2011 Explaining the Central Asian Energy Game_ Complex Interdependence and How Small States...

Explaining the Central AsianEnergy Game: Complex Interdependence

and How Small States InfluenceTheir Big Neighbors

Jean A. Garrison and Ahad Abdurahmonov

Dominant voices in the energy security debate describe the compe-tition for energy resources as a zero-sum, realist game that will leadto future resource wars among prominent system-shaping states.However, the complex set of interlinked political, economic, and se-curity issues that make up energy security involves “big” and“small” states. Complex interdependence provides a different lensto view power in situational and relational terms and thus a morecomprehensive way to measure a state’s potential influence. This ar-ticle examines the foreign-policy behavior of energy-rich “small”states in Central Asia, specifically Kazakhstan and Turkmenistan, inthe context of their “big” neighbors, particularly Russia and China.The goal is to begin to explain the energy dynamic within CentralAsia and the bargaining process that is reshaping Central Asia’s in-terlinked political, economic, and security relationships. KEYWORDS:energy security, complex interdependence, Central Asia, China, Rus-sia, Kazakhstan, Turkmenistan.

THE WORLD COMMUNITY HAS ENTERED THE TWENTY-FIRST CENTURY WITH

ever-growing energy demands, increasing energy costs and volatilityof supply, and the perception of shrinking access to secure energy re-sources. These realities, and the fact that energy resources are foundonly in a few countries, take trade in energy out of the realm of ordi-nary “low” policy in which it is assumed that basic laws of supplyand demand are determining. Due to their scarcity and link to futuredevelopment, energy resources take on some of the strategic charac-teristics of “high” policy. The ongoing competition for energy re-sources leads many to see a future of resource wars, particularly in thecontext of large producing states such as Russia and large consumerssuch as the United States and China that fuel global demand. But this

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zero-sum lens misses the growing interdependent political, economic,and security relationships among producing, consuming, and energytransit countries. In fact, the high-versus-low policy distinction pres-ents a false dichotomy. The reality is a complex set of fluid, asym-metrical relationships in which all states have a certain level ofdependency and influence.

By the numbers, the importance of the Caspian Sea region in theglobal energy equation is quite small. For example, its oil accountsfor only 2–3 percent of the world’s known resources, and its gas foronly 4–5 percent. However, its relative proximity to Russian, Euro-pean, and Chinese markets and the tightness of the world energymarket make these resources a source of potentially critical leverage.The possession of vital, expensive, and sought-after energy re-sources in large amounts provides certain small states with foreign-policy choices and strategic advantages that they would not normallypossess.

But the Central Asian energy equation is not a simple one. Giventhe vast distances involved, the process of extracting and transportingthese resources requires a big commitment by the parties involved.Russia has the advantage of long-term cultural and political ties tothe region and a ready, although aging, pipeline and grid infrastruc-ture that routes Central Asian energy exports through Russia. In con-trast, China’s ready cash reserves that are available for investment innew pipelines and infrastructure vital to the region have changed thenature of the game. These circumstances give new options and op-portunities to Central Asia’s energy-rich states. In this context, Cen-tral Asian states forge ahead to re-create their identity as importantregional actors rather than just remaining a place acted upon by out-side great powers such as Russia and China.

This article asks how energy-rich Central Asian states work toavoid being sandwiched between the regional giants or to becomevictims of a new resource “great game.” To address this question, weexamine the impact of the foreign-policy behavior of energy-richsmall states in Central Asia, specifically Kazakhstan and Turk-menistan, in the context of their “big” neighbors, particularly Russiaand China. Given their relative poverty, geographic isolation, andclose historical and functional ties to Russia, these states seek to step

382 Explaining the Central Asian Energy Game

out of the shadow of their former master. China’s rapid rise offers theopportunity for new markets and ties that may balance Russian in-fluence and potentially change the geopolitical dynamic in CentralAsia.

The goal is to begin to explain the energy dynamic within Cen-tral Asia, and the bargaining process that is shaping current (and fu-ture)Asian political, economic, and security relationships.We addressa number of interrelated questions focusing on the broader geopolit-ical context and the tools available to energy-rich states: How has thecomplex energy-interdependent system developing in Central Asiachanged regional relationships? What strategy and tools do smallstates such as Kazakhstan and Turkmenistan use to increase their con-trol over their energy resources and future? How has their growing ac-tivism influenced the energy game in Central Asia? How do Russiaand China guarantee access to Central Asia’s energy resources in asituation of complex interdependence?

Understanding Energy Security ina World of Complex Interdependence

Currently the world is facing a new security challenge due to grow-ing energy demands, decreasing cheap fossil fuel resources, andemerging energy nationalism. According to the 2010 World EnergyOutlook, world primary energy demand will increase by 36 percentbetween 2008 and 2035, or 1.2 percent per year on average (Interna-tional Energy Agency 2010). In this context, many security scholarssee a future in which states compete for scarce resources, reinforcingthe zero-sum nature of global politics in general. This perspectiveoften shapes the discussion of energy as a strategic commodity. Schol-ars such as Michael Klare and Paul Roberts, for example, argue thatthe condition of rising powers and diminishing energy resources canproduce a dangerous competition among countries, since energy re-sources have acquired a prominence in world politics that rivals mil-itary power in importance. Klare (2008) suggests that a “NewInternational Energy Order” is developing that divides countries intocompeting energy-surplus and energy-deficient nations (Roberts

