venture which will lay the pipe further on, along the Brody - Plock route. (It should be noted that an advantage of this project is reducing the load on the Black Sea straits). If the attempts to set up a new inter-state alliance in the post-Soviet space are successful (it is supposed to include Ukraine, Georgia, and, possibly, also Lithuania and Poland - discussion in this regard was held in Borzhomi on August 13, 2005), the Odessa - Brody pipeline may become an element of transportation infrastructure of the new alliance.

The situation around the Odessa - Brody pipeline project is currently characterized by increased activity. The key intention is

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to involve Kazakhstan in it, which is actually a correct thing to do, because Kazakhstan can play a decisive role in the project Odessa - Brody - Plock. Moreover, there is reason to believe that Kazakhstan leaders are already heading in this direction. In early June 2005, Kazakhstan Prime Minister Danial Akhmetov used the meeting of CIS Prime Ministers in Tbilisi to reach an agreement about an early start of construction of a parallel 52-km section of the Odessa - Brody pipeline. Kazakhstan is even willing to lay the pipe down to Plock and Gdansk and build oil loading terminals there, providing thus a direct access for Kazakhstan oil to Baltic ports.

Kazakhstan officials refer to availability of 3 billion tons of recoverable oil reserves and over 0.3 billion tons of gas condensate in their country. According to BP experts' estimates (made in 2004), Kazakhstan has 9 billion barrels of oil (0,8% of the world's total reserves); they believe this may cover 22 years of its future oil production needs.

According to Nursultan Nazarbayev, Kazakhstan should become one of the leading oil and gas producers in the world. With world prices rapidly growing, Kazakhstan oil production figures went up, too (see the Table). As of 2005, Kazakhstan intended to increase oil production to 100 - 115 million tons by the year 2010 and to 150 million tons, by 2015.

However, these plans will only come true if Kazakhstan makes provisions for transportation of its oil to global markets. Being a land-locked state, Kazakhstan has no direct access to open seas, which is an important restricting factor. At present, the existing pipeline network enables Kazakhstan to export no more than 70 - 80 million tons of oil. The actual figure is even less, as Astana is constantly maneuvering between global power centers, trying to

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minimize outside pressure exerted on Kazakhstan. Today, 81% of Kazakhstan's oil is exported via pipelines, 12% is transported by railway, and about 7%, by sea.

Formerly, the main routes of Kazakhstan oil exports, primarily to European customers, passed through Russia. Later on, there also emerged an opportunity to transport Kazakhstan oil via Azerbaijan, Georgia and Turkey, as well as through Iran. Of late, Kazakhstan has had another potential customer, China. It is planned to commission the first string of the Kazakhstan - China oil pipeline on December 16, 2005, timing it to Kazakhstan's national holiday, the Independence Day.

The Chinese company participating in the oil pipeline construction has three fields in Kazakhstan, which are not big enough to use the pipeline to its full capacity. Astana hopes that additional oil can be supplied from Russia. In the meantime, the Chinese are trying to sharply increase their oil assets in Kazakhstan. According to media reports, they would like to buy the Canadian company PetroKazakhstan, which produces 150,000 barrels of oil equivalent a day, owns the Shymkent oil refinery in the south of Kazakhstan, and 49.9% of stock of the oil pipeline Kenkiyak - Aryskum - Maibulak (which can also be used to pump oil to China).

It is not yet clear what tariffs will be used for the pumping of Kazakhstan oil to China. The Chinese propose to charge $22.69 per ton over the distance of Kenkiyak to Western China. It means that the China pipeline may offer strong competition to the already existing routes. Today, the cost of transporting one ton of Kazakhstan oil via the Caspian Pipeline Consortium from Kazakhstan to the Russian port of Yuzhnaya Ozereyevka totals $26.19. The cost of transportation of Kazakhstan oil in the Atyrau -

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Table:

Oil production in Kazakhstan (including gas condensate)(million tons)

Samara - Primorsk direction is $17 per ton; to Novorossiisk, plus another $7; to Odessa, plus another $12.9. With freight and harbor dues included, the cost of transportation of Kazakhstan oil from Atyrau to world markets in the western direction through Russia reaches $25 - 40 per ton, depending on the route.

In this situation, the Ukrainian proposal to use the Odessa - Brody pipeline seems attractive for Kazakhstan.

According to the information available, Kazakhstan companies KEGOC and KazMunaiGaz are already negotiating acquisition of stock of infrastructure in Poti and Batumi ports - in the first place, oil terminals, storage facilities, bulk cargo transshipment facilities and oil pipelines. Kazakhstan business is not discouraged by the worn-out state of Georgian Black Sea ports. In Poti, Kazakhstan companies show interest in "dry cargo" transportation facilities, too (containers, etc.), trying to find a convenient port for Kazakhstan grain exports. The reports on Kazakhstan's potential participation in privatization of Georgian transport facilities indicate that Kazakhstan will most likely continue attempts to create its own transport infrastructure on the Black Sea coast of Georgia. This conclusion gets a further confirmation from the development of the situation in the Caspian Sea region.

