Free Lunch at Kashagan

Kazakhstan has offered up another important piece to the jigsaw puzzle in terms of what it wants to allow development to proceed on the suspended supergiant Kashagan oilfield.

A free ride.

The Kazakhs, whose move on Kashagan has made some wonder whether the nation is aping Russia's oil nationalism, had already made it clear that they want at least joint control of the field, the largest oil discovery on the planet in more than three decades. Until they get it, plus a big cash payment, they are holding up field development.

Customarily, in order to be operator of an oilfield, one's share must at least match the largest stake held by any other partner. That's meant to ensure that the operator has at least as much investment at stake -- in other words as much to lose if things go wrong -- as anyone else involved. The current operator, Italy's Eni, has 16.6% of Kashagan, as do Exxon Mobil, Shell and France's Total.

So one apprehension regarding Kazakhstan's demands has been who would be called upon to sell part of their ownership in order to increase the state's current 8.3% share and make it equal to or greater than the rest.

That seemed one of the hardest likely nuts to crack in talks under way with the Kazakhs, since none of the foreigners was likely to want to give up some of their share. Then there was the matter of getting the state to pay a market price certainly exceeding $1 billion. (BG sold its 16.6% of the field for $1.8 million in March 2005, a time of much lower world crude oil prices.)

But in a statement Thursday, Energy Minister Sauat Mynbayev raised the idea of the state obtaining joint control without increasing its stake.

"It's not essential for us to raise the share. That's not the main question," the minister said, quoted by Reuters. "What is essential is to approve or disapprove of Kashagan's development plan and budget." Read Reuters story

Kazakhstan seems not to be guilty of petro-state nationalism as much as trying to get the country's so-far horribly managed jewel in the crown to pay out.

But if Kazakhstan's KazMunaiGas obtains an equal footing without sharing equally in investment and field development costs, that would seem to instantly and considerably raise the foreign partners' risk profile for Kashagan.

And one wonders how company lawyers would get that past their boards of directors and shareholders back home.

The Ripples of an Incompetently Managed Field

The Kazakhs are tightening the screws on the foreign developers of Kashagan, the biggest oilfield discovery of the last three decades. Today they passed a law allowing them to sever any oil contract unilaterally. Reuters story

It's all meant to put most of the leverage on the Kazakh side in their dispute with the managers of the field. But the perhaps unintended consequence has been the impression that the Kazakhs can also apply leverage to change or repudiate any other contract they so wish in the future.

Is it also more evidence of the Caspian states going the Russian way in terms of petro-state assertiveness?

Here is an email I received today from a foreign friend in Almaty who prefers to remain anonymous: "This is a particularly sticky time here. As of the unanimous passing of the new sub surface law. Many are saying that new investment here should go stone cold. Those who have gone to the expense and trouble to set up a rep office here and try to secure licenses may pack up and go elsewhere as hopeful as they have been. This law is expected to be used as leverage in the future when they want something in any negotiation. They can always find or create an infraction giving them grounds to annul a deal whether well founded or fictional. This is generally expected. The question is will they ever actually use the law to close down an investor(s) and resell the asset?"

I've heard such grumbling before over the years in the face of perceived government high-handedness, but I know of no one substantial who ever actually pulled out. Foreign oilmen in the end are focused on the bottom line, and the stakes in terms of profit are too high for impetuousness.

That does not mean that President Nazarbayev is going to be able to allow this new law to stand in the abstract. In terms of satisfying the due diligence requirements of publicly owned foreign companies, he is going to have to explain what a multi-billion-dollar contract means when one side can just tear it up at will.

Yet this dust-up is still not of the same character as the across-the-board contract repudiation going on in Russia. I do think that down the road Kazakhstan will demand better terms from the country's two other major projects -- Tengiz and Karachaganak. But I doubt that the country will insist on majority ownership of the fields, as Russia has.

Another difference from Russia is that it's probable that none of this would have happened if Italy's ENI had not been such a poor field operator. While undeniably the world's most successful charmer of Russian and Kazakh oilmen, which has resulted in the company's friendship with otherwise obstreperous Gazprom, for instance, ENI is over its head and over-stretched when it has come to actually managing these difficult projects.