Jean A. Garrison and Ahad Abdurahmonov 383

2004). The nationalization of key energy sectors in several energy-producing states—reflected, for example, in Russia’s pipeline poli-tics or China’s “go forth” policies—illustrates this mercantilisttendency (Noreng 2006; Lieberthal and Herberg 2006; Ebel 2005).These writers often predict a process in which conflict over energy isimminent unless preventive actions are taken. This sentiment getspress in periodicals such as the Oil and Gas Journal regarding theCentral Asian context. For example, Gawdat G. Bahgat in June 2009noted the intense and growing competition among China, Europe, andRussia over oil and gas from Central Asia. The Russian advantage isnoted in terms of decades-long cultural and political ties. China is theemerging competitor given its deep pockets, while European compa-nies offer more advanced technology than is available from either ofthese competitors (Bahgat 2009).

The energy equation is complicated by the geographically unevendistribution of energy deposits across the globe and within regionalcontexts. From the perspective of security of supply for importingstates, the difficult transportation routes that make energy shipmentsgo through a few “chokepoints” is a major concern (Caldwell andWilliams 2006). But energy-exporting countries share similar con-cerns, such as the security of demand and transportation to get theircommodity to the market. Long-term demand security is importantto ensure a predictable flow of revenues. These countries also heav-ily depend on limited transportation choices and routes, which meansthat they share the concerns of energy-importing countries on the se-curity of supply (Garrison 2009).

For those who embrace the age of globalization and the perceivedopportunities that come with economic interdependence, securityanalyses provide an incomplete picture of the energy game. From botha security studies and an international political economy (IPE) per-spective, little literature deals with energy security beyond how somescholars apply the major international relations paradigms to explainthe function of energy markets (Ozdamar 2010; Wilson 1987). Secu-rity studies provide the basis for the zero-sum lens. The IPE litera-ture is guided by the premise that economic systems rest on aparticular political order with certain values, norms, and expectations,and that these interdependent relations change the behavior of the ac-tors involved (Gilpin 2001).


Maneuvering amid Complex Interdependence

The concept of complex interdependence, coined by Robert Keohaneand Joseph Nye, describes a world in between these two perspectives.Nations are calculating actors but also are so interconnected througha web of interdependence that common interests and shared vulnera-bilities shape opportunities for cooperation and prospects for compe-tition. In the age of complex interdependence, modern states areinterlinked with each other to such an extent that the notion of “hier-archy” diffuses and the use of (military) force is discouraged andcounterproductive. While states that are interdependent are sensitiveto external change, their vulnerability to the system is measured bytheir ability to respond to changes effectively (Keohane and Nye2001; Keohane and Nye 1998). Power is measured by their ability tomanipulate asymmetrical relationships.

In this vein, shared vulnerabilities and shared interests giveleaders opportunities and constraints in the choices they make. Eventhough fossil fuels are a vital source of influence, other factors suchas markets and technology, investments, and trade, which are cen-tral to promoting energy extraction, are important because they en-tangle countries in a web of complex interdependence. Despite theinclination toward energy nationalism, energy-surplus countrieshave their own vulnerabilities, such as the difficulty of exploration,extraction, and transportation of fossil fuels as well as internal andregional instabilities. They also can be constrained by a lack of tech-nology and limited ability to control demand and production. Ulti-mately, the energy-exporting countries heavily depend on energyrevenues and foreign investments as well as long-term security ofdemand. These constraints and vulnerabilities can compel states andtheir leaders (with or without significant energy deposits) to searchfor shared interests and common ground for collaboration. Russia,for example, needs Chinese investments and Japanese technology totake advantage of its vast energy resources (Aron 2006; Ivanov2003).

A number of countries engage in strategic energy dialogues withthis interdependent reality in mind. China engages in a number of bi-lateral strategic dialogues and uses organizations such as the Shang-hai Cooperation Organization (SCO) as vehicles to promote energy


cooperation with Central Asian states. Similarly, the Organization ofPetroleum Exporting Countries (OPEC) has strategic dialogues withother producers as well as with consumers, noting the interests that areshared. The president of the European Commission, Jose ManuelDurao Barroso, echoes this sentiment by noting the shared interests ofconsuming, producing, and transiting countries, all of which are be-coming increasingly dependent on one another. “Security of supply isimportant for us, but other countries seek security of demand. This isthe age of energy interdependence” (Bahgat 2010).

This brief discussion of geopolitics and complex interdependenceillustrates that states are constrained actors in regional and global con-texts. But energy resources provide new options. For example, in ex-plaining the change that took place in the international oil regime after1973, Joseph Nye notes that the OPEC embargo and oil crisis led toan enormous shift of power and wealth from the industrialized worldto the developing world (Nye 2005). The decline of US power alteredthe stability of the existing energy “regime.” Further domestic polit-ical responses shaped how deeply the United States and others wereaffected by external shocks. Acknowledging both the domestic andforeign sides of the energy security coin, Daniel Yergin (2005) in-corporates factors such as building cooperative relations with pro-ducer and consumer states, a proactive foreign policy that preventsdisruptions of the chain of supply, and domestic strategies to promoteenergy security.

