U.S.News & World Report: The Great Energy Game

In the 19th century, Russian and British diplomats, officers, and spies sketched maps of central Asia, carving political boundaries into the steppes and mountains as they played "The Great Game" to win control of the region. Today, there is a new map of central Asia, pored over by governments and oil company executives. It is known as "hub and spoke." The hub is the Caspian Sea, and the spokes are the multiple pipe-lines emanating from it, representing potential export routes for the vast oil and gas resources that lie beneath.

Today's superpower struggle is over not the land itself but the hydrocarbons under it-believed to be among the world's largest untapped fossil fuel resources. And there are some new players. While Russia still seeks to maintain control over its former satellites, China, with its seemingly endless thirst for energy, has entered the region with a vengeance. The United States, always looking for alternatives to buying oil from the Arab-dominated Organization of Petroleum Exporting Countries, has also made it a mission to loosen Russia's grip on energy resources in the area, while keeping China and Iran from exerting too much influence over their neighbors. "It is the one non-Persian Gulf, non-OPEC, major resource holder, but there is no other neighborhood bounded by such big interests," says Frank Verrastro, a former oilman now at the Center for Strategic and International Studies. "Everyone is jockeying for position."

That's because the stakes have suddenly shot up. In the past year, hurricanes in the Gulf of Mexico took vast quantities of oil off the world market, and global demand surged. As the price of oil neared $80 a barrel, all three players raced to open key pipelines in the region. At the same time, in the post-9/11 world, central Asian countries-wedged between China, Afghanistan, Iran, and Russia-gained a new strategic importance.

Russia is the world's second-largest producer and exporter of oil, after Saudi Arabia, and the largest producer of natural gas. For a long time, its state-owned monopoly, Gazprom, could buy gas in central Asia for $65 per thousand cubic meters and sell it in Europe for four times as much. Its strategy was to import increasing amounts of cheap gas from Central Asia and sell its own production to a more expensive European market. But senior U.S. administration officials say that by 2009, Russia will be unable to meet its contracts in Europe unless it gets significant quantities of central Asian gas.

On January 1, Russia turned off the gas taps on Ukraine, after ending subsidies to and raising prices on the former Soviet republic (which had just ousted a pro-Russian president) by 400 percent. This affected gas deliveries to western Europe, which gets 25 percent of its gas from Russia and whose energy demand is expected to double between 2000 and 2030. "Russian pressure on its southern neighbors in the energy sector has been relentless from the time of independence," says Fred Starr, chairman of the central Asia-Caucasus Institute of Johns Hopkins University. "But last autumn, it moved from being one of many tools of Russian foreign policy to being the main tool. It has become a petrostate."

Europe's need. That episode awakened Europe to its energy vulnerability. "Recent events have proven important for the European Union," says Ferran Tarradellas, the European Commission's energy spokesman. "Before, there was cheap energy everywhere. Now we are importing half our energy, and the trend is to go up to 70 percent in the future. This is not a problem just for certain states but for all of us."

Since the fall of the Soviet Union in 1991, central Asian countries have continued to be dependent on Russia for exporting their oil and gas. The United States, looking out for its own strategic interests in the region, wants to change this. That's why U.S. officials have been pushing the $4 billion Baku-Tbilisi-Ceyhan pipeline, which opened with much fanfare in July and links Azerbaijan, Georgia, and Turkey. At the ribbon-cutting, the 1,109-mile pipeline was hailed as "the Silk Road of the 21st century," bypassing Russia to bring oil from the world's third-largest reserves in the Caspian to a Turkish port on the Mediterranean, where it can be loaded onto tankers to supply global markets.

Kazakhstan, the largest country in central Asia, has three of the world's richest hydrocarbon fields. One of them, Kashagan, was discovered in the Caspian five years ago. It is believed to rank among the five largest fields on Earth and is expected to start producing in the next few years. Kazakhstan produced 1.2 million barrels a day last year, but it is expected to pump 3 million barrels a day by 2015-almost as much as Iran. Chevron is spending over $5 billion to expand production there, its largest project anywhere. "There are very few places in the world that have still untapped reserves and the openness in the business environment," says Roman Vassilenko, a Kazakh government spokesman. He says 70 percent of Kazakh oil production is owned by foreign companies.

