Regional trade realities have been slowly chipping away at the sanctions regime for years, and the final nail in the coffin may well come from U.S. ally Kazakhstan, the sole rising petro-state able to ramp up production to meet rising global demand, where oil is topping $126 a barrel.
Kazakhstan’s problem is that, if current estimates are correct, within the next two years its oil production will outstrip the current carrying capacity of its major export pipeline, the 938 mile-long Tengiz-Novorossiisk pipeline. The pipeline links western Kazakhstan’s Kashagan and Karachaganak oilfields with Russia’s Novorossiisk port on the Sea of Azov; tankers then ferry the crude across the Black Sea and through the Turkish Straits to thirsty Western markets.
The Tengiz-Novorossiisk pipeline is owned by the Caspian Pipeline Consortium (CPC) joint venture. Kazakhstan adroitly awarded Russia’s Transneft pipeline monopoly a 24 percent share in CPC, but parceled out the remaining shares to the government and Western oil companies.
Last year Kazakhstan produced approximately 1.45 million barrels per day. Almaty estimates that by 2010 its Karachaganak, Kurmangazy and Tengiz fields will be joined by early oil from its massive offshore Caspian Kashagan field, the largest oilfield outside the Middle East, the fifth largest in the world in reserves and the largest discovery of the past three decades.
It is estimated that in less than two years Kashagan, which measures 47 by 22 miles, will push total Kazakh oil production to 1.6 million bpd, rising to 2.0 million bpd by 2015, nearly three times the CPC’s current carrying capacity. By 2020, by some regional estimates, Kazakh output could soar further to 2.998 million bpd.
Enter Iran. While the CPC is slated for upgrades to produce a projected capacity of about 1.4 million barrels per day by 2015, Tehran sees the disparity between Kazakh production and transit capabilities as a golden opportunity to increase its oil swaps, under which Kazakh oil is shipped across the Caspian to the northern Iranian port of Neka, with Almaty receiving an equivalent amount of Iranian crude at Iran’s southern port facilities on the Gulf.
Up to now, Kazakhstan, fearing to anger the United States, has made limited use of Neka, which last year received about 70, 000-80,000 bpd. But Iranian-Kazakh trade is steadily rising, in 2006 exceeding $2 billion, up from $700 million in 2004. Iran’s Caspian port of Amirabad also receives Kazakh oil imports.
Now Iran is upping the ante, offering increased Kazakhstan transport facilities not only for its oil exports but other goods, including wheat. Last month at an oil and trade conference in Baku, National Iranian Oil Refining and Distribution Company oil refining department director, Aminollah Eskandari, touted for Caspian business, telling participants: “Countries in the region should not ignore Iran as an attractive option for access to international markets and as a reliable partner.”
He remarked that Iran is planning not only to increase Neka’s handling capabilities, but to build a trans-Iranian pipeline linking Neka to Iran’s Arabian Sea port at Jask. First proposed last year, the 970 mile-long Neka-Jask pipeline will have a projected capacity of 1 million bpd.
A further incentive to Almaty to use the proposed pipeline would be lower transit fees. Eskandari stated that the Neka-Jask transportation tariff would be $45 per ton, in contrast to the Baku-Tbilisi-Ceyhan pipeline ($75/ton), CPC ($55/ton), or the Baku-Batumi-Kulevi railway ($73/ton.)
Adding further to the attractiveness of the Iranian option, Kazakhstan’s Kazmortransflot Caspian tanker fleet is already well established on the Aytrau-Neka run. In 2006 Kazmortransflot shipped 2.226 million tons of oil from Aktau to Neka.
Now Tehran is raising the stakes by offering Kazakhstan access to the Chabahar Free Trade Industrial Zone (CFZ) on the Arabian Sea. On May 6 Kazakhstan’s ambassador to Iran, Yerik Utembayev, met with CFZ port officials and said that Almaty believed that the CFZ can play an important role in connecting Kazakhstan to the open ocean.
He added that Kazakhstan’s President Nursultan Nazarbayev places a high priority on Kazakh-Iranian trade, hoping to boost it from its current $2.09 billion annual level to $10 billion annually. Bringing the proposal closer to fruition is the recent opening of the Mashad-Chabahar railway.
Before Utembayev’s visit Afghanistan’s ambassador to Iran, Mohammad Yahya Maroufi, also arrived there to inspect the CFZ and called Chabahar port a “very important link” between Afghanistan and the rest of the world.
Kazakh and Afghan interest in Chabahar indicate that regional political and economic realities are slowly and inevitably eviscerating Washington’s cherished sanctions policy.
Pressuring Kabul over its interest in Chabahar will put the fragile administration of President Hamid Karzai under even greater strain, while misguided demands on Kazakhstan will simply cause Kazakhstan to shift its rising production to Russian or Chinese alternative routes, alienating two U.S. allies in a volatile region of the world.
As unpalatable as the George W. Bush administration might find it, Kazakhstan and Afghanistan are finding it harder and harder to ignore their 636,296 square-mile neighbor, especially as it sits astride their easiest access to the open ocean.
While most American motorists barely even know where Kazakhstan is, if the U.S. administration finally decides on a military option against Iran, then $126 a barrel oil may become a fond memory, as it is certain that production from the world’s largest oilfield discovered in the last three decades will be diverted elsewhere.