The Possibilities for Small States

Within the realist tradition in the international relations literature,the size of a state often is used to explain its potential for independ-ent foreign policy behavior. The distinction made among great pow-ers, middle powers, and small powers is an attempt to ascribedifferent levels of potential influence within the global system. Inthis context, the great powers hold undisputable potential power ad-vantages over small states (often industrialized versus developingstates). Historically, those who have focused on small-state foreignpolicy take the structural perspective that small states are limited inthe foreign policy choices they have vis-à-vis big powers and inshaping policy outcomes to fit their goals. The principal finding of


the field is that small states—as measured by the size of the military,population, or area—are more vulnerable than others to the vagariesof international and regional systems. They are assumed to go alongwith the system rather than attempt to change it. Some analysts, suchasAnnette Baker Fox, claim that small states have persuasive power,meaning they aspire to neutrality and limited alignments. Similarly,Peter Katzenstein notes that smallness will result in active partici-pation and promotion of the international system rather than game-changing behavior (Baker Fox 1959; East 1973; Katzenstein 2003;Neumann and Gstohl 2007; Payne 2004; Randma-Liiv 2002; Sutton1993). Jeanne Hey, on the other hand, explains how perceptions ofsmallness are what matter. Essentially, if you and others perceiveyourself as a small state, then you see yourself with limited choicesand ability to affect policy outcomes (Hey 2002). But the conceptalso leaves room for flexibility.

However, in a world of complex interdependence, which is thefocus of this analysis, smaller states also have their own strengthsand resources and can seize new opportunities. Laura Neack seesthe presence of critical natural resources (in combination with in-sightful leaders) as one such source of leverage to pursue more in-dependent foreign policies (Neack 2002; Snyder, Bruck, and Sapin1965). From this perspective, the potential influence of states, andtheir proxies in the game (the national oil and gas companies), de-pend on various features of the host country as well as the compa-nies themselves. These features include the size of the investment,its share of the project, the percentage of a host country’s oil or gasexports taken by a particular country or company, the relativestrength of a host country’s economy, the extent of its diversification,and its reliance on energy exports for influence. The vulnerability tothe dictates of outside countries and national energy companieshinges on factors such as the political stability and capabilities ofthe host state and the international alignment of forces around them(Ziegler 2008, 139).

Central Asia offers a look at smaller states that have traditionallybeen beholden to their wealthier neighbors but now are coping withrelatively new energy wealth. They offer a context to evaluate how en-ergy wealth has changed the nature of their traditional dependent re-lationships with Russia.


Putting Central Asia into Context:Changing Historical Alignments and the Energy Game

Competition for Oil

In the Central Asian context, zero-sum perspectives have dominatedthe analyses of the region as a whole. This perspective was especiallypopular in the early years of the independence of CentralAsian stateswhen scholars perceived Central Asia as a “grand chessboard,” rem-iniscent of the eighteenth-century Russian-British rivalry and thestruggle of the great powers for influence and dominance. CentralAsian governments were viewed merely as pawns unable to influencethe course of the game. Scholars such as Zbigniew Brzezinski andFrederick Starr had little trust in the ability of these countries to staystable without being guided and dominated by one or another greatpower (Brzezinski 1997; Starr 1996). With the collapse of the SovietUnion, the newly independent energy-rich republics again were seenas a playground for great-power rivalry: a new great game was pre-dicted to describe the rivalry between the West and a weakened Rus-sia for control of Eurasia’s energy resources (Kleveman 2003).

The geography of Central Asia has contributed to the analysescategorizing them as weak states acted upon by outsiders. CentralAsia is a landlocked geographic region located in the strategic heartof the Eurasian landmass. This region’s importance is primarily con-nected to its location between great powers and its natural resources,which its neighbors covet. Since the independence of these states,outside interest in their resources has grown. It is precisely this com-petition for the region’s resources that provides various CentralAsianstates with new leverage.

Petroleum is the natural resource that we think about first as thegame changer in the CentralAsian context because it has received thegreatest amount of Western investment. Based on oil reserves, pro-duction figures, and geography, Kazakhstan is the coveted prize inthe oil game. Kazakhstan has about half of Russia’s total of 60 billionbarrels in reserves and holds more than the 21.8 billion barrels that theUnited States is estimated to have (see Table 1). This oil is also geopo-litically well placed because Kazakhstan is the only country thatChina can import it from directly overland without it passing through


Russia first. In 2009 Kazakhstan produced 1.54 million barrels perday (bpd), and with the continued expansion of its large Tengiz,Karachaganak, and Kashagan fields this output is expected to doubleby 2019 (Energy Information Administration 2009a).

Large-scaleWestern investment in the oil sector began in the early1990s with formation of the Caspian Basin Consortium, which has ex-ported millions of barrels to the European market. The most lucrativeoil field, Tengiz, with estimated recoverable reserves of 7.3 billion bar-rels, began to be exploited by US-based Chevron-Texaco and Kaza-khstan in a consortium in 1993. The Kazakhs welcomed Westerninternational oil companies (IOCs) because the Kazakhs needed ex-pertise and equipment, which the Russians lacked, to develop the field.The government saw such joint ventures as helpful to Kazakhstan’s


Table 1 Selected Asian Oil and Gas Figures, 2008–2009

Production and Reserves of Crude Oil

Production of Crude Oil Proved Oil Reserves Proved Oil Reserves(thousand bpd), (billion barrels), (billion barrels),

