November 27, 2006 | Backgrounder on Europe
In the past five years, real and present dangers to U.S. national security, especially Islamist terrorism and threats to the energy supply, have affected U.S. policy in Central Asia. The region has great energy potential and is strategically important, but it is land-locked, which complicates U.S. access and involvement there.
The United States has varied and at times competing interests in Central Asia. The region, which includes the five post-Soviet states of Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, as well as Afghanistan and the Caspian basin, plays an important part in U.S. global strategy in view of its proximity to Russia, China, India, Pakistan, Iran, and other key regional actors. No less important are its ethno-religious composition and vast deposits of oil, gas, coal, and uranium.
U.S. interests in Central Asia can be summarized in three simple words: security, energy, and democracy. The United States is waging an enduring struggle to safeguard the West in general and America in particular, not only from terrorist threats emanating from Afghanistan, but also from overreliance on unstable sources of hydrocarbons in the Middle East. In that effort, it is essential that U.S. foreign policy not inflate the importance of one interest to the detriment of the others.
A key U.S. national security concern is the diversification of energy sources, and the Caspian region is a significant alternative source of fossil fuels. To put things in perspective, however, it must be noted that while the Caspian Sea's production levels are considerable, with peak production comparable to that of Iraq and Kuwait combined, they are much smaller than total Organization of Petroleum Exporting Countries (OPEC) output.
Production levels are expected to reach 4 million barrels per day (bbl/d) in 2015, compared to 45 million bbl/d for the OPEC countries in that year. Central Asia is neither the world's largest source of oil and gas nor easily accessible; market access is hindered by political and geographic conditions, including continued Russian influence, limited access to waterways beyond the Caspian Sea, and limited export infrastructure.
However, the region is clearly important geopolitically and geoeconomically. Russia controls the majority of oil export routes from reserves in Central Asia and the Caspian. Nevertheless, prior and continuing efforts by major Western oil companies, particularly the Baku-Tbilisi-Ceyhan (BTC) pipeline, as well as current and planned investments in the Central Asian oil sector by India and China, have yielded more options for non-Russian export routes and diversification of the customer base. These developments may help to break the Russian energy-transit monopoly, but they also open the region to intensified competition over energy resources on the part of other energy-hungry economies.
China is steadily increasing its involvement in the energy sector, as demonstrated by the purchase of the PetroKazakhstan oil company last year, acquisition of Canada-based Nations Energy by China Interntional Trust and Investment Corporation (CITIC) in the fall of 2006, and the signing of several significant pipeline agreements. Russia and China have been cooperating to reduce U.S. influence in the region and, as they accrue more Central Asian energy assets, will have more leverage with which to prevent U.S. encroachment into their alleged spheres of influence.
What is needed in Central Asia is a policy that allows the United States to continue to diversify its energy supplies, station its military forces close to the most immediate threats, and create a lasting and deep impact by promoting democratic and free-market values in an area that is still undergoing political and economic development.
Policymakers and lawmakers alike should assess how energy issues fit into wider U.S. strategic interests in the region and develop balanced, nuanced policies that allow the U.S. to stay engaged where necessary while distancing itself from the less savory aspects of these regimes. To achieve these ends, the U.S. should:
The hydrocarbon reserves of Central Asia are concentrated in the Caspian region. Azerbaijan is therefore a principal actor, despite its location in the Caucasus. It has considerable oil and gas resources in its own right and is central to non-Russian energy transit from Central Asia to points west. The bulk of Central Asian-Caspian hydrocarbons is located in Kazakhstan, Azerbaijan, Uzbekistan, and Turkmenistan. Both Tajikistan and the Kyrgyz Republic have limited reserves of oil and gas in amounts that thus far have not warranted much attention from foreign investors.
Table 1, which shows proven and possible oil reserves by country, demonstrates that the region's largest oil deposits as well as the three largest regional oil projects are located in Kazakhstan and Azerbaijan. These three projects are in the Tengiz and Karachaganak fields in Kazakhstan and the Azeri-Chirag-Guneshli (deep-water) field in Azerbaijan. Each project includes Western oil majors as shareholders.
Potential offshore reserves of Turkmen oil in the Caspian Sea have yet to be explored or developed because of disputes between Turkmenistan, Azerbaijan, and Iran over border delineation in the southern portion of the sea.
