Expect More Oil Contract Demands on the Caspian

The notice given by Kazakhstan that it may seek a penalty from the developers of the much-delayed super-giant Kashagan oilfield is another sign of push-back by the former Soviet petro-states. The upshot - the likelihood is that there will be renegotiations of contractual terms on both sides of the Caspian in the coming several years. Among the main targets will be BP.

In fact, ENI-operated Kashagan deserves such treatment from Kazakhstan. Its 1997 contract, negotiated by James Giffen, includes a specific penalty clause that is triggered if first oil is not produced according to a specific timetable. That year for first oil was 2005, meaning the companies are already two years late with the probability that the first shipments won't come before 2011 or even 2012.

The indication is that Kazakhstan will leverage the missed deadline -- plus the current hostile oil environment to the north in Russia -- into a higher profit share.

This is just the beginning. After the oil is flowing from Kashagan, Kazakhstan is likely to push for more concessions. Kazakhstan's Tengiz oilfield, in which Chevron and Exxon Mobil hold 75 percent of the shares, is also likely to be under such pressure from the government.

Across the sea in Azerbaijan, the BP-operated offshore fields are also likely to face demands for contractual concessions in the coming years. Neither the leaders of Azerbaijan nor Kazakhstan are blind to the squeeze put on the multinational oil companies in Russia, and to one degree or another will follow suit.

What If Rakhat Testifies?

Nazarbayev; Dariga and Rakhat in more powerful days

The word is that Rakhat Aliyev, Kazakh President Nazarbayev's former son-in-law, has met with U.S. Justice Department lawyers in Vienna. The subject: his possible testimony in the upcoming foreign bribery trial of James Giffen. While Aliyev was definitely in a position to know the degree to which Giffen did or did not serve as a cash conduit for Nazarbayev while he served as his main oil adviser, it is unclear he has the credibility to withstand cross examination.

It has been two months since Aliyev's fall from grace. In that time, he has seemingly lost everything -- his perch in Kazakhstan, his royal link, and even his retinue, most of whom have deserted since Nazarbayev ordered him charged with racketeering, and apparently led his daughter, Dariga, to divorce him.

What Aliyev does have left, however, is his tightly held knowledge of the inside workings of the Nazarbayev family. Some of the family finances was detailed in the Justice Department's indictment of Giffen, in which Nazarbayev is listed as an unindicted co-conspirator. But Aliyev could presumably say with some definitiveness just what role Giffen did or did not play with his former father-in-law. That is why U.S. prosecutors sought to see him in his exile in Vienna.

The question, if such testimony went forward, is whether Aliyev could overcome the natural presumption that he is settling scores.

As yet, no date is set for the trial to begin. Another pre-trial hearing is scheduled in New York this Friday.

Harry Potter in Kazakhstan

When the final volume in the Harry Potter series went on sale last Saturday, an 18-year-old college student named Sabila Baimukhamedova was one of the first to snag a copy in Almaty, the Kazakh business capital. The price at the Turkish grocery Ramstore -- a whopping $56 in tenge, compared with $17.99 charged by Amazon.



Her mother, Dilda, bought it for her. "It was ridiculously expensive, but I drove my mom crazy for about two weeks before it came out, and she knows that I'm a huge Harry Potter fan," Sabila says. The actor who plays Harry in the movies, Daniel Radcliffe, says that Sabila is not his only Kazakh fan.

Sabila, an engineering student who will start at Coopers Union in New York in the Fall, says she finished Harry Potter and the Deathly Hallows in seven hours, reading all night.

Russia For Now Holds Its Trump Card

President Putin's reprisal today was measured. (Video) He shrewdly held out his ultimate card -- energy -- as ammunition to be used as he believes the need arises.

For his domestic audience, Putin could have done no less than the expulsion of an equal number of British diplomats, and possibly also the imposition of visa restrictions that was announced. The moratorium on terror cooperation can be taken with a grain of salt -- the two sides share concern on the important grounds, and joint efforts will continue.

As noted in a comment to the previous post, Russia and Britain to a degree are tied at the waist financially -- BP for instance desperately needs continued good relations with Moscow for its current and future production and reserve base. But Russian business relies on London's capital markets as well.

Concern about Russia's future attitude toward British business is well-founded. That remains the likeliest ground for Putin's long-term reaction to what, if one listens to his remarks, he seems to regard as an intolerable challenge to Russia's image and its law. BP's investments remain Britain's soft underbelly.

How Moscow Will Respond to Britain's Expulsion of Russian Diplomats

Britain's soft spot in Russia is BP. Watch for Russia's response to today's expulsion announcement not only in a predictable tit-for-tat removal of British diplomats from Moscow, but in a tougher line toward the British oil giant.