No surprise, the country is being wooed by all sides. Vice President Dick Cheney, a former oilman, visited Kazakhstan in May, as did the European Union's energy commissioner. Before arriving, Cheney gave a speech attacking Russian manipulation of energy resources: "No legitimate interest is served when oil and gas become tools of intimidation or blackmail." Afterward, Russian dailies warned of "the beginning of a second cold war." Cheney left with a pledge from Kazakh President Nursultan Nazarbayev to export Kazakh gas through a trans-Caspian pipeline, when-and if-it is built. But soon after, Nazarbayev went to Russian President Vladimir Putin's summer residence on the Black Sea and agreed to cooperate in extracting oil from three fields in the Caspian, as well as to share military equipment and expertise. The leaders also signed a long-term contract for Gazprom to transport Kazakh gas. "The U.S. in the mid-'90s had better leverage because it offered sovereignty and western technology," says Verrastro. "Now countries believe Russia and China can hurt them, and the U.S. won't necessarily protect them, so they are hedging their bets."

Before this year, all pipelines from Kazakhstan passed through Russia. But in July, a 620-mile line started operating from central Kazakhstan to feed two refineries in China. Right now it is carrying low volumes, but the Chinese envision this oil pipeline extending to the west of Kazakhstan, where the Chinese hold significant assets. China, the world's second-largest oil consumer, is looking at its own energy security. It gets almost half its oil imports from the Persian Gulf and worries that in a conflict, the U.S. Navy could easily cut off these imports. "If they are given the green light to build a pipeline, they will build it and then figure out the supply," says Julia Nanay of PFC Energy, a consultancy.

Chinese activity in central Asia has mushroomed. China beat out Russia's Lukoil last year to acquire Petrokazakhstan, which owns a few small oil fields in central Kazakhstan. The office of one of China's state-owned oil companies, CNPC, is across the street from its embassy in the Kazakh capital and is just as big. "China has two major producers on its borders. It would be like the U.S. going to Canada or Mexico," says Erica Downs of the Brookings Institution.

"Better deals." And the Chinese know how to bargain. "They can bring to the table offers that can't be matched by international oil companies," says Bob Ebel of the Center for Strategic and International Studies. "They can sell military equipment, make loans. They know they are latecomers to the game, so they offer better deals."

With the money comes political influence. The Shanghai Cooperation Organization, created by Beijing in 2001 as a buffer against the United States, includes Russia, four of the five central Asian republics (Kazakhstan, Kirgizstan, Uzbekistan, and Tajikistan), and Iran as an observer. It was after its meeting last July that, with China and Russia cheering on the sidelines, Uzbekistan expelled American forces from its air base supporting operations in Afghanistan. Kirgizstan, the other country in the region with a U.S. base, has discussed a similar move.

Kazakhstan, for one, is milking all it can, playing all three superpowers off one another. "If it's a game, it's a friendly one," says Kazakh spokesman Vassilenko. "Ever since we became independent, we have pursued an open policy and are open to cooperation with all countries."

But still, as more oil is pumped out, Kazakhstan must choose between exporting it north through Russia, east through China, or west through an expanded BTC pipeline. The United States is gearing up to make its pitch. Later this month, Nazarbayev will come to the United States for the first time since 2001, visiting the White House and the Bush family compound in Maine. Energy, obviously, will top the agenda.

The same choices go for natural gas. This fall, a gas pipeline will open along roughly the same route as the BTC, bringing gas from the Caspian through Turkey to Europe. The U.S. government hopes it will eventually connect under the Caspian to also pipe gas from Kazakhstan and Turkmenistan, pioneering a "new generation of energy investments in the Caspian beginning with Azerbaijan," according to Matthew Bryza, deputy secretary of state. But although Turkmenistan has central Asia's largest gas reserves, it also has an unpredictable dictator who has profited from transit fees. Previous attempts in the 1990s to reach an agreement with him broke down. "The U.S. is trying to promote non-Iranian, non-Russian supplies to Europe, but sound policy needs to be based on sound economics," says Ed Chow, a consultant and former Chevron executive. "If you're an oil and gas producer, how do you decide which way to go? After you spend 1 to 2 billion dollars crossing the Caspian, you need to pay the Azeris, the Georgians, and the Turks to get gas to Austria. How does that compare to [a cheaper]alternative-pumping central Asian gas to China?"