Existing oil pipelines in Central Asia include the following:
It is estimated that the oil fields of Central Asia are capable of producing about 4 million barrels per day in 2015, roughly equivalent to the daily production levels of Iraq and Kuwait combined. Possible future oil pipeline projects include the Central Asia Oil Pipeline (CAOP) and the Kazakhstan-China pipeline, construction of which is already underway.
Finally, in December 2002, the governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding to construct the Central Asia Oil Pipeline, which would bring Uzbek and Turkmen oil to Gwadar, Pakistan, on the Arabian Sea. However, this project has been delayed by continued instability in Afghanistan.
The Central Asian countries with the largest reserves of natural gas are Turkmenistan and Uzbekistan, although there are considerable amounts of gas in Kazakhstan (particularly the Karachaganak field in western Kazakhstan) and Azerbaijan (Shah Deniz). (See Table 2.)
Central Asian gas transit routes that are not controlled by Russia are scarce and are currently limited to the as yet unfinished Baku-Tbilisi-Erzerum pipeline, from Azerbaijan to Turkey, and Korpedzhe-Kurt-Kui, which is short, extending only from Turkmenistan to Iran. Future projects are hindered by heightened political risk and an unfriendly investment climate.
Other than Korpedzhe-Kurt-Kui, all Turkmen and Uzbek natural gas exports are controlled by Gazprom, and almost all Turkmen gas is exported to Russia via Uzbekistan or to Ukraine via Russia. Existing gas pipelines include:
Future gas transit projects include the Trans-Afghan Pipeline (TAP) and the South Caucasus (Baku-Tbilisi-Erzerum, or BTE) Pipeline. The TAP will bring gas from Turkmenistan through Afghanistan to Fazilka, a port on the Indian-Pakistani border. The governments of Turkmenistan, Afghanistan, and Pakistan signed a Memorandum of Understanding in February of 2006 for construction of the pipeline, and it also has strong backing from India. American officials are promoting the TAP, which will be renamed TAPI when India signs on, as an alternative to the Iran-Pakistan-India pipeline. However, instability in Afghanistan and questions surrounding the commercial viability of the project, which has a planned annual capacity of 1.1 bcf, have far delayed its implementation.
The BTE is currently under construction. It will run parallel to the BTC oil pipeline from the Shah Deniz gas fields in Azerbaijan to Greece and presumably will then be linked to Nabucco, a planned gas pipeline to bring Central Asian and Caspian gas through Greece, Italy, and Austria. The BTE's planned initial capacity is 1.5 bcf/yr, to be increased to 3 bcf/yr by 2007. Major shareholders include BP, Statoil, SOCAR, LukAgip, Nico (Iran), and Total.
Western investments have made some inroads into the Central Asian oil industry, but the same is not true of the gas sector. The leaders of the biggest gas-producing countries-Turkmenistan and Uzbekistan-are not friendly with the U.S., and their investment climates are similarly unwelcoming.
Overall, in most of Central Asia, local economies are characterized by excessive government intervention, corruption, weak corporate governance, insufficient legislative frameworks, and incompetent, corrupt court systems. They exhibit a systemic failure to protect property rights.
Furthermore, they generally lack transport infrastructure that is not controlled by Russia. Yet Russia is doing its best to prevent foreign firms either from accessing its vast gas pipeline network or from building competing pipeline networks. If multiple gas pipelines connecting Central Asia to outside markets are built, competitive bidding by companies from energy-consuming countries along with increases in both production and demand could drive up prices for Central Asian gas. Both investors in and consumers of Central Asian and Caspian oil and gas would derive great benefit from the increases in exploration, development, extraction, and production that have resulted from increased foreign direct investment in the region.
These benefits have yet to be seen, however, because the Central Asian natural gas sector has received very little outside investment until recently. Russia, through Gazprom, continues to profit from its position as the largest recipient of gas exports from Central Asia. Gazprom buys Central Asian gas at prices as low as one-quarter to one-third of market prices in Europe and then resells gas at market rates. In 2003, Turkmenistan signed an agreement to sell almost all of its gas to Russia starting in 2009.
