The Kazakhs Want Control

An article today in The Wall Street Journal advances the ball toward discovering Kazakhstan's wish list if it's to lift the suspension of work at the supergiant Kashagan oilfield. Its apparent aim: to take over.

It’s been evident for some time that Kazakhstan had high demands in mind of the Italian-led developers of Kashagan, particularly after the government halted development of the field last week. But it turns out that far larger and earlier payment of oil profit isn’t the only issue on Kazakhstan's list.

Greg White, my former colleague at the Journal, rang up the Kazakhs’ deputy finance minister, Daulet Ergozhin, who said that the country has its complaints about how Eni, the Italian oil major, is operating the field.

Here is the key paragraph from the piece: Kazakhstan isn't insisting that state oil company KazMunaiGaz become the operator of Kashagan, he noted, but said the government would "look positively" on a proposal to put a Kazakh company in control or jointly operate the project. Read story

Steve's comment: The Kazakhs are interested in operatorship out of pride and prestige, not to mention lucrative contracts for the actual work.

There is a noticeable pattern in how such assertiveness takes place. In Russia, Moscow acted after Shell got far over budget on its Sakhalin II project, and a bit presumptuous that the Russians would simply swallow it. The Russians used that wedge to force concessions from Total and BP.

Similarly, the Kazakhs moved after warning signs about Eni's competence -- a series of huge cost overruns, plus at least a seven-year postponement in first oil. Because of this, the demands of the Kashagan consortium do not say anything negative in my view about the Kazakhs -- the foreigners probably deserved it a long time ago. But they do suggest that similar action will take place in the much better-run supergiant Tengiz and Karachaganak fields.

There will be high tension during the designated 60-day talking period over Kashagan, because the foreigners won't voluntarily agree to cede control of development when they are putting in all the money. If they are forced to, one can imagine one or more of the companies heading for the exits.

One wonders separately about the future of President Nazarbayev's second son-in-law, Timur Kulibayev, whom he has dismissed from his executive position with the state investment fund.

Kulibayev, a billionaire who as Nazarbayev's representative in the oil industry dominates the sphere in Kazakhstan, will definitely be re-appointed to an important government post; Nazarbayev needs him.

One wonders whether that new position will be linked with the crucial operatorship of Kashagan.

Fencing Out Russia

The Financial Times has an interesting piece today on a developing European Union strategy that's explicitly designed to prevent outside countries from buying up energy properties for political purposes. The story is based on a leak of internal EU working papers. The upshot: the disclosure takes the vagueness out of Western Europe's attitude toward Russian acquisition of its pipelines and refineries -- the writers of the papers are clearly worried that Europe will be treated like some former Soviet states.

Here are the two key sentences from the FT piece: An internal Commission document about the implications of unbundling, seen by FT Deutschland, the Financial Times' sister paper, says the EU could be "vulnerable to a strategy of third countries to dominate the EU markets not only in terms of supply but also by acquiring the networks". The document explicitly warns about situations "where investment is driven by other motives than economic ones". Read story

Steve's comment: Of the EU states, Poland has most openly discussed the issue of state- owned and private Russian companies buying parts of Europe's energy infrastructure. It has said in so many words that it is not going to risk its independence after the decades it took to take it back from Moscow.

The likelihood is that broader support has formed within Europe to prevent its energy assets from being swallowed up by wallet-thick petro-states like Russia and also Saudi Arabia.

Russia bristles at such attitudes, calling them hypocritical. And it is true that some of the criticism from Europe and the U.S. has been self-serving and at times hysterical.

Yet Moscow is short-sighted if it believes that no one has taken account of its behavior in Central Asia and the Caucasus.

Since the 1991 Soviet breakup, oil and natural gas export pipelines that pass through Russia have been routinely blocked or bottled up to use by Kazakhstan and Turkmenistan. A needed expansion of the export pipeline from Kazakhstan's supergiant Tengiz oilfield has been blocked at least partly for Russian geopolitical reasons (in order to counterbalance the U.S.-backed Baku-Ceyhan pipeline by forcing Chevron to help build a rival pipeline through Bulgaria and Greece to the Mediterranean). And Georgia has regularly suffered oddly timed cutoffs of its natural gas supply.

In part there are financial reasons for these acts; but the over-arching explanation is that Russia has a history of bullying whom it can, and attempting to keep its former colonies under its thumb.

The working papers no doubt will go through revisions. But there is no doubt that Europe will adopt some sort of legal mechanism to make it harder for outside countries to buy its energy assets.

How stringent that mechanism is will depend on how convincing Russia is that its treatment of its former Soviet colonies has been an aberration.

What Plane?

There has been silence from both Tbilisi and Moscow in the days since Georgia claimed it shot down a Russian military aircraft. The upshot: The two disputatious neighbors have taken the sensible route away from confrontation, which is -- pretend nothing happened.

Steve's comment: Last weekend, it looked like tension could rise considerably between Georgia and Russia after Georgia claimed it had shot at the jet on Aug. 23. Georgia said it saw the plane go down and then a fire erupt in an isolated part of the forest, possibly in Georgia proper, and possibly in the breakaway Black Sea region of Abkhazia.

There was concern because it is one thing to claim that Russia has violated one's airspace -- which Georgia has done with some regularity -- and quite another to shoot down that violator.

There were the usual Russian denials and Georgian vows to prove what they said. Since then, however, both sides have held fire.

