Should Gazprom be allowed to monopolise the transportation of Central Asian gas to Europe?

Washington has always looked at Kazakhstan’s rich hydrocarbon reserves as a potential source for US-backed pipeline projects in the region, bypassing Russia. US Ambassador to Kazakhstan Richard E. Hoagland talked to New Europe correspondent Kulpash Konyrova in Astana about US President Barack Obama’s energy policy in the region, the Russia-Ukraine gas crisis, the Georgia conflict, the Trans-Caspian pipeline and the controversial oil tax launched by the Kazakh government and its effect on foreign oil companies operating in the energy-rich former Soviet republic.

Mr. Obama’s pre-election speeches were mostly focused on domestic US energy policy. Former US Vice President Dick Cheney has accused Russia of using energy as a weapon and had been strongly against the former Soviet republics participating in Russian projects. Do you see a change in that stance now that President Obama and Vice President Biden are in office?

Under both President Bill Clinton and President George W. Bush, the US government firmly supported the independence and sovereignty of the countries of Central Asia, including Kazakhstan, and I do not see that policy changing in the Obama administration. Specifically, this means we support their right to make sovereign decisions that are in their own best interests. We have nothing against Kazakhstan participating in projects with Russian partners. In fact, we support projects such as the expansion of the Caspian Pipeline Consortium (CPC) pipeline, which exports Kazakhstani crude through Russian territory to world markets. We just don’t think it is wise for any one country to have monopoly control over Kazakhstan’s export options. We therefore support and encourage the development of multiple export options for Kazakhstan’s hydrocarbon resources, which is fully consistent with the multi-vector policy of the government of Kazakhstan.

Was Georgia’s reliability as a transit state damaged after the Russian-Georgian conflict last summer?

No. In fact, since the conflict last August, oil producers in Kazakhstan have expressed increased interest in shipping oil westward from Azerbaijan through Georgia. For example, in October, Kazakhstan’s largest oil producer, TengizChevrOil, began to send crude through the Baku-Tbilisi-Ceyhan pipeline for the first time. TCO continues to send large quantities through Georgia by rail and they are in negotiations with parties in Azerbaijan over the use of the Baku-Supsa oil pipeline.

How about Ukraine’s reliability as a transit country and Russia’s reputation as a supplier after the Russian-Ukraine gas crisis?

I don’t think there were any winners in this dispute. But one consequence is that European governments were starkly reminded of their dependence on gas imports from Russia. Subsequently, the European Commission voted to invest 250 million dollars in the proposed Nabucco gas pipeline project that would bypass both Russia and Ukraine.

How do you feel about Kazakhstan’s new oil tax? Is the country still appealing to the US or has the image of the promising Wild East changed?

In talking with US investors recently about the new Tax Code, it is clear that the one concern they have above all others is tax stability. In other words, they are less concerned about the actual tax rates than with frequent or unpredictable changes to the tax regime, particularly if new taxes are applied ex post facto to contracts with tax stability clauses. Kazakhstan remains an attractive investment opportunity for many American companies, but changes like this can increase uncertainty and undermine confidence, which could have an adverse impact on investment.

The new Tax Code does not affect work at Kashagan, Tengiz and Karachganak, why might biggest investors worry about tax changes?

But the point is the major companies are unsure because the government has said the several different things at different times and we don’t know what the real bottom line is on this issue.

What can you say about future of trans- Caspian projects?

As I said earlier, supporting hydrocarbon transportation and export projects from Central Asia to Europe is a long-term policy of the United States, and that includes the shipment of oil and gas across the Caspian. The US government in particular supports the so-called Kazakhstan Caspian Transportation System (KCTS), which entails shipping oil via pipeline from Eskene to Kuryk and then by tanker to Baku. We applaud the governments of Kazakhstan and Azerbaijan for their leadership of this project, which will be essential to ensuring the export of Kazakhstani oil once the Kashagan field begins producing in 2013. We have also encouraged the government of Kazakhstan to consider the possibility of trans-Caspian pipelines to ship oil and gas to world markets. We believe that a trans-Caspian pipeline is economically and technically superior to shipment via tankers, and politically feasible. In addition, in our view, there is no need for all five Caspian littoral states to agree on Caspian delimitation to build such a pipeline. This project would be beneficial for all parties involved, including oil production companies. However, the support of projects such as a trans- Caspian pipeline will ultimately depend on their economic viability, not political interests. Certainly, political questions will come up along the way, but ultimately the decisions will be commercial.

Is the United States concerned that the pipeline to China will cause the reflux of oil and gas from West-oriented pipelines?

No. We support and encourage the development of multiple export options for Kazakhstan’s hydrocarbon resources, including exports to China. Ultimately, of course, this is an issue for the market to answer. Market forces will determine in which directions it makes the most sense to ship Kazakhstan’s oil and gas. As far as oil shipments are concerned, it is my understanding that there is currently no spare transportation capacity in Kazakhstan. So once Kashagan comes online in 2013 and other large fields reach their full potential, Kazakhstan will need to take advantage of every transportation mechanism available, including, perhaps, exports to China.

How much gas will Central Asia be able to transport through the Nabucco pipeline?

That is an excellent question, but one that I don’t believe anyone can answer definitively at the moment. However, it is clear that the recent dispute between Russia and Ukraine over gas shipments to Europe has increased attention on the proposed Nabucco pipeline, as European countries seek to enhance their energy security and begin to lessen their dependence on gas imported from Russia. The United States has voiced its support for the Nabucco pipeline, and will aim to further diversify hydrocarbon transit from Central Asia. While we don’t have specific numbers yet, a recent audit of Turkmenistan’s South Yolotan gas field suggests that Turkmenistan has enough gas to meet its contractual obligations to Russia and still have enough reserves to export a significant volume to Europe via Nabucco. The key matter is whether Russia’s Gazprom should be allowed to monopolise the transportation of Central Asian gas to Europe. It is worth noting that both Turkmenistan and Kazakhstan sent high-level representatives to the Nabucco Summit in Budapest on January 26-27, which is some indication of their interest in participating in the project.

Which Central Asian states could be gas suppliers for the Nabucco pipeline?

If you consider Azerbaijan Central Asian then, certainly, Azerbaijan is one. But from this side of Caspian Sea, in first instance, it would probably be Turkmenistan. But a little further in future, Kazakhstan will also have that potential if he wants to develop in that direction.

Do American companies plan to sign more contracts in the oil sector of Kazakhstan?

Of course, the companies themselves are better able to provide information about their investment plans in Kazakhstan. I don’t have direct knowledge of future US corporate investment projects or contractual negotiations in the oil sector. But I do know that US oil and gas companies consider Kazakhstan an important strategic partner and an attractive long-term investment opportunity. Whether – and how much – US companies will invest in Kazakhstan depends on many factors, including the government of Kazakhstan’s ability to create an attractive investment climate by respecting the sanctity of contracts, providing a predictable tax regime, granting work permits to expatriate employees, and enforcing environmental regulations in a fair and transparent manner.