Country 2009 2008 2009

China 3,790.18 16.00 16.00Kazakhstan 1,455.15 30.00 30.00Russia 9,495.36 60.00 60.00Turkmenistan 176.26 0.60 0.60Uzbekistan 43.45 0.59 0.59

Production and Reserves of Natural Gas

Natural Gas Proved Reserves of Proved Reserves ofProduction Natural Gas Natural Gas(billion cm), (trillion cm), (trillion cm),

Country 2009 2008 2009

China 82.94 2.27 2.27Kazakhstan 10.95 2.83 2.40Russia 5,836.10 47.57 47.57Turkmenistan 38.11 2.83 2.66Uzbekistan 61.42 1.84 1.84

Sources: Energy Information Administration, “World Proved Reserves of Oil andNatural Gas, Most Recent Estimates,” June 30, 2010, www.eia.doe.gov. Data is fromNatural Gas in the World, July 2008, and Oil and Gas Journal, January 1, 2009.

modernization efforts and proof that Kazakhstan welcomed outsideinvestment. Despite this, getting the oil out has been an ongoing chal-lenge. Under a 1998 deal, the Russian government agreed to build apipeline from Tengiz in two phases. The first, with a capacity of650,000 barrels a day, has been built, but Moscow has refused to com-plete the second phase, which would more than double the pipeline’scapacity to over 1.4 million barrels a day (Kramer 2010).

In 2002 another prominent consortium led by Italy’s Eni reportedthat the new Kashagan offshore field in the Caspian rivaled Tengizwith 7–9 billion barrels of proven oil reserves. This oil reaches mul-tiple international markets with destinations in Russia, China, Europe,and Turkey. In late 2010, 23.2 percent of its oil flowed to Italy, 15percent to China, 11.5 percent to France, and 7.5 percent to Austria(Oil and Gas Information Agency 2010; Nichol 2007).1

Kazakhstan has followed a strategy that diversifies transportationroutes in a multivectored energy export policy. As such, the Kazakhgovernment seeks multiple pipelines and markets to ensure that noregional power can exercise strategic control over its energy exportsand its broader economic future (Blank 2005).2

Natural Gas Exporting

Natural gas is the newcomer in the CentralAsian energy export game.Just a few short years ago Central Asian gas was a commodity con-sidered too difficult to produce except by Russia. CentralAsia’s threenatural gas providers with the greatest potential—Uzbekistan, Turk-menistan, and Kazakhstan—all have faced the challenge to diversifytheir markets to make planned natural gas exports viable beyond Rus-sia (see Table 1). Both Uzbekistan and Turkmenistan have significantreserves but have needed a new infusion of funds to increase pro-duction. Uzbekistan is the second-largest producer of natural gas inthe Commonwealth of Independent States (CIS) after Russia, and hassped up production at existing fields and sought to develop new fieldsprimarily with the help of Russia’s giant state gas company, Gazprom.With Gazprom, Uzbekistan plans to spend $1.5 billion to revamp nat-ural gas pipelines in the region to boost exports through Russia. Incontrast, Turkmenistan has sought to open new opportunities beyondRussia (Energy Information Administration 2009a).


Getting the resource to markets beyond Russia has required sig-nificant political and economic effort because of the existing gridstructure that has gas routed north through Russia. For example,China’s President Hu Jintao’s efforts to link a gas field in Turk-menistan to its western Xinjiang region succeeded in getting broadregional support. This required the cooperation of the presidents ofKazakhstan, Uzbekistan, and Turkmenistan in a joint commissioningof a pipeline that transected each of their countries. The opening ofthis pipeline marked the end of Russia’s near-monopoly over CentralAsian natural gas exports. It is the first high-volume export route forTurkmen gas that does not go through Russia. The new pipeline han-dles 30–40 billion cubic meters (bcm) per year, while the Turk-menistan pipeline to Russia handles between 50 and 70 bcm per year.Full capacity is slated to be reached by 2012, but Turkmenistan andChina have already completed preliminary agreements to add another10 bcm in the future (Asia Pulse 2009; Garrison 2007).

A closer look at the Kazakh oil equation and Turkmenistan’s nat-ural gas game from a complex interdependence perspective will showKazakhstan’s and Turkmenistan’s efforts to gain control over theirown energy resources. Regional alignments are undergoing signifi-cant shifts. Analysts who ignore the role of small states miss a sig-nificant piece of the energy puzzle.

Changing the Rules in theKazakh Petroleum Equation

Kazakhstan’s massive reserves and potential as a major exporter pro-vide it with greater potential influence.3 Its oil and gas productionhave tripled in the last decade, and its Kashagan field is the largestfield outside the Middle East and the fifth largest in terms of world re-serves. Multiple investor opportunities, particularly in the context ofhigh energy prices and high demand, have helped Kazakhstan tap itswealth. The astute manipulation of new opportunities has helped itgain leverage vis-à-vis its neighbors. No longer doWestern and Russ-ian energy investors dominate Kazakh energy investments as they didduring the 1990s. One reason for this is the growing presence of Chinain the mix.