Chinese activity in central Asia has mushroomed. China beat out Russia's Lukoil last year to acquire Petrokazakhstan, which owns a few small oil fields in central Kazakhstan. The office of one of China's state-owned oil companies, CNPC, is across the street from its embassy in the Kazakh capital and is just as big. "China has two major producers on its borders. It would be like the U.S. going to Canada or Mexico," says Erica Downs of the Brookings Institution.

"Better deals." And the Chinese know how to bargain. "They can bring to the table offers that can't be matched by international oil companies," says Bob Ebel of the Center for Strategic and International Studies. "They can sell military equipment, make loans. They know they are latecomers to the game, so they offer better deals."

With the money comes political influence. The Shanghai Cooperation Organization, created by Beijing in 2001 as a buffer against the United States, includes Russia, four of the five central Asian republics (Kazakhstan, Kirgizstan, Uzbekistan, and Tajikistan), and Iran as an observer. It was after its meeting last July that, with China and Russia cheering on the sidelines, Uzbekistan expelled American forces from its air base supporting operations in Afghanistan. Kirgizstan, the other country in the region with a U.S. base, has discussed a similar move.

Kazakhstan, for one, is milking all it can, playing all three superpowers off one another. "If it's a game, it's a friendly one," says Kazakh spokesman Vassilenko. "Ever since we became independent, we have pursued an open policy and are open to cooperation with all countries."

But still, as more oil is pumped out, Kazakhstan must choose between exporting it north through Russia, east through China, or west through an expanded BTC pipeline. The United States is gearing up to make its pitch. Later this month, Nazarbayev will come to the United States for the first time since 2001, visiting the White House and the Bush family compound in Maine. Energy, obviously, will top the agenda.

The same choices go for natural gas. This fall, a gas pipeline will open along roughly the same route as the BTC, bringing gas from the Caspian through Turkey to Europe. The U.S. government hopes it will eventually connect under the Caspian to also pipe gas from Kazakhstan and Turkmenistan, pioneering a "new generation of energy investments in the Caspian beginning with Azerbaijan," according to Matthew Bryza, deputy secretary of state. But although Turkmenistan has central Asia's largest gas reserves, it also has an unpredictable dictator who has profited from transit fees. Previous attempts in the 1990s to reach an agreement with him broke down. "The U.S. is trying to promote non-Iranian, non-Russian supplies to Europe, but sound policy needs to be based on sound economics," says Ed Chow, a consultant and former Chevron executive. "If you're an oil and gas producer, how do you decide which way to go? After you spend 1 to 2 billion dollars crossing the Caspian, you need to pay the Azeris, the Georgians, and the Turks to get gas to Austria. How does that compare to [a cheaper]alternative-pumping central Asian gas to China?"

The Kremlin plans to expand a gas pipeline from the Black Sea to Turkey and to build another across the Baltic to northern Europe, in an attempt to choke off competition into Europe. It has also been trying to lock countries into long-term contracts, offering to pay central Asian producers higher prices, while threatening to cut off the supply to consumer countries in Europe. "Europeans allowed themselves to be divided and conquered by Russia," says a senior U.S. administration official, who recounts reports of Russians pressuring European officials to enter into exclusive gas supply agreements. "If they stood together, they would have huge bargaining power."

Perhaps anticipating this, Moscow signed a pact with Algeria in August that calls for coordinated gas prices and raises the specter of an OPEC-like cartel for gas. But as pipelines continue to open in all directions and the hub-and-spoke map gets cluttered, the region may be harder and harder to control. "We're not just talking about oil and gas going to the west, but also to the east and southeast. It's all going to happen," says Starr of Johns Hopkins. "The region is coming out from under the monopoly control of Gazprom and, with the help of these other countries, going back to its traditional place as the center for transcontinental trade." Just as it was in the 19th century.

By Bay Fang

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