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Kazakhstan continues expanding its tanker fleet in the Caspian Sea, improving its Caspian port infrastructure, and is negotiating options for laying a pipeline across the Caspian Sea floor with the US. In May 2005, Talgat Abylgazin, Kazakhstan Vice Premier in charge of transport and communications, declared that Kazakhstan would like to buy out the controlling interest in the Vyborg shipbuilding works (Leningrad region), with a view to creating a tanker fleet, designed in the first place for Caspian Sea shipping (the fleet may also be used in the Black Sea for shipping between the Georgian ports and Odessa).

Kazakhstan orders already make up a third of overall production volume of the Vyborg shipbuilding works. In late May 2005, Kazakhstan got its "Astana" tanker with a displacement of 12,000 tons, specially adapted to the shallow waters of Northern Caspian Sea. It is planned to operate the tanker on Aktau - Baku and Aktau - Makhachkala routes to ship oil from Tengiz and Buzachi fields (the tanker will make 7 - 8 voyages a month, on the average, transporting over 1 million tons a year). Tanker oil shipments are also conducted in the Caspian Sea between Kazakhstan and Iran, even though their current volumes are insignificant (in 2004, 3 million tons of oil was shipped in this way).

On July 22, 2005, "Almaty" - a second oil tanker built by the Russian shipbuilders and having the same displacement - arrived in the Kazakhstan port of Aktau. "Aktau", a third tanker of this class, is expected in the Caspian Sea in December 2005. The Kazakhstan president refers to plans of buying a 60,000-ton tanker. At any rate, $257 million is earmarked in the Kazakhstan government program for creation of a national maritime fleet in 2004 - 2006.

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At the same time, to ensure efficient operation of the Caspian shipping route, Kazakhstan requires an agreement with Azerbaijan on maritime oil unloading terminals and the Baku - Supsa pipeline. Unless this agreement is reached, the advantages of the Odessa - Brody route do not become evident enough, considering the number of oil cargo transshipments involved (in the ports of Kazakhstan, Azerbaijan, Georgia, Ukraine and, finally, Poland or Germany), which results in considerably higher export costs. Kazakhstan can only bring the costs down by buying transport infrastructure facilities along the export route. It appears that Azerbaijan can agree to the infrastructure agreement Kazakhstan is interested in, at least with regard to the Baku - Supsa pipeline. In 2004, about 3 million tons of Kazakhstan oil was exported via Azerbaijan.

At present, studies are under way for the Aktau - Baku transport link. The investments required for establishing it are estimated at $3 billion. These should cover construction of a 700-km Atyrau - Aktau pipeline in Kazakhstan, a new oil loading terminal in Kuryk, formation of an oil unloading complex in Azerbaijan and its hookup to the BTC pipeline, and creation of a tanker fleet in Kazakhstan.

Kazakhstan also demonstrated its interest in acquiring the oil unloading terminal in Odessa and the Odessa oil refinery. Conducting negotiations on the Odessa - Brody pipeline with Kazakhstan, the Ukrainian government surely expects to reduce its energy dependence on Russia by getting access to Kazakhstan oil. (Kiev sources say that Ukraine would like to cover up to a third of its domestic oil requirements by imports from Kazakhstan). Ukraine also regards the Odessa - Brody pipeline as an important

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transit route for supplies of Kazakhstan oil to Europe, because Kiev needs to obtain funds for its oil purchases. In 2004, the transit of Kazakhstan oil via Odessa amounted to as much as 7.6 million tons.

The Kazakhstan oil to be pumped through the Odessa - Brody pipeline may arrive to the Ukraine via various routes. Besides the Baku - Supsa pipeline, one can also use oil transported from Tengiz to Novorossiisk via the Caspian Pipeline Consortium (CPC). By the year 2006, the volumes of Kazakhstan oil transported via the CPC are expected to reach 32 million tons. By 2010, the throughput capacity of the CPC pipeline may be raised to 67 million tons, while the Kazakhstan oil quota here may rise to 45 million tons.

If we assume that Kazakhstan oil production in 2005 will total 60 million tons (which is a more real figure than the announced 100 - 115 million tons), its exports will in this case amount to about 51 million tons and will be distributed among export routes as follows: the CPC - 28.2 million tons, another 15 million tons via the Atyrau - Samara pipeline, and, possibly, 10 million tons to China. By the year 2010, the situation will be as follows: Kazakhstan oil production will probably reach 115 million tons, with 98 million tons to be exported. Of the overall exports, 45 million tons may be transported via the CPC, 25 million tons via the Atyrau - Samara pipeline, an estimated 20 million tons will go to China and, possibly, another 20 million tons will be exported via the BTC pipeline. Yet the BTC portion may actually be exported via other routes - through Supsa and (or) Batumi. By the year 2015, Kazakhstan may raise its oil production to 150 million tons - in this case, its exports will reach 127.5 million tons - 45 million tons via the CPC, 25 million tons via the Atyrau - Samara pipeline, 20

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million tons to China, and another 20 million tons via the BTC pipeline. It appears, therefore, that by this time Kazakhstan may not have enough oil to fill all its export pipelines.

Due to this, the actively discussed hookup to the BTC pipeline does not seem to be an optimal solution for Astana. Kazakhstan is not a BTC shareholder, so its tariffs for oil transportation through Georgia and Turkey are going to be high - the figure $3.3 is currently quoted. For comparison, the oil transportation tariff along the Baku - Novorossiisk route is $2.1 per barrel. Consequently, Kazakhstan must still be interested in getting access to the Ukrainian oil export channel on advantageous terms.

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