China and New Diversification Opportunities

For over a decade China has played a growing role in Central Asia,and frequent energy discussions have provided greater opportunitiesfor both sides. China’s first deal came in 1997, when its China Na-tional Petroleum Corporation (CNPC) bought a 60 percent share ofthe Aktobemunaigaz oil company for $4.3 billion. Later that yearCNPCwon the controlling interest in Uzen, the second-largest oil fieldin Kazakhstan. The next year the two countries agreed in principle tobuild a nearly 3,000-kilometer oil pipeline linking Kazakh oil fieldswith China’s Xinjiang Province in a deal to be financed by CNPC overtwenty years (Lee 2005, 271–272). Despite initial enthusiasm for thesedeals, however, projects were delayed for several years.

The discovery of Kazakhstan’s giant Kashagan oil field, China’sdisappointments with Russia’s unwillingness to open access to its oiland gas reserves, and domestic energy shortages spurred the Chineseleadership again to look to Central Asia for energy. This context pro-vided a new opportunity for Kazakhstan. As a result, in March 2003CNPC and the Kazakh state oil company, KazMunaiGaz (KMG),moved forward to jointly construct the westernmost section of thecross-border oil pipeline, running 448 kilometers from Atyrau toKenkiyak in Kazakhstan. The easternmost part of the pipeline, run-ning 988 kilometers from Atasu in Kazakhstan to Alashankou at theChinese border, was completed at the end of 2005 and became oper-ational in May 2006 with a total investment of just under $800 mil-lion (Liao 2006, 62–68). The final section, the Kenkiyak-to-Kumkolpiece, started operations in October 2009 with completion of the 761-kilometer Kenkiyak-to-Kumkol pipeline section.

These joint ventures are hardly an even split in terms of resourcesexpended. While the Kazakh-China pipeline project was billed as afifty-fifty joint venture between KMG and CNPC, the Chinesecompany paid 85 percent of the cost. Only 12.9 million barrels flowedthrough it in 2006, but capacity was reached in 2010 with 73.3 millionbarrels of crude exported as of the end of the year. With thecompletion of the second phase of the project in 2013 the capacitycan increase to 146.7 million barrels per year (Silk Road Intelligencer2011). The pipeline can accept crude oil deliveries from the north(Russian sources in western Siberia), the west, or the south from


Kazakhstan’s Turgai basin. To function effectively, the pipeline needsRussian oil to supplement Kazakh contributions because ofinsufficient fill and viscosity issues (Lee 2005, 271–272). The purposeof the pipeline may be to provide a long-term, strategically securesource of oil rather than to meet immediate demand requirements.Still, Kazakh oil now provides 15 percent of China’s imports.

China’s purchase of PetroKazakhstan (Petrokaz) and its new assetsin the Turgai basin (including full ownership of Kumkol South and jointownership with Lukoil of Kumkol North) will improve the pipeline’s ef-ficiency because the oil fields feed the pipeline at its midpoint. For ex-ample, Petrokaz’s combined assets in the Turgai basin produce around150,000 bpd of crude, which could go directly into the pipeline (Liao2006, 62–68). Through the Petrokaz acquisition, CNPC also gained a 50percent stake in the Kazgermunai field (the other 50 percent belongs tostate-owned Kamunaigas). To secure these deals, CNPC has agreed toinvest nearly $4 billionmore over the next twenty years to develop otherareas (Eurasia Group 2006, 15; Energy Information Administration2009b). China has become a more attractive partner because its gov-ernment-backed national oil companies (NOCs) also have been morewilling to invest up front in big infrastructure projects. For example,China’s CNPC agreed to foot the whole bill for the oil pipeline fromCentral Asia when no one else would. China’s NOCs aggressively fol-low an acquisition strategy in which they purchase stakes in explorationand production activities and whole firms, and where needed partner injoint ventures, finance infrastructure projects, market petroleum prod-ucts, and operate facilities (Department of Energy 2006, 3).

China also has begun to invest more broadly in Kazakhstan andother CentralAsian states and now rivals Russia in terms of its foreigntrade with Kazakhstan. In 2009 China’s share of Kazakh trade was21.4 percent, compared to Russia’s 17.5 percent, a gap that continuesto widen over time (International Monetary Fund, 2010a). Chinesetrade is vital for Kazakhstan and other CentralAsian states because itfills a void in consumer goods and provisions to the region. China’sgoods are cheaper than theWest’s and of higher quality than Russia’s(Garrison 2009, 52–56).

These agreements and ties are significant and demonstrate theChinese determination to develop closer ties with Kazakhstan’s en-ergy industry. The increase in exports to China also reflects a Kazakh


calculation that closer ties to China’s energy markets (and generalmarket) provide the country with greater security and diversified rev-enue streams.

Kazakhstan’s Efforts to Seek Better Deals

Seeking diversification has allowed Kazakhstan to gain greater con-trol over (and even the upper hand in) its energy security policy. Thegovernment inAstana now has greater confidence that it can set morefavorable investment terms, and it is not afraid to use its leverage withthe oil majors and NOCs. For example, the CNPC takeover ofPetrokaz, noted above, with its investment of $4.2 billion in 2005, ledthe Kazakh government to pressure CNPC to sell a 33 percent shareof the company (for $1.4 billion) to Kazakhstan’s KMG for a hugeloss. The sale price undervalued Petrokaz as it gave advantageousterms to the Kazakh company (Liao 2006; Department of Energy2006). The Kazakh government forced CNPC to pay above marketvalue for Petrokaz (by about 20 percent) in the first place and forcedit to undersell some of its assets to the government (Ziegler 2006, 12).Foreign firms can expect to be junior partners in future energy dealsin Kazakhstan. This behavior reflects government dissatisfaction withprevious production sharing agreements (PSAs) signed during des-perate times in the 1990s when oil prices were low and foreign com-panies had the advantage. New practices reflect a new balance ofpower as old agreements are revisited. The Chinese multibillion-dollar investments to develop Kazakhstan’s energy resources, as wellas investments in various pipeline projects, are not immune to a moreactive Kazakh government seeking better terms.