The only one talking a bit has been Abkhazia, which says it, too, saw something in the sky and a fire. The verdict? Space debris, say the Abkhaz.

Good enough.

The Dealmaking General

Former Pakistan Prime Minister Benazir Bhutto has granted a slew of media interviews claiming that increasingly isolated General Musharraf has agreed to resign from the military in order to run again as president next month. The upshot: With the media blast, Bhutto is trying to force Musharraf to honor the pact she says they struck. But if he has nodded to such a deal, and abides by it, he has opened the door to a fresh catfight among Pakistan’s vile senior political elite.

Here is the first paragraph of the FT story: General Pervez Musharraf has reached an agreement with exiled opposition leader Benazir Bhutto under which he will resign as military chief in exchange for her party’s support for his re-election as president. Read story

Steve's comment: According to the news accounts, Bhutto, who was twice prime minister before being forced to leave the country following Musharraf's 1999 coup, squeezed several key concessions from Musharraf: The constitution would be changed so she could run for prime minister again; corruption charges would be dropped against her and some of her political followers; and he would step down by the end of the year as chief of the Army.

According to Bhutto, the idea is that Musharraf would then be free to run again for a five-year term for elections expected next month.

No one is defending Musharraf from criticism -- he has plenty to apologize for in terms of his performance in office. But his dealmaking is cynical to the extreme in his effort to retain political power.

Quite apart from Bhutto's competence, the problem with his horse-trading is that the Supreme Court has agreed to allow the country's other exiled former two-time prime minister, Nawaz Sharif, to return home.

And Musharraf apparently hasn't included Sharif in the deal. So expect more political turmoil among politicians with absolutely no respect for the person in office -- unless it happens to be they themselves. Here is Zahid Hussain's take on the topic.

The Noise in the Royal House of Kazakhstan

The circus-like atmosphere continues in the first family of Kazakhstan, as President Nazarbayev has now publicly fired his billionaire second son-in-law. The upshot: there is too much noise emanating from the petro-country's royal house; something fundamental is amiss.

The fresh news is that Nazarbayev has dismissed oil tycoon Timur Kulibayev from his executive post in the country's rainy-day investment fund, the repository of much of the state's wealth. The same day, authorities said they found arms and explosives at the home of prominent surgeon Mukhtar Aliyev, the father of Nazarbayev's former first son-in-law, Rakhat Aliyev.

The developments come as the government continues to try to extradite Aliyev back to Kazakhstan from Europe on charges involving the alleged torture and disappearance of two executives at his former bank.

In addition, the country has just suspended a foreign oil consortium's development of one of the world's largest oilfields. Kulibayev, as de facto head of the country's oil industry, had to have a leading role in that decision.

Here is the first paragraph of the Reuters story: Kazakh President Nursultan Nazarbayev said on Tuesday he had sacked his influential son-in-law from a senior post managing strategic assets, in an apparent bid by the long-serving leader to further centralise power. Read Reuters story. And here is AP's account

Steve's comment: No one seemed surprised in May when son-in-law Rakhat Aliyev self-destructed. After years of public and private accusations of thuggery against fellow businessmen, Aliyev was charged with racketeering and kidnapping in connection with the disappearance of two executives of Nurbank, controlled by Aliyev and Nazarbayev's oldest daughter, Dariga. Nazarbayev fired him as ambassador to Austria, and seemed to be behindhis daughter's decision to serve him with divorce papers.

But Monday's dismissal of Kulibayev as deputy chairman of the investment fund, called Samruk, is different. Unlike the ostentatiously ambitious Aliyev, Kulibayev has always maintained a studiously low profile. In addition to being the country's most powerful oilman, he is thought to have served as the royal house's trusted money manager, controlling family investments in oil, banking, shipping and other assets.

Nazarbayev has chalked up a record of chopping off the heads of high-ranking underlings in order to shuffle power and keep it from accumulating anywhere but in his own hands, and there is the possibility that he is simply showing who is boss. Perhaps he is not happy with how the suspension of work at the Kashagan field was handled.

If so, one wonders if the president is losing his touch after the personal embarrassment over the pursuit of Aliyev, along with the international attention to the news at Kashagan. Why add tabloid-quality fuel to the fire at this time?

Kulibayev is no mere window dressing in Nazarbayev's power base, but a basic member of his team. As to the arms allegedly found at the home of Aliyev's father, the Interior Ministry announcement strains credulity. A well-known surgeon, Mukhtar Aliyev is a respected member of the Kazakhstan elite going back long before his son married into the first family.

So what is going on within the palace? In addition to his reputation as a deft balancer of power, Nazarbayev has a reputation for vindictiveness if pushed too far. It appears that more than just Rakhat Aliyev has done so.

Politkovskaya: Arrests and Apprehension

The Kremlin used the occasion of a planned Moscow commemoration for slain journalist Anna Politkovskaya to announce the arrest of ten suspects. All are accused of a role in the hit team – which included former and current members of the Interior Ministry and an officer in the FSB, the successor agency to the KGB – and none of actually ordering last October’s murder. A memorial ceremony is planned in Moscow on Friday to mark her birthday. She would have turned 49 Thursday.

Interfax quoted Politkovskaya’s boss at Novaya Gazeta, Dmitry Muratov, as finding the results of the investigation "very convincing and professional".

