By Marat Yermukanov

Jamestown Foundation
Eurasia Daily Monitor, DC
May 31 2005

Tuesday, May 31, 2005

Until Kazakhstan's President Nursultan Nazarbayev made a landmark
trip to Baku on May 25, marking Kazakhstan's decisive move towards
joining the Baku-Tbilisi-Ceyhan pipeline project, bilateral relations
between Azerbaijan and Kazakhstan had shown few signs of progress.

Azerbaijan's President Ilham Aliev visited Kazakhstan in March 2004,
a meeting that produced a joint statement on friendly relations
and strategic partnership directed at safeguarding stability in the
Caspian region and rooting out terrorist organizations that could
undermine the sovereignty, independence, and territorial integrity of
Kazakhstan and Azerbaijan. At that time, Nazarbayev went out of his
way to pledge Astana's readiness to mediate Azerbaijani-Armenian talks
on Karabakh. Armenian President Robert Kocharian reacted angrily to
this indiscreet remark, stating, "Nagorno-Karabakh cannot be a part
of Azerbaijan" (Kontinent, March 30, 2004).

Although Nazarbayev's arrival for the BTC launch was generally welcomed
by project participants as a positive sign, Kazakhstan has not signed
the requisite intergovernmental agreement with Azerbaijan specifying
conditions for transporting Kazakh oil through the BTC pipeline. In
his talks with Aliev, Nazarbayev stressed the priority of economic
interests in bilateral relations and sidestepped the thorny issues of
terrorism and separatism. Nazarbayev had good reason to be sure that
the talks would be productive. Oil experts estimate that Azerbaijan
alone cannot provide enough oil to operate the BTC pipeline at its
full capacity of 50 million tons of oil. In the future, the total
annual oil output of Azerbaijan and Kazakhstan could reach 220 tons,
but not before Kazakhstan starts commercial development of the Kashagan
oil deposits in 2008 (Delovaya nedelya, May 26).

One of the reasons Kazakhstan was reluctant to climb on the BTC
bandwagon until the last moment was believed to be the high costs of
pumping oil through the Baku-Tbilisi-Ceyhan pipeline. On his recent
visit to Astana and subsequent trip to Baku, Georgian President Mikheil
Saakashvili removed that hurdle by convincing BTC shareholders to lower
transportation tariffs for Kazakhstan to $3.30 per barrel. But even
this moderately low tariff is less attractive than the transportation
costs charged by the Caspian Pipeline Consortium (CPC), which
Astana currently uses to ship the bulk of the oil produced by the
Tengiz-Chevroil joint venture. The fact that the BTC pipeline passes
through volatile regions in the North Caucasus and eastern Turkey
makes the prospect of using that route even grimmer for Kazakhstan.

Astana's hesitancy about joining the BTC project for so long seems
to be primarily the political uncertainty of the route. Even after
the hearty handshaking with BTC shareholders at the Azeri Sangachal
oil terminal, Nazarbayev has left his options open for backtracking
regarding the current route, as well as the maritime route to Iran,
Azerbaijan, and Russia as an alternative to highly politicized BTC
route. Nor has Kazakhstan ruled out, despite all political risks it
may entail, the construction of a pipeline to Iran via Turkmenistan.
The Iranian option would be incomparably cheaper than the BTC
pipeline, which demands up to $3 billion to build oil transportation
infrastructure in western Kazakhstan. Astana will have to pour millions
of dollars into the projected 700-kilometer pipeline that is to
link oil producing Atyrau (western Kazakhstan) with Atyrau seaport,
from where the oil will be delivered to Sangachal oil terminal in
Azerbaijan. Kazakhstan depends on Russia for oil tankers, as creating
its own shipbuilding industry is not economically feasible for this
landlocked country. Astana needs only five high-capacity tankers to
service the Atyrau-Sangachal oil transport route. All these economic
and political factors may force Kazakhstan to make a hard choice
between competing powers (Novoye Pokolenie, May 27).

In recent months Russia, in its drive to raise the annual capacity of
the CPC to 67 million tons, has incessantly pressured Kazakhstan to
increase the amount of oil pumped through the CPC pipeline. To achieve
that target Russia is planning to build ten additional oil refineries.

Notably, just a few weeks before Nazarbayev's departure for Azerbaijan,
Kazakhstan Prime Minister Daniyal Akhmetov, a man known for his close
personal links to Russian energy oligarchs, unexpectedly announced
at a cabinet meeting that recent talks with Moscow on increasing the
amount of Kazakh oil through the CPC pipeline had led nowhere, and
therefore Kazakhstan would have to look for other routes. Although
he did not specify the BTC, it was clear that Tbilisi and Baku had
some role in that change of heart.

However, Azerbaijan also finds it difficult to cut the cord with
Russia, as it currently lets 5 million tons of its oil flow through
the Baku-Novorossiysk pipeline via Russia. In his remarks at the
opening ceremony for the BTC project, President Aliev said that the
doors to the BTC pipeline were open for everyone, including Russia
(Panorama, May 27).

Not surprisingly, these words resonated with the often-emphasized
multi-vector oil policy of President Nazarbayev, who was the only
one in Baku to stress the importance of diversified export routes
for the Caspian region's hydrocarbons.

It is still too early to determine how oil cooperation between
Azerbaijan and Kazakhstan will be shaped in the future. But they share
at least one common interest: the search for a safe course ahead of
the impending battle for oil.