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. Last Updated: 07/27/2016

Caspian Great Game Back On

APCheney listening to an introduction prior to giving a speech to pro-Western leaders at the Vilnius summit Thursday.
The U.S. government appears to be stepping up its drive to secure energy supplies from Central Asia in a bid to counter Gazprom's growing clout and thwart a mounting challenge from China, as analysts signal the start of a tense new Great Game.

U.S. Vice President Dick Cheney is expected to push in Kazakhstan on Friday for a major new gas pipeline from the country to bypass Russia and take Kazakh gas westward through Azerbaijan and on to Turkey. Kazakhstan on Thursday gave an early signal it was interested in the project following talks between Kazakh officials and EU Energy Commissioner Andris Piebalgs.

The new push comes as consumer nations grow increasingly nervous about future supplies, with energy prices soaring to all-time highs, and concerns mount about dependence on Gazprom. The gas giant has locked in a monopoly hold on gas supplies out of Central Asia and Russia, while it supplies Europe with 25 percent of its gas needs.

In a sign of the growing pressure, Cheney lashed out at Russia in a speech in the Lithuanian capital, Vilnius, on Thursday for using its energy resources as "tools of intimidation or blackmail." In the strongest statement yet by a senior U.S. official, he said Russia was throwing its weight around "either by supply manipulation or attempts to monopolize transportation."

Washington's latest attempt to secure additional Caspian energy supplies comes after several years of wavering U.S. policy in the region due to concerns over increasing authoritarianism there. The administration of U.S. President George W. Bush offered an olive branch to Azerbaijani President Ilham Aliyev just last week, granting him his first visit to the White House since he succeeded his father as president in October 2003. Energy cooperation was one of the main issues on the agenda, as was democracy reform, a U.S. State Department official said.

"Cheney ... has decided that this is getting ridiculous," said Zeyno Baran, director of the Eurasian Policy Center at the Washington-based Hudson Institute, referring to the U.S. administration's previous balking over democracy concerns at high-level meetings with regional leaders . "Soon there won't be any more democracies in the region to participate with."

"You can say all you want about how we will not take part in these great games, but Russia and China are taking part in them and there is a risk that the United States is losing out," Baran said by telephone from Vilnius, where she was taking part in the Cheney trip.

Gazprom has been signing off on a string of major new supply agreements with Uzbekistan and Turkmenistan. While President Vladimir Putin last week threatened to send more Russian energy east, China has been stepping up its activities in Central Asia as it seeks to secure supplies from Kazakhstan and Turkmenistan.

China's CNPC last year bought Kazakh oil producer PetroKazakhstan, and the first oil from Kazakhstan reached China last week via a major new pipeline. Turkmen President Saparmurat Niyazov last month paid a six-day visit to Beijing, where he signed off on a plan to send 30 billion cubic meters of gas annually by a new pipeline to China beginning in 2009. Not satisfied, China is in talks with Kazakhstan over a gas pipeline from that country, too.

"The Chinese are now waving their checkbooks," said Alfa Bank chief strategist Chris Weafer, who is also an expert on OPEC politics. "The whole historic Great Game is back, and the Caspian is very much front and center as the main region for energy security."

When Putin named energy security as a priority during Russia's presidency of the Group of Eight nations this year, the expectation was that Russia could use its growing might as an energy supplier to leverage its interests and gain an increasingly important seat at the top table of global politics, Weafer said.

But Russia's standoff with Ukraine over the New Year, in which it briefly cut off gas supplies, led to growing fears Russia was using its energy might as a political weapon. As a result, G7 nations have begun discussing energy security on a much broader level and have stepped up efforts to diversify supplies.

Gazprom's increasing wealth at a time of sky-high energy prices is also sparking new worries, said Matt Sagers, director for energy economics at Cambridge Energy Research Associates. "Nothing in terms of strategy is different. What is different ... is that Gazprom now has muscle."

The Caspian is becoming a focal point in the search for new supplies because of its vast energy reserves and the fact that Caspian nations may be easier to reach than those in regions such as war-torn North Africa, Weafer said.

A State Department official said Thursday that the U.S. foray into Central Asia was more of an attempt to ensure diversity of supplies than a direct response to Gazprom's increasing clout.

"We have to help the European gas market function more efficiently," the official, who was speaking on condition of anonymity, said from Washington. Gazprom's ability to buy gas from Central Asia for as low as $55 per 1,000 cubic meters and sell it for $240 or more to Europe thanks to its monopoly on all pipelines running west out of the region was "a perverse situation," he said.

"This generates enormous rents that are distributed in nontransparent ways," he said, adding this was not in line with the U.S. reform agenda. "We can address that by increasing competition and diversifying pipeline routes."

Russia should adhere to the principles of the Energy Charter and allow third-party access to pipelines, he said, adding that Russia had called on Ukraine to do exactly that during the price standoff. "What's good for the goose is good for the gander," he said.

The official played down Putin's threats last week that Russia could send energy east if the West did not lift obstacles to its expansion in markets there. It is clear "there's bargaining going on here," he said, adding that Russia was not going to give up on its most prestigious market, Europe. "The Russian government has decided that energy could be the most influential tool to influence Europe. ... It has clearly established revenues there."

Weafer said, however, that Putin's saber-rattling last week had sent shivers down Europe's spine, even if it would take a decade to build the infrastructure necessary to take Russian energy eastward.

"In 10 years' time, Europe is facing its greatest crunch," he said. "There will be a real energy crisis in Europe if it has not secured major new energy supplies by then."

Russia is "taking into account the fact that China and India have a huge appetite for energy and will give favorable terms," Weafer said.

Baran said that even though U.S. officials would not openly admit they were concerned by any threat from Chinese deals, privately they were expressing increasing concern. "There's a sense that it's going to be impossible to compete with them. It's becoming increasingly difficult to win any open tender because the prices are just incredible," she said.

Weafer said the extended period of high oil prices had changed the entire dynamic between consumer and producer countries, as producers, buoyed by windfall revenues, become increasingly independent. "The United States has finally woken up to the fact that it is not going to be able to secure energy supplies based on political relationships," he said. "The Chinese have already changed the rules of the game with their checkbooks."

Other analysts disagreed, however.

Kazakhstan is unlikely to antagonize Russia by moving fast on a new gas pipeline westward, while the low quality of gas in Kazakh fields would also make any such project extremely costly, said Valery Nesterov, oil and gas analyst at Troika Dialog. Proposals to hook Turkmen gas up to a Kazakh pipeline westward would likely serve to push up prices for Russia rather than win the United States and Europe easier access to the gas, he said.

Another big problem for any direct Kazakh route to the West is that it would have to go under the Caspian Sea, the demarcation of which has yet to be agreed on by its littoral states, including Iran, Baran said. "Iran would be a threat to any pipeline project," she said.

With obstacles like these, any discussion of a Kazakh pipeline by Cheney would just be "the start of a long process," she said.