In the past, Britain's Russia policy has been led by the requirements of BP, its largest publicly held company. And BP has walked softly with Moscow from the time of the Soviet collapse. In the 1990s, BP opposed the U.S.-backed Baku-Ceyhan oil pipeline, until it decided that its U.S. interests -- its wish to purchase Arco -- trumped its plans for the former Soviet Union. The British government walked lock-step with BP in the anti-, then abruptly pro-pipeline policies.

In the past few months, BP, like some of the other multinational oil companies, has buckled under to Moscow; they have had to because of the much more challenging global exploration environment. So it is that BP has provided cover to a Russian "auction" of a Yukos property by making a "bid" on it; and it has surrendered its rights to the Kovykta natural gas field.

In expelling four Russian diplomats, Britain has taken a principled stand on the Litvinenko murder case. A component of Moscow's calibrations is likely to take note that a quarter of the global production of Britain's marquee company -- BP -- comes from Russia. That is where President Putin is likely to pressure Britain.

Europe's struggle for energy independence from Russia

An excellent new piece in the Economist describes Europe's yet-again-divided and weak approach toward energy supplies. The first two graphs:

WESTERN failures in recent energy tussles with Russia have been persistent and spectacular. Key allies have drifted off into private deals. The big picture has been ignored. The gloomy drift accelerated this year with the signing of a three-cornered deal between Russia, Kazakhstan and Turkmenistan to pump the Caspian’s huge gas reserves north through Russia. Now Uzbekistan, according to Russia’s Vladimir Putin, is going to join too.

Europe’s only chance of getting gas along pipelines that Russia doesn’t control is a project called Nabucco. Its aim is to connect the gas riches of the Caspian and the Middle East to Europe via the Caucasus and Turkey. Read rest of article

From Steve: In addition to a hilarious account of State Department energy authority Matt Bryza in action, the piece points up how Russia yet again has triumphed by relying on Europe's propensity for going multiple ways at once. It also highlights the persistently short-sighted attitude of Kazakhstan and Turkmenistan, which so far have refused to concretely back an independent export pipeline for their lucrative natural gas reserves and so are subject to Russia's whims on price. The Economist piece is by Edward Lucas

Russia Rebuffed in Latest End-Run Attempt Around U.S.-backed Pipeline

Reports are that Chevron and Exxon Mobil have held steady against Russian pressure to back an oil pipeline spur meant to diminish U.S. influence in the region.

The companies and Russia have spatted over oil exports for more than a decade. But the supply of crude out of the former Soviet Union has assumed new importance, with projected oil supplies tightening in the coming few years.

Last week, Russia’s pipeline monopoly, Transneft, demanded, among other financial incentives, an enormous increase in tariffs it is paid for crude shipped through a dedicated pipeline carrying oil from Kazakhstan's Tengiz pipeline. The hike for the line, called the Caspian Pipeline Consortium, or CPC, would be to $5.10 a barrel, up from the current $3.30 a barrel.

The backdrop is that Moscow also wants the two companies effectively to finance the proposed Burgas-Alexandroupolis oil spur. The spur would carry oil from Russia, across the Black Sea, and on to the Mediterranean through Bulgarian and Greece. In exchange, Transneft would step aside and allow Chevron, Exxon and their partners to approximately double CPC's size to 1.3 million barrels a day.

Moscow wants the Burgas-Alexandroupolis line as competition to the U.S. backed Baku-Ceyhan pipeline, the first major export line out of the Caspian Sea that skirts Russia entirely.

The companies rebuffed the CPC tariff increase. But in order to realize their original financial model, the companies still must expand Tengiz production to at least 700,000 barrels a day, and they have hoped to export as much as 1 million barrels a day and more. So far, their Plan B is far more expensive than CPC -- to barge a lot of crude across the Caspian to the Baku-Ceyhan line.

Hamas Says Alan Johnston freed

Both the Associated Press and Reuters reported that kidnapped BBC reporter Alan Johnston has been released after nearly four months in captivity in Gaza. The release was announced by the Islamic militant group's TV and confirmed in a text message from Hamas to The AP. Hamas said Johnston was in the custody of its military wing.

From Steve: As of 7 p.m. Eastern Time, there has been no sign of Alan, who was previously the BBC's Central Asia correspondent. But the indicators are positive that he is out.

Midnight update: Alan is out.

Bush to Urge Putin to Aid in Pressuring Iran

KENNEBUNKPORT, Me., June 30 — President Bush, seeking to change the tone of an increasingly caustic, fraught relationship with President Vladimir V. Putin of Russia, will urge him on Sunday to support a major escalation of pressure on Iran, administration officials said.

Read rest of story

From Steve: Russia's strongest suit in the post-Soviet period has been its embracement of figures and countries estranged from the major Western countries with which it seeks leverage. At the height of his powers, contrary to Bush's domestic and international stature, Putin will go along with Bush only if he perceives a genuine nuclear threat to Russia from the south.