The Kazakh government has taken specific steps to solidify itsposition vis-à-vis its energy partners. Following the Russian modelof energy nationalism, which insists on state control of strategic as-sets, Astana introduced new laws in October 2007 that allow theKazakh government to break natural resources contracts and forcerenegotiation. This puts pressure on projects involving both IOCs andNOCs in new and well-established partnerships. For example, theconsortium of companies producing at its Kashagan-Caspian fieldshad an ongoing dispute with the government over production delaysand cost overruns. The older PSAs for theAgip consortium (which in-cludes ExxonMobil, ConocoPhillips, Shell, Total, and Japan’s Inpex)


delayed royalty payments until after its costs were recovered (esti-mated to be well beyond 2011). These terms have been renegotiated.Further, KMG doubled its stake in the Kashagan venture to 16.81 per-cent while the other shareholders were asked to take a cut (UpstreamOnline 2009). In this investment model, described by some as “mar-ket-friendly resource nationalism,” the state company renegotiates tobecome the dominant partner. This arrangement allows partners toco-invest in the country’s oil sector (Gorst 2007, 12).

This change in Kazakh business practices indicates that a smallerstate that has a resource its neighbors covet can take advantage ofchanged circumstances. Kazakhstan has leverage because it is one ofthe few places with untapped oil and gas reserves still open to in-vestment.And it has neighbors and companies (both NOCs and IOCs)desperate to invest. The government gambles that new power asym-metries provide new opportunities and that companies will remain in-terested despite the new regulations. In 2010 Kazakh presidentNursultan Nazarbayev announced new practices that continue the pat-tern of asserting greater government control of the energy sector. Henoted that foreign ventures enjoying special protective status may losetheir immunity from changes in tax legislation. “Times are changingand life is changing in the entire world, and state interests are push-ing us in this direction. We have to work more thoroughly and con-structively.” Kazakhstan continues to carefully reclaim its influenceover its vast hydrocarbon wealth and to seek a greater role for thestate oil and gas company (Silk Road Intelligencer 2010).

The Kazakh energy equation shows that the context for these re-lationships between states has changed. The government has suc-cessfully taken advantage of the Chinese market and high energyprices to create new options for its valuable energy resources and forforeign policy. From a leadership perspective we can anticipate con-tinuity as Nazarbayev has been declared president for another tenyears through 2020.

Turkmenistan’s Shifting Natural Gas Equation

Commercially, CentralAsian natural gas has faced greater challengesthan the Caspian oil sector due to its historic low prices, underdevel-oped markets, and the remote location of its gas fields. Russia’s state


gas company, Gazprom, retains a near monopoly on Central Asiangas exports despite China’s inroads; today 92 percent goes throughRussia via the Central Asia–Center pipeline system, which feeds theGazprom system. Through November 2007 Russia accounted for allof Turkmenistan’s exports and most of its gas production (Interna-tional Crisis Group 2007, 15–18). Turkmenistan is the prize in Cen-tral Asia’s natural gas game, given its potential growth in productionand lack of use for domestic purposes. Russia’s dominance of thepipeline grid reflects an asymmetrical dependence equation with Rus-sia on top and gas distribution largely dependent on the system builtduring the Soviet period, which routes all Turkmen exports throughRussia.4

The Central Asia–Center pipeline that connects Turkmen andUzbek gas to the Druzhba pipeline going to Europe (through Ukraine)became a system of energy import and export operations between dif-ferent countries after the breakup of the Soviet Union. This changemade Russia an intermediary country with a pipeline monopoly overTurkmen gas exports. Historically Russia has bought Turkmen gas atlow rates and sold at higher prices to Europe along with its own gas.Until 2003 Turkmenistan used to sell its gas at the rate of around$25/tcm (trillion cubic meters), but the prices rose sharply, especiallyafter Turkmenistan signed a twenty-five-year supply deal withGazprom in 2003 at the rate of $44/tcm. Since then, the sides periodi-cally renegotiate the prices; in the first quarter of 2009 the price reached$301/tcm. This was a high point, and the price has settled closer to$250/tcm since (EurasiaNet 2009a; EurasiaNet 2009b; Socor 2009).5

Turkmenistan does have some leverage vis-à-vis Russia. Turk-menistan is the single major source of natural gas that can help keepthe supply sufficient for European markets. While the mutually con-verging interests for exports and imports seem to bind these two coun-tries together, there are tensions (Fee 2007).6 However, frequent pricedisputes and the vulnerability Turkmenistan faces regarding the po-tential manipulation of its pipeline monopoly by Russia make the di-versification of gas pipelines a desirable energy strategy for Turkmenleaders. Recent losses suffered due to a stoppage of exports to Rus-sia in 2009 meant that its gas production fell to 38 bcm from 70.5bcm the previous year. This stoppage translated into a one-quarterdrop in Turkmenistan’s gross domestic product (Tynan 2010). Events


such as theApril 9, 2009, pipeline explosion near the Turkmen-Uzbekborder demonstrate the tensions. In that case, Turkmenistan accusedGazprom of deliberately arranging the explosion. Russia attemptedto leverage Turkmenistan either to reduce the price or the volume ofgas or a combination of both prior to resuming the gas flow (Socor2009). This is an example of complex interdependence in that Rus-sia’s role as the primary importer of Turkmen gas has actually givenTurkmenistan some leverage.