Recently, however, China also has expressed interest in Turkmen gas. On April 3, 2006, the leaders of the two countries signed a deal whereby an export pipeline will be built from Turkmenistan to China and China will buy 30 billion cubic meters (bcm) of Turkmen gas every year for 30 years beginning in 2009. On the surface, this Chinese-Turkmen deal seems to bode well for the foreign investment climate in Central Asia; however, suspicions abound that Turkmenistan may be overestimating its reserves of natural gas. Thus, there is speculation that Turkmenistan, in making its deal with China, may have oversold its reserves. This very feasible possibility highlights the lack of transparency in Central Asia's oil and gas markets.
The same difficulties abound in Uzbekistan. Although foreign firms have expressed an interest in Uzbekistan, its natural gas sector remains largely closed to all comers except for Russia. Uzbekneftegaz had a production-sharing agreement with the British firm Trinity Energy, but Uzbekneftegaz broke the deal in 2005, alleging that the subsidiary company created to carry out the deal had not lived up to its end of the agreement.
Since then, Uzbekistan has been working more closely with Gazprom, signing a deal to provide Russia with up to 350 bcf annually, giving Gazprom access to gas fields in the Ustyurt region, and updating dilapidated gas pipelines. In January 2006, Gazprom CEO Aleksei Miller signed a deal with Uzbek President Islam Karimov to transfer three of Uzbekistan's largest gas fields-Urga, Kuanysh, and Akchalak-to Gazprom, in effect giving the firm a monopoly over the export of Uzbek gas. Some analysts suggest that Karimov is courting Russian favor in exchange for Russian assistance with regime security.
Turkmenistan and Uzbekistan are not prime targets for most foreign investors. Neither country has yet implemented any substantial economic reforms, and both can be described as abysmal in terms of transparency and rule of law. The U.S. Department of State warns that "The government of Turkmenistan has a history of capricious and arbitrary expropriation of property of local businesses and individuals, including foreign investors…." Furthermore, poor relations between Uzbekistan and the West, and with the United States in particular, preclude most opportunities for investment by Western firms.
Investment Magnets: Kazakhstan and Azerbaijan
By contrast, U.S. involvement with Kazakhstan and Azerbaijan has been successful. In both countries, Western investment has been not only allowed, but facilitated by local governments, with a commensurate increase in per capita GDP and overall standards of living. Both countries are also now economically competitive in energy sectors on an international level.
Since independence, Kazakhstan has received higher levels of foreign direct investment per capita than any other Commonwealth of Independent States (CIS) country. Investment in Azerbaijan rose by more than 30 percent between 2003 and 2004. Both countries benefit from healthy levels of growth and foreign direct investment and have greater access to hydrocarbon export routes that do not go through and are not controlled by Russia. Although both countries have a long way to go to be considered mature democracies, their potential is undeniable, as can be seen with their more positive attitudes toward democracy, civil society, and the West compared to prevailing attitudes in Turkmenistan and Uzbekistan.
The two countries' success in attracting foreign direct investment in their oil and gas sectors is due to privatization and reform efforts, as well as openness to Western oil majors, although certain regulations, such as quotas on foreign employees and domestic content requirements, continue to deter investment. Courting investment from a wider range of interested parties and enhancing competitiveness in their energy markets, both countries serve as an effective counterweight against pressure from Russia and China, and both have used this counterweight to their economic advantage.
The Allure of Central Asia
There are many political risks to doing business in Central Asia. As previously mentioned, property rights, transparency, and law enforcement are still in the process of development in these countries. Corruption is endemic, as are human rights violations. None of these issues deters Russian or Chinese investments, making competition in the area more difficult for Western firms that seek investment guarantees. Furthermore, Russia is making every effort to keep Western investments out of its former sphere of influence.
Security, particularly in terms of Islamist terrorism and radicalism (the Islamic Movement of Turkestan, the global Hizb'ut Tahrir, Akramiyya of Uzbekistan, and other organizations), is a pressing issue for all of Central Asia's governments and may pose serious risks for potential investors in energy and vulnerable energy infrastructure.
Despite these political vulnerabilities, investors and governments in the U.S., the United Kingdom, France, Italy, Russia, China, and the Middle East still seem eager to lay claim to the hydrocarbon resources of Central Asia. One of the most attractive features of Central Asian oil and gas is that there are deposits that have yet to be explored or developed, and the national governments are reliant on foreign investors to provide the capital to undertake such costly projects.