The Kashagan consortium members are meeting with the Kazakhs next Tuesday in Astana. One way to change the tenor of the discussions would be to take the initiative and announce a management change. Either Exxon Mobil, France's Total or Shell should take over operatorship, with a primary role offered to the state oil firm, KazMunaiGas.

That appears to be what the Kazakhs are looking for, in addition to an enormous compensation payment to make up for the minimum five-year delay in first oil and a bloated project budget. The oilmen should write a first money offer on a piece of paper and offer it up.

A Window Into a First Family's Oil Holdings

Aliyev
Guy Chazan at The Wall Street Journal breaks an excellent story today on the Kazakhstan first family's ownerships in the oil business. For years, the biggest guessing game on the Caspian Sea has been which fields and companies are controlled by the various first families, as sharing with those on high is usually the only way to do an oil deal in the region.

An important factor to understanding how the Caspian really works is to know the first families' business relationships, particularly in the oil industry.

In the story, Chazan helps to explain the subject by opening a window into a field of extremely heavy crude called MangistauMunaiGaz, or MMG.

Here are the first two paragraphs: A family dustup in energy-rich Kazakhstan has turned one of the country's largest oil companies into a potential takeover target, attracting interest from some of the biggest players in the global oil industry. MangistauMunaiGaz, or MMG, has been in play since a dispute earlier this year between Rakhat Aliyev and his former father-in-law, Nursultan Nazarbayev, the country's autocratic president, according to people familiar with the situation. Read story

Steve's comment: In Almaty, the most important fact for those wishing to conduct oil business is that nothing substantial can be done without a nod from Timur Kulibayev, the husband of Nazarbayev's second daughter-in-law, Dinara. Kulibayev owns shares in oil fields, and those he does not own he holds sway over through his influence in the state oil company, KazMunaiGas.

As for MMG specifically, the assumption of oilmen in Almaty and investment bankers in the West has always been that it was controlled by the first family. They controlled either 60% or a full 90% of the field. Though the field produces a low-grade crude, those political links gave the field a certain gravitas.

But was that majority stake controlled by Aliyev, the rough-hewn husband of first daughter Dariga Nazarbayeva, or was it surrogates of the president himself? Perhaps a combination of the two? That was not known publicly, and the western bankers and accountants inside the deal were not talking.

That MMG has gone on the sales block is the best confirmation yet, however, that Aliyev is at least a partner. He has been in trouble for a long time, but a few months ago it reached a head with accusations that he ordered the kidnapping of two executives of Nurbank, which he controlled. Nazarbayev ordered him arrested, and Dariga divorced him.

Ever since then, the oil community has waited for word that MMG was on sale. Now it is.

That fact may be mere burlesque, since it does not shed light on other privately held oilfields in Kazakhstan.

Still, since the self-exiled Aliyev has turned into a political opponent of Nazarbayev, one wonders how the proceeds of the sale will be paid. The president no doubt would not want to put billions of dollars to the use of a much-motivated opponent.

Nikolai Khokhlov: 1922 - 2007

Khokhlov (right) and Okolovich

Nikolai Khokhlov, a KGB defector who survived the world's first known assassination attempt by a nuclear isotope, died last week. He was 85.

Khokhlov, who recounted his story in the classic memoir "In the Name of Conscience," first gained fame in 1954 when he defied a Kremlin order to organize the assassination of an anti-Soviet dissident named Georgi Okolovich. Heading a three-man unit operating in Frankfurt, Khokhlov walked up alone to Okolovich's apartment, and informed him just what he was sent to Germany to do. With that, the murder was sabotaged.

The heroic tenor of the event turned tragedy, however, when the CIA failed to rescue Khokhlov's wife, Yana, and son, Alek, in Moscow, as the agency had promised as part of his defection. The wife and son were arrested, and Khokhlov saw them again only 38 years later, in 1992, when Boris Yeltsin pardoned him. He and Yana had meanwhile divorced, and Khokhlov had remarried.

In 1957, Khokhlov again attracted international attention. While he was attending an anti-Communist conference in Frankfurt, someone slipped a dose of a radioactive isotope of thallium, a metal, into his coffee. Khokhlov's doctors were certain he was going to die -- his hair had fallen out, his skin was covered with bloody splotches, and his body seemed to be working against him. Instead, Khokhlov somehow came out of it.