But, while Politkovskaya’s colleagues expressed confidence in the arrests, some also saw the makings of a political dimension to the news, for instance that the government might accuse Putin's political enemy, oligarch Boris Berezovsky, of being the mastermind of the murder. Here is the piece by Politkovskaya's newspaper, Novaya Gazeta, on today's events (it's the newspaper's own rough English translation).

Federal prosecutor Yuri Chaika fed that apprehension by saying that the murder was planned abroad. He also said that Politkovskaya knew the person who ordered her killing, and had met with him. She had met with Berezovsky several times in London.

Here are three reports:

Russia Today
Regnum.ru
bbc

In a televised meeting with President Putin and a followup news conference, Chaika outlined the murder, which occurred as she walked from the elevator of her apartment building. He said it was “carefully planned,” with two surveillance groups watching Politkovskaya. Evidence previously released, based on video from a surveillance camera near her apartment, showed a lone figure – apparently the trigger man – entering the apartment building and then walking out at about the time of the murder.

Chaika identified the leader of the hit team as the ethnic Chechen head of a Moscow crime group specializing in contract murder. Without providing the man’s name, he said the group had organized murders in Russia, Ukraine and Latvia. He said the same hit team may have been involved in the 2004 murder of Forbes Russia editor Paul Klebnikov and the 2006 killing of central bank deputy chief Andrei Kozlov.

An FSB official identified the FSB suspect as Lt. Col. Pavel Ryuguzov. He is the only suspect whose name was released. The arrests were made from Aug. 15 through last Thursday.

The Biggest New (Suspended) Oilfield in the World

Kazakhstan eliminated any uncertainty today about where foreign oil companies stand in the country: on the defensive.

After weeks of salvos regarding work on the Kashagan oil field, Kazakhstan forced a three-month halt to development of the supergiant. The field is the largest found anywhere on the planet in three decades. But Ecology Minister Nurlan Iskakov says it has unresolved environmental problems. As Reuters stated: The dispute is reminiscent of Russia's row with Royal Dutch Shell, which ended up with the multinational oil firm losing control of the giant Sakhalin-2 oil project to Russia's Gazprom.

Here is Reuters' quote from Iskakov: “In 2003-2005 we specified a number of offshore sites and we put forward our demands. As of today, these ecological requirements have not been fulfilled. That's why we decided to carry out such an unprecedented step. I think you will hear in the nearest future what will happen next." Read story

Steve's comment: It's been clear that Kazakhstan has tough demands in store for the foreign consortium developing Kashagan. The companies, led by Italy's Eni, look to be about six or seven years behind schedule in producing first oil, plus they are far over budget.

That alone put Kazakhstan in the driver's seat in terms of changing the 1997 contract negotiated on Kazakhstan's behalf by the country's then-oil adviser James Giffen. But other objective factors have now also conspired in Kazakhstan's favor: the world crude oil supply shortage, expected to last at least through 2012; the shortage of fresh oil reserves for the major oil companies to exploit; and Russia's new, tough approach to the oil companies.

The last item on the list -- Russia -- may be the most influential at the moment. Like Russia, Kazakhstan seems to have taken off the gloves.

Before today's escalation of combat, Eni CEO Paolo Scaroni publicly conceded that the contract would have to change. In another soothing move, the company has arranged for Italian Prime Minister Romano Prodi to visit Kazakhstan on Eni's behalf.

But the field suspension shows that Kazakhstan isn't ready to be soothed.

So what does Kazakhstan want? For starters, a lot more money, and much earlier than the companies had planned.

Like most such deals, the Kashagan contract calls for most of the expenses to be paid out of initial oil production before the partners and government begin to take their big profit. But now look for the companies to be forced to cough up larger profit from virtually the first oil to come out of the ground, probably around 2012.

Another reason why the Kazakhs will play especially tough is that whatever ultimately happens will be a model for a probable follow-on challenge to the contracts governing production at the country's other two supergiants -- Tengiz and Karachaganak.

Out of Jail, and Leaving Kazakhstan

A Kazakhstan appeals court has upheld the acquittal of American businessman Mark Seidenfeld, who is now free to leave the country after a year and a half in Russian and Kazakhstan jails.

In an email exchange, Seidenfeld said judges rejected the appeal by his former telecoms partner, Arna Inc., last week. He says he’s leaving the country as soon as possible. “Currently waiting on paperwork to get out of here,” Seidenfeld writes.

Seidenfeld was imprisoned in December 2005 in Russia on a warrant from Kazakhstan after getting into a business dispute with his telecoms partner, Murat Zhunussov, who claimed that the American stole $40,000 from the telecoms company, Arna Inc.

In April, Seidenfeld was shifted to Kazakhstan on a prison train for trial, and last month an Almaty court acquitted him of all charges, saying the money was accounted for and reprimanding law enforcement agencies for bringing the prosecution. Here is Arna’s statement (in Russian) criticizing the acquittal. Basically, Arna asserted that the court ignored the facts, a claim the appeals judges rejected.

While the ruling is a relief for Seidenfeld, the case as a whole may not be a badge of honor for the country. It appears that Zhunussov managed to get the charges filed because of bad blood between himself and Seidenfeld. The fair part of the process began after U.S. political leaders including Senate majority leader Harry Reid lobbied Kazakh officials on Seidenfeld’s behalf. In a letter, Congresswoman Shelley Berkley of Nevada called the charges “extortion pure and simple.” They appear to have gotten the attention of Kazakhstan leaders, who stepped in to make sure the trial was not tampered with.

