On September 6th, a couple of bad pieces of news came out of Central Asia. The Taliban captured Taloqan, a strategic city in northern Afghanistan, and Kyrgystan was forced to call out the air force to combat Islamic rebels, who operate from Tajikistan.
Islamic fundamentalism, politically shaky regimes and civil war are nothing new to this part of the world. But the problem now is that things don’t appear to be getting any better. Potential foreign investors in Caspian Sea energy are starting to wonder just how stable the region is and whether instability could one day engulf the key oil-producing countries of Azerbaijan, Kazakstan and Turkmenistan. It matters a lot, because these investors are being asked to pony up as much as $180 billion to develop Caspian oil.
In August, consulting group Wood Mackensie published a telling study on the cost of developing Caspian Sea oil. Analyzing 32 key projects -- 29 exploration and development projects and 3 regional pipeline projects -- it found that potential costs could run as high as $180 billion over 30 years (1990-2020).
According to its estimates, of these 32 projects, $80 billion will go to capital expenditures (capex). Kazakstan will get 57percent, Azerbaijan 27 percent, Turkmenistan 2 percent, and 12 percent will be for regional pipelines. The remaining $100 billion will go to operating expenses (opex). Of that, transportation tariffs will take a 51 percent bite and the rest will go to lifting the oil.
So what can foreign investors expect to get in return for their $180 billion? About 4 million b/d by 2010-2015, or a total of 18 billion barrels, at an average cost of $10 a barrel. Break those figures down, and you get a capex of $4.44 a barrel, an opex of $2.72 a barrel, and transportation costs of $2.78 a barrel. That’s expensive oil.
At prices like those, political risk takes on a great deal more significance. Here’s a rundown of the way Central Asian experts look at it. At the moment, conflict in Central Asia is limited to three countries: Tajikistan, Uzbekistan and Kyrgyzstan. And, ethnically, it is generally limited to Persian-speaking Tajiks and Turkic-speaking Uzbeks.
Turkmenistan has largely been untouched. Azerbaijan appears stable as long as Haidar Aliev is president and Nagorno-Karabakh is quiet. And Kazakstan -- with 60 percent of recoverable Caspian reserves -- appears to be stable, at least for the time being. The only cloud on the near horizon is unhappy ethnic Russians in the northwest, but so far Moscow has kept them quiet.
But now that Kyrgystan is engaged in a real war and apparently has lost control of a third of its country to Islamic rebels, will Kazakstan remain immune? The Kazaks and the Kyrgyz are closely related. While no one has a good idea whether they’re close enough so that Kyrgyzstan’s problems are about to spill over into Kazakstan, there is one indication that the situation in Kazakstan may take a turn for the worse.
Earlier this year, Kazak Defense Minister Sat Tokpakbaev announced the relocation of several military garrisons to protect Kazakstan from fundamentalist groups in Kyrgyzstan and Uzbekistan.
In any case, with the fighting in Kyrgyzstan and Afgahnistan, Russian President Vladimir Putin smelled opportunity. On September 6th, the 12 interior ministers of the Commonwealth of Independent States (CIS) hurriedly met in Bishkek to show a common front and to hammer out a unified policy on terrorism.
But in the corridors, the Russians were telling their counterparts: it is chaos or us. Russia pulled out its now tattered shopping list -- more Russian troops stationed in Central Asia (First Deputy Chief of the Russian General Staff General Valerii Manilov proposed in July they be increased by 50,000); better protection for Russian minorities; no sectoring of the Caspian, and so on.
But can the Russians pull it off, reassert control over Central Asia and at the same time, reassure foreign investors? Oil Navigator™ has its doubts. Lately, there have been a couple of dropouts from the Caspian. The U.K.’s Lasmo Oil withdrew its Azeri Inam license, explaining the project needs a “big player.” Lasmo’s Monument also pulled out of Turkmenistan’s Nebit Dag field. A sparrow does not make a spring, but it looks like the smaller companies just don’t want to put up the money for increasingly risky and expensive ventures.
( oilnavigator )