In the 1960s, Khokhlov went on to begin an entirely new career as a tenured psychology professor at California State University at San Bernardino. He became known as an exceedingly articulate defender of parapsychology, and conversely a critic of Freud and Jung.

Interest in Khokhlov became renewed in November, when another defector from Moscow -- Alexander Litvinenko -- was poisoned by a nuclear isotope in London. Litvinenko displayed almost identical symptoms to those suffered by Khokhlov. It turned out that he was poisoned by polonium, another radioactive isotope. Litvinenko died in November. Khokhlov gave several interviews in which he pinned the blame on the Russian spy services.

Khokhlov leaves his wife, Tanja, a son, two daughters and five grandchildren.

Is There Political Will on the Caspian?

The presidents of Kazakhstan and Turkmenistan are in New York this week for the United Nations General Assembly. While together in a neutral environment, they could take the first step to resolving the pipeline morass that has bedeviled their half of the Caspian Sea for fifteen years. That would mean getting out of their luxury hotel suites, dispensing with the hallowed meetings with oilmen lining up to kiss the presidential ring, and announcing that they intend to build a joint oil and natural gas pipeline system across the Caspian to Baku.

Why should they take a rest from such accouterments and risk the predictable firestorm with Russia? Because it’s the only way they will finally obtain a measure of true political independence. Once they make that commitment, oil companies and western governments can help realize it.

Since the Soviet breakup, Russia has wielded what a former National Security Council officer named Sheila Heslin called its “iron umbilical cord” to hold the Caspian republics in check. Heslin’s term referred to the former Soviet energy pipeline system, which channels almost all the region’s oil and natural gas exports through Russia. When it is so moved, Russia just switches off the spigot.

In just one recent example of what it means to be reliant on the Russian system, Chevron and Exxon Mobil last week were effectively forced to agree to a large tariff increase for an oil pipeline that runs from Kazakhstan through Russia, even though it’s private and not ostensibly under Russian state control. The tariff increase is part of a Russian squeeze before it agrees to the companies’ plan to double the pipeline’s capacity and export more oil from Kazakhstan’s supergiant Tengiz oilfield.

In Turkmenistan’s case, it has its hopes pinned on a Chinese pledge to link the countries through a $26 billion natural gas pipeline. If it's actually built, the pipeline will be crucial to Central Asia’s economic and thus political independence. But this is the same China that has vowed for a decade to build a much cheaper oil pipeline to Kazakhstan, a pipeline that has yet to be finished. If it takes comparatively long in Turkmenistan, the line should be finished by mid-century.

In the mid-1990s, Azerbaijan and Georgia decided to reject Russia’s energy stranglehold, and spearhead the construction of an oil pipeline to Turkey, avoiding Russia entirely. With then-Azerbaijan leader Heydar Aliyev taking the lead locally, the Clinton administration backed the line on the world stage, and pushed the oil companies to build and finance it. A year ago, the first oil began moving through the Baku-Ceyhan pipeline, and natural gas will come, too.

But Turkmenistan and Kazakhstan cut themselves off from the East-West link by refusing to concretely back a trans-Caspian spoke to the Baku hub.

The Kazakh and Turkmen presidents may think that such a pipeline will simply be built, and that then they will use it. But the countries have it reversed – they themselves must take charge of their future.

Tengiz: Rattling the Cage

The last time Gani Kasimov attracted big attention, it was for throwing a vase at a television interviewer while running for president of Kazakhstan back in the late 1990s. Now the Kazakh parliamentarian has targeted Chevron, calling for the suspension of its supergiant Tengiz oilfield for alleged environmental violations.

Given the perilous atmosphere for oil majors in the region -- the erosion of Big Oil's positions in Russia, and the threat of the same at a sister field in Kazakhstan, the supergiant Kashagan -- Chevron Chairman Dave O'Reilly hopped on the corporate jet to see President Nazarbayev.