Similar cases have happened in the past in Kazakhstan and elsewhere in the former Soviet Union. The courts are susceptible to manipulation by businessmen and others wishing to have their way with a given deal, and their less-savvy partners can be left empty handed or, in Seidenfeld's more dramatic case, with a long stint in jail.

The General's Bungled Opportunity in Pakistan

Pakistan seems headed for even worse trouble than seemed possible last week. Now both of its discredited former prime ministers seem poised to return from exile. The upshot: This perpetually strategic country is again unable to break its cycle of corruption and politics-of-entitlement.


Here is the first paragraph of The AP story: The party of exiled former Prime Minister Nawaz Sharif ruled out reconciliation with Pakistan's embattled military leader after a court said he can return home before upcoming elections. Read rest of story

Steve's comment: Sharif and his constant rival, Benazir Bhutto, both seem to see blood in the water, and a chance to grab back the power they lost when Gen. Musharraf seized control in 1999. Both are enjoying portraying the democrat.

Of course, neither is anything of the kind. Both represent crooked politics, crooked business, bribes and madness for power. That their respective parties have failed to grow up and find someone new after eight years in the wilderness demonstrates their own bankruptness.

Musharraf is ultimately at fault. Eight years after promising his country a new way, he failed to cultivate any civilian politician to replace him in the event of just the situation he now faces. Because of that, he, too, resembles the same old generals of Pakistan's past, who seized power and could imagine no one else sitting in their seat.

Without fail, Pakistan with regularity has found itself at the vortex of world events since its birth in 1947. It seems genetically strategic. So its politics cannot be ignored. As to what those politics will ultimately be this time, all bets are off.

One thing seems sure. Musharraf appears to be hanging on to power by a slender reed. Zahid Hussain of the Times of London has this typically incisive analysis of Musharraf's predicament.

Did Georgia Shoot Down A Russian Plane?

Georgia says there is a fire in a thick, isolated section of forest in the north of the country. That's relevant because the country's interior minister also said a few hours ago that the Georgian military fired on an aircraft that it believed to be Russian. A search may start tomorrow to determine the source of the fire. So far Russia says it is missing no planes. The upshot: If it is a Russian military aircraft, there will probably be a significant escalation of tensions in the already much-strained relationship between the two neighbors.

Here is the top of the Reuter's story: Georgian forces fired at a plane they believed was Russian after it violated the Caucasus republic's airspace on Wednesday, a senior interior ministry official said. The incident marks an intensification of a row between the two countries in which Georgia has accused Russian planes of violating its border and of dropping a missile near Tbilisi. Russia called the Georgian statement a provocation. It has not reported any plane missing, and when asked specifically about the Georgian statement an official denied Russian aircraft had violated Georgian airspace. Rest of story.

Steve's comment: Russia and Georgia have had a tense relationship since the Soviet breakup. Under Eduard Shevardnadze, Georgia was dismembered when Russia backed separatists in the Black Sea region of Abkhazia, which used Moscow's sophisticated military to successfully break away.

More recently, Georgia has accused Moscow of a few violations of Georgian air space, including the firing of a missile. Western inspectors traveled to Georgia and backed up its claim about the missile.

Russia has been enraged by the charge, and the western position toward it. But if Georgia actually shot down one of Russia's planes, that could change the complexion of the tension. Russia's Putin stands almost entirely on a nationalistic platform of toughness bordering on belligerence toward the outside world. If it is indeed what the Georgians suggest, that will color his response.

Bonus: Russian Cutoff and Lord Browne

Two news items of note:

Russian oil cutoff in Germany

Over the last month, Russian oil supplies to Germany have been curtailed in an apparent dispute with Lukoil. The cut of about 50,000 barrels a day, in figures compiled by Reuters, may be restored in the coming days because of a compromise. The supply disruption does not appear on first glance to be linked to the Russian government. But it does come after Russia came under European criticism for cutting supplies to Ukraine and Belarus over the last couple of years. Read Reuters story

Back At Work: John Browne

Officially John Browne is going to work for a seven-year-old private equity company. But while doing so he will work with the repository of the corporate world’s marquee names of the past – the powerful Carlyle Group. He is joining to run the new London office of Riverstone Holdings, which is a partnership with Carlyle in energy investments, Carlyle announced on its Web site.

The 59-year-old Browne brought BP into some of the biggest deals in the former Soviet Union – offshore Kazakhstan and Azerbaijan, operatorship of the Baku-Ceyhan Pipeline, and the TNK-BP partnership in Russia.

For years, Browne was Britain’s most famous businessman, and was even knighted as Lord of Madingley. But he withstood unaccustomed tabloid treatment in May when he resigned from BP after a scandal involving a former lover.

While he will be Riverside’s biggest name, he is hardly so in the Carlyle crowd. Former President George H.W. Bush and former British Prime Minister John Major were advisers there. Its current roster includes Richard Darman, former director of the Office of Management and Budget under Bush Sr.; Mack McLarty, former chief of staff to Bill Clinton and president of Kissinger McLarty Associates; Karl Otto Pohl, former president of Germany’s Bundesbank; Arthur Levitt, former head of the SEC; and Norman Pearlstine, who formerly edited both Time and The Wall Street Journal. The Bloomberg story

Eight-Ball on the Caspian

Sometimes it's instructive in Caspian pipeline politics to recall the simple game of eight ball, in which players use any means to dispose of all their billiards for a chance at finally firing in the solid black ball. The first to do so wins. The upshot: it does not matter if Central Asia's oil and natural gas flows to China; the objective -- the eight ball -- is for the region to obtain as much financial, hence political, independence as possible.