Geopolitical considerations are another key concern as Central Asia continues to evolve as a highly important strategic area, especially for the U.S., Russia, China, Iran, and India. Political instability in other major oil- and gas-producing locations-the Middle East, Venezuela, and Nigeria-and increasing economic nationalism in Russia are also fueling the drive to claim a share of Central Asian resources.
Russia's access to Central Asian (specifically Turkmen) natural gas is key to its domination of the European natural gas market, primarily because of concerns, both within and outside of Russia, that Gazprom's production levels will not be sufficient to uphold its end of gas export deals. At present, it appears that Gazprom's natural gas export obligations cannot be met by Russian production alone, and future gas obligations, including a deal to provide China with 80 bcm of gas annually, will also require that Russia have access to the bulk of Turkmenistan's and Uzbekistan's production. As noted, this may be particularly problematic in light of Turkmenistan's recent deal with China, which seemingly involves selling twice as much of the same gas supply.
A recent study of the Russian gas industry gives the following annual projections: Russian annual gas production will be 665 bcm, domestic demand will be roughly 479 bcm, exports to the European Union (EU) will be around 161 bcm, exports to the CIS are projected at 80 bcm, and exports to Asia are projected at 24 bcm. To meet its export obligations, Russia will have to import 79 bcm from producers in Central Asia. Russia therefore has an incentive to maintain its close political and trade ties with Kazakhstan, Turkmenistan, and Uzbekistan in the years to come.
However, Kazakhstan has been and will likely continue to be open to a diverse range of investors, while Turkmenistan has already begun increasing the price of its natural gas. As export opportunities for the Central Asian states increase, not only will gas prices go up, but supply may be redirected to countries other than Russia that may not demand the same discounted prices that Russia does. In 2005, Russia was paying $44 per 1,000 cubic meters of Turkmen natural gas-five times below European gas market prices, which hovered around $220-$250.
U.S. Role and Policy in Central Asia: Energy and Beyond
The U.S. is unlikely to become a single dominant power in Central Asia, nor is there any reason why it should attempt to achieve such a status. Realistic goals-energy security; proximity to the main theaters of operation in the war on terrorism, Afghanistan and Pakistan; combating the traffic in drugs, weapons, and weapons of mass destruction technology; and encouraging participatory and transparent social and economic development-require a sustainable engagement. This is especially the case as the U.S. focuses its resources and attention elsewhere, primarily in the Middle East.
The strategic location of the region and the intense global competition over its energy reserves will, to a certain extent, keep the U.S. involved. U.S. engagement is particularly constricted by uneasy relations with current Central Asian regimes, whose authoritarian tendencies are of no consequence to Russia, China, Iran, or even India.
Even if the U.S. had the capacity to limit the presence of other large powers in the region, to do so would be unwise. First of all, the primary U.S. goals in the region are energy security and proximity to terrorist threats, not outright control. Limiting other powers in the region is unnecessary and would be a grave mistake, just as it was an error for the U.S. to support an oil and steel embargo on Japan in the 1930s, triggering Japanese expansion in the Pacific. The U.S. and other great powers share the goals of stability, economic development, and preventing religious radicalization and terrorism. Rather than openly antagonizing China, Russia, or India over their involvement in Central Asia, the U.S. should pursue the benefits to be derived from regional cooperation.
Despite the unappealing nature of the region's authoritarian regimes, Chinese and Russian backing of these governments contributes to their short-term stability, staving off political crises. Political disintegration in any of these countries would have severe consequences for regional security, because they are for the most part impoverished, dissatisfied, largely Muslim, and thus susceptible to recruitment by fundamentalist Islamic groups. Furthermore, heroin trafficking is a serious problem in all of Central Asia, particularly Afghanistan and Tajikistan, and the collapse of any of the states would allow for even more prolific smuggling in narcotics, people, and possibly even nuclear weapons components. Overriding strategic imperatives suggest that it might be best to tread lightly until the region finds a measure of stability that allows for change without chaos.
One way for the U.S. to play a more influential role in the region is through the use of partners, such as India. As India is a U.S. strategic partner, a stable democracy, and a growing economic power, a greater Indian presence in the region may be beneficial for U.S. interests. India is refurbishing a former Soviet air base in Tajikistan (Ayni), which is intended as part of an effort to contribute to stability in Afghanistan and to battle Islamist terrorism in Central Asia. Both goals are shared by the United States.