Turkmenistan’s Diversification Options

Turkmenistan’s diversification options rest with new European Unionmarket access and deals with China. For example, Turkmenistan hasexplored the feasibility of the Nabucco project, which would bringCaspian gas to Europe outside the Russian-controlled pipeline struc-ture. In November 2008 Turkmenistan attended the Baku summit inAzerbaijan, which was dedicated to diversification of the Caspianbasin energy resources beyond Russia. Later on, the Turkmen presi-dent met with the presidents of Turkey and Azerbaijan in Turkmen-bashi to discuss the prospects for the trans-Caspian part of theNabucco pipeline (Cohen 2008). More importantly, recent inroadswith China show the clear goal to diversify more aggressively. Fre-quent top-level diplomatic visits between Turkmenistan and China,especially sinceApril 2006 when they signed a thirty-year gas exportdeal, have cemented a closer relationship.7

The most significant example of this objective is the launch of theTurkmenistan-China gas pipeline in December 2009. The pipeline,which runs through Uzbekistan and Kazakhstan, had the full backingof Turkmenistan and China when proposed in 2007. The pipelinecurrently carries gas from Turkmenistan. It was expected to transport4 bcm by the end of 2010, rising to 15 bcm in 2011 (Interfax 2010;Vershinin 2010). The thirty-year supply deal with Turkmenistan signedin April 2006 exports gas from Turkmenistan via the new seven-thousand-kilometer-long, $7.3 billion pipeline (SinoThaiYouth 2009).The deal has weathered a leadership change in Turkmenistan. In 2008President Berdymukhammedov reassured his Chinese counterparts thatthe pipeline to China would go into operation as scheduled (Du 2008).In June 2009 Turkmenistan pledged to export 40 bcm per year, 10 bcm


more than the original agreement. In exchange China provided $4 bil-lion in soft loans to Turkmenistan to develop and improve its gas fields(“Turkmenistan, China Sign Gas Agreement” 2009).

The new gas pipeline came into operation in December 2009 (RIANovosti 2010). This pipeline helps to support the rapid increase inChina’s natural gas consumption, a harbinger for the need for large fu-ture imports. Official estimates put China’s natural gas consumption at10 percent of its annual total primary energy consumption by 2020;currently consumption is at 3.9 percent of the total (International EnergyAgency 2010). Compared with other fossil fuels such as coal and oil,China’s consumption of natural gas will growmore rapidly, in line withthe government’s plan to use more clean energy (China Daily 2010).

As with its oil deals, China incentivizes its gas deals with broadertrade and infrastructure investments. Along with the soft loan notedabove, China announced a nearly $2.2 billion investment in the pipelinefromTurkmenistan to China, involving CNPC and PetroChina (EnergyInformation Adminstration 2009b). Moreover, China agreed to a loanof $3 billion to Turkmenistan to assist in developing the South Iolotangas field to feed the Central Asian Gas Pipeline (Energy InformationAdminstration 2009a). Such deals sit within a broader economic andpolitical fabric, which helps to overcome any resistance from the Turk-men side. Further, China has the cash for investment, unlike other coun-tries, including Russia, that have been strapped for cash during thecurrent credit crunch. This and other deals demonstrate China’s for-ward-looking foreign policy and point to a future date when China willneed to import natural gas. In 2009 China also surpassed Russia to beTurkmenistan’s second-leading trade partner after Turkey. China ac-counts for 12.8 percent while Russia accounts for 11.6 percent of Turk-menistan’s trade (International Monetary Fund 2010b).

China’s advantage is that its goods cannot be matched by Russ-ian goods in quality and are cheaper than goods from the UnitedStates or Japan. China also has a consistent record of providing othermuch-needed sweeteners that other countries do not, such as loans tobuy Chinese commercial goods (Socor 2009). China regularly fundsinfrastructure projects as well, including the billions of dollars inpipelines already noted and nearly $2 billion more destined to con-struct Central Asian connector highways. As a result, the economicties that were in their infancy in the mid-1990s have expanded


tremendously. In 1995, for instance, bilateral trade between Chinaand the five Central Asian states totaled only $847 million, account-ing for a modest 0.03 percent of China’s total foreign trade. By 2008China’s overall trade with the region grew significantly to reach justunder $31 billion (China National Bureau of Statistics 2009). Sincethen China has topped Russia in its trade with Central Asia.

The complex interdependent nature of the relationships amongCentral Asian states and their big neighbors shows that strategic en-ergy perspectives provide a much too unidimensional and static viewof the natural gas energy equation.

Conclusion

The Central Asian oil and gas game necessitates a closer look at thecomplex interdependent relationships that have developed here and inother places. More than ever, traditional security analyses miss thedynamic nature of energy relationships and the factors that have em-powered small energy states to influence their neighbors. The set ofinterdependencies illustrated just in the few energy deals noted hereillustrates a more fluid decisionmaking context that challenges sim-ple assumptions about how states should behave. The mercantilisttendencies of these states are not in doubt, but the circumstances thatlead to a future of resource wars does not hold up. The energy gameis much more than a competition between great powers over the re-sources of their weaker neighbors.