In the last couple of weeks, the so-called Shanghai group of nations (Central Asia plus Russia and China) attracted much attention with a military exercise and an ostensible final agreement to complete energy pipelines from Kazakhstan and Turkmenistan to China.

Putting aside the military issue for now, the idea is to complete an oil pipeline from Kazakhstan to China, and build a natural gas line from Turkmenistan to the thirsty giant to the east. The former will definitely be built; the notion of such a Turkmen line has made the rounds for a long time, and we will have to wait until construction is well under way to be sure of its credibility this time. Henry Meyer's story on Bloomberg

Is this bad news for the East-West strategy promoted by Washington? Only for those fixated on the details and not the outcome. As long as the region obtains multiple export routes for its oil and natural gas, thus shedding its reliance on the monopolistic power enjoyed by Russia with its Soviet-era pipeline route, it is keeping a clear-eyed vision of the ultimate aim.

It is true that the eastern Caspian so far looks to be compromising a western component to that strategy -- current plans for a mere shipping link, and not a cross-sea pipeline, from Kazakhstan and Turkmenistan into the Baku-Turkey pipeline network look flimsy and not serious.

But the China link is wise. Here is a UPI story on China's economic linkage into the region. Policy strategists in the West ought to be thrilled.

Cyberattack, Schmyberattack

Wired magazine's September issue has an interesting post-mortem on the May cyberattack on Estonia's internet system. But take a look at the Web page, which includes a critique of the hard-copy version. The upshot: the incapacitating of Estonia's internet system appears to have been by cyber-savvy nationalistic Russians (perhaps inspired by, but not necessarily led by the Kremlin), but could have been a lot worse.

Here is the key paragraph in Kevin Poulsen's critique: There's no doubt that the May packet floods were far more disruptive to tiny Estonia than similar attacks have been to the U.S. and others. But in some ways, Estonia's attacks were less sophisticated than previous "cyberwars" -- like those between Israeli and Palestinian hackers, India and Pakistan, China and the U.S. Read story

Steve's comment: The main issue in the "botnet" attack, as they call it, was not whether a more intrepid hacker could not have done worse, or, as Poulsen says, whether a truly dangerous cyberattack could even be mounted. What made the incident notable was the connect of events -- needle Russia's nationalist rib, and watch out.

Putin has hopped up a segment of youth in Russia that is super-sensitive to any incitement of their patriotic sensitivities. That plays into his hands as he seeks populist support for his campaign for international respect, as he measures it. But patriotism can cut many ways, and as we've seen in other events of the last few years can lead to a multitude of errors.

That China, Israel and so on can and have done worse is besides the point. The issue is the reflection of the Kremlin's hunt for a variety of theaters in which to make itself felt.

Western Literati on the Caspian

Humphrey Hawksley, my BBC colleague during the Philippines days, has a new novel keyed on a break-in in the Kazakhstan Embassy in Washington. "The History Book," Humphrey's seventh novel, is the latest in a fistful of works from Western novelists and filmmakers set in the Caspian region.

Borat, of course, has attracted the most attention, but all have been big. Before that, there was "Syriana," in which a James Giffen character and the Tengiz oilfield were principal to the script, and, in Baku, the James Bond film, "The World is Not Enough." There also was, "Nomad."

No doubt readers will cite others. But one wonders when something of the caliber of "Ali and Nino" will be produced from a setting on the Caspian or the Slavic countries.

The Russian Solution

Taking the cue from Russia's triumphant taming of Western oil companies, Kazakhstan says the partners in the super-giant Kashagan oilfield have violated environmental laws, and could lose their license. The upshot: Kazakhstan has a big profit demand in mind.

Here is the first paragraph of today's Reuters account: Kazakhstan threatened on Tuesday to revoke an Eni-led consortium's permit to exploit the giant offshore Kashagan oilfield due to environmental law violations. Read story

Steve's comment: The 1997 contract for Kashagan, negotiated by James Giffen, was regarded at the time as extremely tough on the oil companies, with an upside clause for instance that makes the Kazakh take higher as oil prices rise.

The terms are much stiffer toward the companies for instance than those at Kazakhstan's Tengiz field, whose contract includes no upside clause (look for Kazakhstan to demand one from Chevron and Exxon Mobil, and for them to agree).

Kazakhstan's greater assertiveness precedes the activism in Russia, in which Moscow has successfully demanded concessions from Shell, Total and BP. But the Russian strategy of beginning negotiations with accusations of environmental violations (bound to make any Western company nervous) has changed the underlying equation: Western oil companies are no longer in the driver's seat, regardless of their superior technology; if they want to continue to operate in the former Soviet Union -- in Russia, Kazakhstan and probably Azerbaijan -- they now have to agree to better terms for the countries.

ENI's CEO, Paolo Scaroni, whose company operates Kashagan, has put aside the game of charades and effectively conceded that Kazakhstan will get a better money deal.