India can also lend its support to increasing export options for Central Asian oil and natural gas. In addition to helping to break up the Russian natural gas transit monopoly, this would contribute to economic growth, stability, and improved relations between the pipeline transit countries of India, Pakistan, and Afghanistan, which is in U.S. interests.
It is vital that the U.S. maintain and expand a multifaceted presence in Central Asia. The benefits of U.S. involvement accrue to both sides: The U.S. can protect its security, military, and geopolitical interests and its energy access while helping to promote the development of democracy and civil society in Central Asia. The developing nations of Eurasia can gain access to much-needed U.S. investment, security assistance, and global integration above and beyond what they are offered by Russia, China, India, and Iran.
Challenges to U.S. Energy Interests
A real challenge in promoting U.S. energy interests worldwide, including in Central Asia, is the high level of corruption in the state-run energy sectors. A recent report by the London-based Global Witness on the Turkmen-Ukraine gas trade "poses a difficult question for the EU and its neighbours: can they meet their energy needs without feeding corruption and undermining good governance in the countries that supply or transport this energy?" This question could refer to other regions as well, including the Middle East.
The answer to that question, in Central Asia as well as in the Middle East, is a qualified "no." This applies to both corruption and human rights abuses. Some argue that it would be unwise to sacrifice U.S. energy and security interests because of difficulty in dealing with regimes that do not share U.S. values. After all, such regimes are the majority among oil producers. This is a real challenge to U.S. policymakers.
The recent U.S. experience with criticism of President Islam Karimov of Uzbekistan over the Andijon massacre, in which the Uzbek military opened fire on armed Islamists as well as civilian protestors, is a case in point. This criticism provoked a harsh Uzbek response that resulted in the loss of both a strategic relationship and U.S. access to the Karshi-Khanabad air base. This incident can be seen as a valuable learning opportunity for U.S. policymakers. Intransigence on the issue of democracy development to the exclusion of other U.S. national interests and priorities has not served the U.S. well in Uzbekistan and has led to an overreliance on the Manas International Airport air base in Kyrgyzstan, which comes with an annual price tag in the $150 million range.
Given the high cost of human rights priorities, a more relevant question in this climate of energy insecurity and tight energy markets would be: "How can the U.S. successfully balance its security, energy, and human rights priorities in a way that maximizes U.S. interests?" The U.S. needs to stay engaged with the leaders of most states and with elites, political parties, and the people in Central Asia. Only through this sort of engagement will the U.S. begin to rebuild its former status as friend and model to these countries, as opposed to an external superpower determined to topple regimes in the region.
By staying engaged and persistent, the U.S. may be able to make serious progress on achieving its objectives in Central Asia, which include:
What Should Be Done
To achieve these goals, the National Security Council should coordinate activities by the U.S. State Department, Department of Defense, Department of Energy, and other departments to pursue the following policies:
U.S. and Central Asian political, economic, and security interests are not mutually exclusive and may be better achieved through cooperation than through confrontation. Development and security of supply and transit is one such common interest that needs to be cultivated.
Not seeing eye-to-eye on every issue should not prevent states from working together to attain shared goals. Even if relations between the U.S. and Central Asian states or Russia are at a post-Soviet low point, common interests such as energy development, fighting terrorism, and limiting nuclear non-proliferation should be pursued and cultivated.
U.S. involvement and assistance contribute to the economic, political, social, and security development of the states of Central Asia. The United States should remain as engaged as possible in the region. Given recent tensions concerning values, preferred economic models, and political systems, such engagement will be complex. Continuous dialogue with regional actors, as well as with Russia, China, the European Union and its key members, Japan, and India, is required to coordinate policies and prevent crises.
This will demand give-and-take on both sides, and the U.S. may find that getting concessions requires making concessions. As the greater and more influential power, however, the U.S. may find it necessary at times to make the first move.
Ariel Cohen, Ph.D., is Senior Research Fellow in Russian and Eurasian Studies and International Energy Security in the Douglas and Sarah Allison Center for Foreign Policy Studies, a division of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation. The author wishes to thank Conway Irwin for help in researching and preparing this paper.