While Russia and China are clearly locked in a competition for in-fluence in Central Asia, what is debatable is their ability to influenceoutcomes in the traditional sense. Without taking the “host” states,such as Kazakhstan and Turkmenistan, into account, too much of thepolicy puzzle is missed. In a system of complex energy interdepend-ence, these small states are poised to play one country off the other.Their energy resources give them some ability to influence the asym-metries of the relationships, and increasingly they use this leverage topromote their foreign-policy interests. Countries such as Kazakhstanand Turkmenistan have tangible resources at their fingertips that pro-vide specific tools of influence. The combination of a strategic com-modity such as needed energy resources, and a self-perception that


they are not “small,” makes them more confident in their ability tomanipulate their circumstances to their benefit. Energy is not just aregular trade commodity in this sense.

Looking at small states as actors, rather than as merely those actedupon, demonstrates how states are mutually dependent and must con-stantly work to maintain working agreements. The choices that statesmake and ongoing broader bilateral relationships are better predic-tors of the energy game than deterministic zero-sum energy game as-sumptions. These games are volatile and involve a host of otherrelated issues, including access to appropriate technology and fi-nancing for expensive pipeline projects. Thus, the security debate thatdominates energy policy discussions fails to capture the nuances orthe important everyday parts of the energy game. State behavior re-sults from a series of foreign-policy choices.

Looking inside the black box of state behavior is important to un-derstand the energy equation and to analyze any small state’s behav-ior. From a foreign-policy analysis perspective, this is essential if wewant to understand how policy choices are made.While this approachis a challenge, more in-depth case studies can go a long way to im-prove our understanding of energy politics within the Central Asiancontext and beyond.

Notes

Jean A. Garrison is director of international studies and professor of politicalscience at the University ofWyoming. Her books include China and the EnergyEquation in Asia: Determinants of Policy Choice (2009),Making China Policy:Nixon to G. W. Bush (2005), and Games Advisors Play: Foreign Policy in theNixon and Carter Administrations (1999). Her research and teaching interests in-tersect national energy policy, climate security, and US foreign policy, particu-larly the US relationship with China and East Asia. She can be reached [email protected]. Ahad Abdurahmonov is project coordinator for theWyoming Geriatric Education Center at the University ofWyoming. His researchinterests are energy security and political change in post-Soviet countries. Hecan be reached at [email protected].

1. For the Kazakhstan oil success story told from an industry and regionalperspective, see Ten Years of Tengiz Chevroil 2003.

2. For example, a Sino-Iranian network of oil pipelines already gives theCentral Asian states an alternative route for oil trade, which decreases their de-pendence on Russia. Completion of the Neka-Tehran pipeline offers the chance


for oil swaps of Caspian and Iranian crude, which cut transport costs from theCaspian basin to China. In this plan, Caspian crude would go to Iran while Iran-ian crude would go by ship to China.

3. The discussion of the Kazakh petroleum equation draws from chap. 3 inGarrison 2009, 41–64.

4. Turkmenistan is a relatively poor country whose income and stability arelargely due to ensuring the steady production and export of natural gas, the mainsource of its revenues. Until recently its economy was almost totally dependenton its ties to Russia.

5. Traditionally Turkmenistan maintained a balance in its foreign policy andavoided alignments with any particular regional faction. Its choice for “positiveneutrality” in the 1990s, its own description of its foreign-policy approach, showsan attempt to stay away from antagonism and competition among variousgroupings and alignments (Shikhmuradov 1997). However, due to the growingstrategic significance of its energy resources, Turkmenistan has expanded itsmultilateral and bilateral connections. For example, in December 2010Turkmenistan signed an intergovernmental agreement for constructing the TAPI(Turkmenistan-Afghanistan-Pakistan-India) pipeline with itsAfghan, Pakistani,and Indian partners (Iqbal 2010).

6. There have been a number of strains in the relationship, includingaccusations of Russian attempts to assassinate Turkmenistan’s president; Russian,Ukrainian, and Armenian use of Turkmen gas without payment, which led toTurkmenistan halting its exports in 1994; and Turkmenistan’s refusal to join avariety of new initiatives such as the Collective Security Treaty Organization(CSTO) and the Eurasian Economic Community (EurASEC), as well as limitingits participation in the CIS. Turkmenistan also maintains an independent positionfrom Russia on the legal status and division of the Caspian Sea. The status of theCaspian Sea, which was shared by Iran and the Soviet Union until 1991, becamecomplicated after the dissolution of the Soviet Union. The five littoral states—Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan—cannot come to anagreement on the division of the energy-rich Caspian seabed. Russia, along withAzerbaijan and Kazakhstan, maintains that it should be divided based on shorelinelengths of each state, whereas Iran and Turkmenistan argue that it should bedivided into five equal sectors. See Fee 2007.

7. Currently China, compared to the European Union, is a significantlysmaller natural gas market, because the EU consumes 496.1 bcm per year andChina consumes only 55.6 bcm per year. The EU imports 361.2 bcm per year,and China imports less than one bcm per year (976 mcm). However, China’senergy demand is growing very quickly due its fast-paced economic growth (CIAWorld Factbook 2009).

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