But today's threat amounts to bringing out the heavy guns. The Caspian Seal is one bit of potent ammunition -- though previous reports blame the deaths of hundreds of the seals on a parasite or some other culprit rather than the Kashagan operation, the Kazakhs now say they want the issue studied again.

That Kazakhstan followed Scaroni's concession with such a threat shows that it probably plans to demand somewhat more than he and his partners expected.

Why Eni is Russia's and Kazakhstan's Best Friend

Over the last several years, ENI has grown from a mom-and-pop Italian would-be into one of the largest oil majors in the world. It is the most successful western oil company in both Russia and Kazakhstan, winning an exclusive perch for example as Gazprom's partner in natural gasfield development in Russia.

An example of why that is the case came over the weekend in a press scrum with ENI CEO Paolo Scaroni. ENI faces terrible trouble in Kazakhstan because it is going to be at least five years -- and probably seven years or more -- late in producing first oil at the Kashagan oilfield. Kashagan is the biggest oil find on the planet in three decades, and could easily produce 2 million barrels of oil a day (the partners currently say their production sights are set lower, but if an independent export channel opens up, look for the higher figure).

Talks are to start soon in which Kazakhstan is probably going to ask for a higher share of the revenue. The boilerplate oil company response to such temerity is shock and horror before agreeing to some of the demands.

Not Scaroni. Here is what he told reporters over the weekend: "The Kazakh government intends to renegotiate the contract and this does not surprise us. We think it's normal because the contract was born when oil prices were much lower." Read story

Thus Scaroni, in acknowledging validity to Kazakhstan's claims, takes the edge off the talks from the outset. Given ENI's record in the former Soviet Union, look for an amicable outcome. Some of the Italian company's partners want to force it to relinquish its role as operator, but as long as it is on friendly terms with Kazakhstan, it is in the driver's seat.

The Sultanate of Kazakhstan

Kazakhstan's Nursultan Nazarbayev carried off the latest in a remarkable string of election victories. His party won every single seat up for grabs in yesterday's parliamentary election. Read AP story. The upshot: the Caspian states are not republics, but sultanates.

The question is not how it is possible to lose no local election, nor whether the election was free and fair (the Europeans said progress was made toward that goal; the former Soviet observers deemed it another grand election in the state); obviously Nazarbayev's deputies rigged the outcome.

Instead, one might ask why Nazarbayev no longer feels it necessary while he is rigging his elections to throw a few crumbs to the opposition.

The answer is that Nazarbayev has now fully made the political transition from Communist Party boss. For a long time, Nazarbayev regarded himself as the most statesmanlike and worldly of the region's leaders, and hesitated to assume some of the accouterments of power that his neighbors took on. Nazarbayev's lieutenants routinely defended him by comparison, snickering at the late Turkmen leader, Saparmurat Niyazov, who ran a personality cult, they would say.

Nazarbayev has shed any hesitation. The election shows that.

Some of the smart thinking says that Nazarbayev's most recent actions -- his very public family spat, his pursuit of his former son-in-law around Europe, his ejection at least for now of his eldest daughter from politics -- actually show that he is weak and frightened. That is probably wishful thinking.

The West should stop the farce of dispatching election monitors to Central Asia and the Caucasus. For starters, it's old and failed international politics, a 1990s approach to diplomacy that didn't move the countries toward truly competitive elections and stronger institutions.

The other reason is that none of the 'Stans, nor Azerbaijan, is a truly elected government. Whatever label one chooses -- kingdom, sultanate, sheikhdom -- all of them have chosen to be unapologetically self-appointed, and that is the way it is going to be for some time to come.

Russia in the Air

The Central Asia republics joined their two paternalistic neighbors -- Russia and China -- in a military show yesterday. The climax was President Putin's announcement that Russia had resumed long-range flights by its nuclear bombers, and a U.S. announcement that NATO aircraft had scrambled the aircraft. The upshot: The message was not warlike, but it was belligerent. Russia is attempting to demonstrate that its global ambitions are not limited to refineries and pipelines.

The first paragraph of the L.A. Times account: Russian President Vladimir V. Putin on Friday announced reinstatement of the Soviet-era practice of having nuclear bombers routinely make long-distance flights that bring them within striking distance of the United States and its allies. "Today just after midnight, 14 strategic missile aircraft, with support and fuel planes, took off from seven airfields across Russia," Putin said in televised remarks. "Combat duty began in which a total of 20 planes are taking part. From today, combat duty of this kind will be carried out on a regular basis." Read story

Steve's comment: Russia's bomber flight is reminiscent of a similar show that the U.S. put on almost precisely 10 years ago. On Sept. 15, 1997, the U.S. 82d Airborne flew from the U.S. all the way to Kyrgyzstan for a Central Asia military exercise. It was the longest such airborne mission in history, capped by a parachute landing.

It was intended to demonstrate not that the U.S. intended to invade, but that it had the reach and will to get to the region. No one anticipated that, four years later, that would be illustrated in fact with the establishment of a semi-permanent military presence there.

The Russian flight was farce in the sense that Moscow lacks the capability to mount a massive long-range military assault. But in military language, image can be crucial. Russia is saying that it intends over the coming years to take its previously formidible military out of mothballs, and turn it into something of use. That use is surely regional, but given the neighborhood it is something that bears watching.

Here is the first paragraph of a Reuters account of the Shanghai military exercises: CHEBARKUL, Russia - Russia and China staged their biggest joint exercises on Friday but denied this show of military prowess could lead to the formation of a counterweight to NATO. Read story

Naked Bankruptcy in Pakistan

The lead story in The New York Times today is that the Bush administration is pushing Pakistan's Gen. Musharraf to share power with former Prime Minister Benazir Bhutto. A mistake six years in the making, the White House has failed to finesse Musharraf into cultivating concrete political alternatives to himself with whom he could live. The upshot: yet again, Pakistan is faced with a stark choice for leadership: A corrupt feudal, a corrupt businessman, the religious opposition, or a General.

The first paragraph of the NYT piece: The Bush administration, struggling to find a way to keep Gen. Pervez Musharraf in power amid a deepening political crisis in Pakistan, is quietly prodding him to share authority with a longtime rival as a way of broadening his base, according to American and Pakistani officials. Read rest of story

The synthesis of the proposed deal between Musharraf and Bhutto was reported three weeks ago by Zahid Hussain, my friend and the author of the first-rate Frontline Pakistan. According to Zahid, "under the agreement, the military leader would be granted another five-year term as president, while Ms Bhutto, twice prime minister of Pakistan, would be allowed to return in September to contest parliamentary elections, exonerated of corruption charges made against her. However, the talks appeared to have stalled over General Musharraf’s insistence that he should be allowed to retain his dual role as army chief and president." Read story

Steve's comment: Bhutto is famously a Harvard- and Oxford-trained political scientist and orator. Based on that background, in addition to the huge political following she inherited from her father, the West has had huge hopes for what she could bring the country. Yet in her two terms as prime minister during the late 1980s and the 1990s, she proved one thing -- an elite education is not guaranteed to take the arrogance out of a feudal.

In short, Bhutto has dictatorship and corruption in her DNA -- she is a beautiful speaker, and a terrible national leader. That Musharraf is trying to make a deal with her reflects his own political desperation, and his willingness to compromise his principles.

The leader whom Musharraf ousted -- industrialist Nawaz Sharif -- is a deceptively talented power accumulator who as prime minister proved himself to be a corrupt would-be dictator.

The sad thing is that Pakistan is absolutely replete with ultra-talented and brilliant economists, political scientists, lawyers and so on. That Washington is getting behind the power-sharing idea reflects utter bankruptcy. The United States should not be in the business of encouraging the perpetuation of the rule of Pakistan's landowning class.

The Old Game is the New Game in Big Oil

Russell Gold, my former colleague at The Wall Street Journal, has an interesting piece today describing how, as contrarian as it can possibly appear, the Middle East is open for business to the oil majors. The upshot: Russia and the Caspian states have a lot of leverage, but not wholesale negotiating power with the western oil companies, which do have options in terms of replenishing their reserve base.

The first paragraph of Russell's piece: Since the 1970s, major oil companies have been shut out of oil production in much of the Middle East. Now, the doors to foreign investment are opening again, this time for natural gas. Read rest of story

Steve's comment: Russia in particular but also Kazakhstan have been wringing concessions from the western oil companies, which have fewer and fewer places to go around the world for new reserves as national oil companies and ministries take control of their own energy supplies.

Though the big-earning companies will deservedly generate little public sympathy, they have been on the front lines of the combat under way at the intersection of geopolitics and commerce.

But the willingness of countries like Qatar and the UAE to grant equity shares in their natural gas fields to western majors is a poke in the eye of the former Soviet petro-states.

Why after making such a fuss over their economic independence are the Middle Eastern countries willing to go back into an equity relationship with the previously expeled majors? In an e-mail exchange, Russell says the majors are "very wary" of Russia now, along with Venezuela, while in their view the Middle East offers some welcome stability.

Russell goes on: "Most of the natural gas projects open to western investment are technically challenging, including Abu Dhabi's $10 billion sour gas project and BP's work in Oman. The Saudi exploration isn't so much technically challenging, but offers the Saudis an opportunity to cement ties with a number of companies from powerful nations, including Shell (UK/Netherlands), Lukoil (Russia), Sinopec (China), Eni (Italy). Add in the big export refinery projects under consideration and you have ties with Total (France) and ConocoPhillips (the U.S.). That's most of the permanent members of the U.N. Security Council."

Bulletin: Georgia Bombed Itself

Over the weekend, the top layer of Moscow's leadership got behind the response of middle-ranking Russian officials to the charge that Russia fired a missile into Georgian territory last week. It is another in a series of lost opportunities for Russia to bat away attacks on its international credibility, and show that it is a serious player.

Here is the first paragraph and backup matter from the AP story: Russian First Deputy Prime Minister Sergei Ivanov on Saturday accused Georgia of faking the alleged release of a missile from a Russian aircraft into Georgian territory. Ivanov called the allegations a "theatrical show" aimed at preventing a planned meeting of a commission of South Ossetian and Georgian authorities to discuss the decade-long standoff over the region's status. "The authors of this theatrical presentation achieved their main goal — they ruined the meeting," he said. Read rest of story.

Steve's comment: The Ivanov remark retreats to Russia's traditional defensive refuge -- blame the victim (most recently employed in the murder of Alexander Litvinenko, who some Russian officials accused of poisoning himself along with Andrei Lugovoi, the man Britain charged with murder in the case.). In fact, the evidence so far is almost entirely on Georgia's side. Here Vladimir Socor presents the current state of reporting on the missile incident.

Moscow's defense might deserve serious scrutiny, except that, coming in this long line of instant Russian denials, it appears reflexive. One wonders why Ivanov -- one of two presumed heirs apparent to President Putin -- is willing to put his name behind such an untenable position, thus playing entirely to the domestic audience but neglecting the international credibility that he may require down the road.

Georgia: A Mirror of Russia

Yet again Georgia is the target of a mysterious military strike, and yet again Russia is accused of responsibility. The upshot: Georgia continues to be a dramatic example for the West of what Russia's critics mean when they say it is dangerous to be vulnerable to Moscow.

Here is the beginning of a Chris Chivers piece in The New York Times:
MOSCOW, Aug. 8 — The Republic of Georgia presented what it called a mounting body of evidence today that a Russian warplane had entered deep into its airspace and fired an air-to-ground missile. It said it was seeking a special session of the United Nations Security Council to address the incident. Read rest of story

Steve's comment: Europe has wondered aloud for the last several years whether it is risky to become more and more reliant on Russia for its oil and natural gas. The latest news from Georgia is not necessarily, or even likely to be, the future of Europe.

But Russia's denials strain credibility. The trail of such incidents, and denials from Moscow, go back at least 15 years, when Russia backed Abkhazia in its bloody separation from Georgia proper. Russia was, and continues to be, responsible for Abkhazia's uprising. That makes the missile attack a compelling illustration of how Russia behaves with troubling regularity with a country that may be the most vulnerable of all.

Here is a good podcast summary from the Guardian.

Kazakhs Threaten to Expel Italians as Operator

Guy Chazan of The Wall Street Journal has a
scoop today that Kazakhstan is exasperated with progress in developing its Kashagan oilfield, the largest discovery on the planet in more than three decades. The upshot - Italy's ENI may lose the prestigious operatorship of the field.

The first part of Chazan's story:
ASTANA, Kazakhstan -- Ratcheting up the rhetoric over a cost-overrun dispute at one of the world's largest oil fields, the prime minister of Kazakhstan said his government might remove Italy's Eni SpA as operator of the project. "We are very disappointed with the execution of this project," Karim Masimov said in an interview in the Kazakh capital, Astana. "If the operator can't resolve these problems, then we don't exclude their possible replacement." Mr. Masimov's comments signify intensifying brinkmanship ahead of a face-off this week between the government and the Eni-led consortium developing the strategically important Kashagan field. Oil-industry observers and regional insiders have said Kazakh authorities aren't likely to take the extreme step of firing Eni as operator because of the project's complexities. But they will probably demand a bigger and possibly earlier take from revenue.

Steve's comment: It is probably true that Masimov's remarks amount to brinksmanship. But Kazakhstan is not the only party exasperated with ENI's performance -- its partners in the supergiant field are also fed up with what now looks like a seven-year delay in first oil, until 2012.

To get the partnership, ENI had to fend off rivals Exxon Mobil and Total. So, quite apart from the Kazakhs' sentiments, there is reason to expect some change in the operatorship, starting with greater formal involvement of ENI's partners. Expect Exxon Mobil to lead the charge.

Counting the Geopolitical Winnings on the Caspian

John C.K. Daly has an interesting article on the latest geopolitical fallout in pipeline politics on the Caspian.

ANNAPOLIS, Md. (UPI) -- The death of Turkmen leader Saparmurat Niyazov last Dec. 21 set off an unseemly but discreet scramble among a number of nations eager for access to the world's fourth-largest reserves of natural gas. Seven months later, the clear winner for the race to control Turkmenistan's energy is Russia, with China as also-ran, while the United States and other Western nations essentially lost. What happened? The answer might be the Realtors' creed, "location, location, location." Read rest of article

Steve's comment: From the mid-1990s, Washington played a brilliant game on the west side of the Caspian, and a massively inept one on the east. The difference was that in Azerbaijan and Georgia, it had strong, far-sighted partners in Heydar Aliyev and Eduard Shevardnadze. In the east, however, Kazakhstan's Nazarbayev and Turkmenistan's Niyazov never joined the geopolitical combat posed by their Azeri and Georgian neighbors, and maneuvered Washington into an embarrassingly absurd diplomatic exercise.

U.S. officials paraded into Astana and Ashkabad to persuade the Kazakhs and Turkmen to do what was manifestly to their advantage -- build an energy pipeline link independent of Russia, and the Kazakhs and Turkmen delivered platitudes on how, yes, they would cooperate before promptly forgetting they had done so.

The recent Kazakh and Turkmen decision to sign a long-term contract for most of their natural gas to Gazprom -- and to build yet another pipeline north to Russia -- appears to be a nail in the coffin for the eastern half of the grand U.S.-backed East-West Energy Corridor to Turkey.

The biggest question is why have Nazarbayev and Turkmenistan's Berdimukhamedov signed such a deal. One answer is that it is the easiest short-term option -- avoid the sparks of geopolitical conflict, and simply sell to one's traditional northern trading partner. They may believe that they retain the opportunity in the future to balance out the increased leverage they have granted to Russia. It is difficult to see how, given the agreement, such a trans-Caspian pipeline could be built any time in the foreseeable future.

Here is an interesting piece on how, contrary to the prevailing wisdom, Italy may not have entirely bet the store on continued good will from Gazprom. Instead, Italy appears to be hedging its bets.