Whatever was said in their meeting today, O'Reilly obviously asked Nazarbayev whether he could tell journalists -- and by extension shareholders -- that Chevron was not in a similar fix as its industry rivals. Here is a paragraph from the Reuters story: Mr. O'Reilly quoted Mr. Nazarbayev as telling him that “Tengiz is an excellent example of how the government and a foreign investor can work together successfully,” according to the Kazakhstan Today news agency. “Today during our meeting both the president of Kazakhstan and the prime minister expressed support for our company's activities,” he said.
Read story

Here is the first paragraph of The Wall Street Journal account of the Kasimov remarks that triggered the stir yesterday: In a sign of rising nationalism and intensifying pressure on foreign investors in oil-rich Kazakhstan, a senior Kazakh lawmaker called for a huge oil project run by Chevron Corp. to be shut down over alleged environmental violations. Read story

Steve's comment: Tengiz is part of the same geologic structure as Kashagan, the field that is currently under suspension for alleged environmental violations and contract demands. The two fields are among the biggest in the world.

It is in fact probable that at some point the Kazakhs will deliver demands for contract revisions involving profit-sharing to Chevron. That is the direction of events in the region, and around the world, and there is no reason to presume that Chevron will be exempt.

But it is premature for that to happen now. Kazakhstan is already embroiled in an enormous flap with many of the world's biggest oil majors over Kashagan. Nazarbayev is no Hugo Chavez -- a seasoned strategist on the geopolitical stage, he will settle one battle before moving on to the next.

So what is Kasimov up to? It is quite possible that, as with his antics during the 1990s presidential campaign, he was simply mouthing off in order to attract attention. For now, I go with that explanation -- Kasimov is not in the ranks of Kazakhstan's serious figures.

But the impact is important. In the past, Chevron has carried with it effective diplomatic status -- Washington has been fully behind its Kazakhstan venture since it first embarked on it in 1990 -- and the field is a huge portion of the company's future and current reserves. Its share price would plummet if its share of the field were threatened.

One must also take into account that the biggest company of all -- Exxon Mobil -- also owns 25% of the field. Exxon has so far stood firm against contract erosion in both Venezuela and Russia.

Whether or not he sanctioned Kasimov's statement, Nazarbayev has no doubt taken note of what happened when he rattled Chevron's cage. That will be incorporated into his strategy in the probability of higher demands down the road for Tengiz.

Gazprom: Casting Out the Giant

Europe is taking no chances: Its regulators have okayed a plan that would block Gazprom from buying pipelines and other energy assets in the European Union. The move, partly a result of President Putin's more assertive foreign policy, is likely to be mirrored in other Western countries.

The EU's regulatory arm voted today to bar state-influenced or -owned companies from outside the EU from controlling gas pipelines or power companies within its borders. Gazprom wasn't named, but it's obvious at whom the regulation is at least in part aimed.

Whether fair or not, Gazprom has gotten a reputation for mixing business and politics; if a certain country irritates the Kremlin, the thinking goes, it could be subject to a brief cutoff of its gas supplies, or even longer.

That certainly seems to have been the case in terms of Gazprom's attitude toward Georgia, and arguably also toward the Baltics. Gazprom's defenders and its public relations agents say -- not entirely convincingly up to now -- that the company has acted only against free-loaders.

Putin's recent habit of barreling his chest and delivering patriotic statements has helped to seal the case as far as Europe is concerned. With a 30% reliance on Russian gas supplies already, the EU is loathe also to allow Gazprom to control actual hard assets and retail networks.

Gazprom has been aggressively in the market for energy assets abroad. For the same reasons as the Europeans, the U.S., Canada and others are likely to continue to be guarded in permitting such purchases.

Here is the operative phrase in today's on-line Wall Street Journal: Foreign energy companies operating in the EU will have to be certified to prove they are free from government influence. Read story

The proposed regulations still must be approved by a majority of the EU's member countries, after which they would come into effect in three or four years.

Greenspan and the Caspian

As part of the publicity for his memoir, just out today, Former Fed chairman Alan Greenspan has given a slew of interviews. In a chat with Bob Woodward of The Washington Post, he accents the knife's edge on which the world economy rests because of tight oil supplies, and inadvertently provides an argument for why the Caspian Sea is strategically important.

In the Post interview, according to Woodward, Greenspan said that the disruption of even 3 to 4 million barrels a day of oil could translate into crude prices as high as $120 a barrel; the loss of anything more would mean "chaos" to the global economy, Greenspan said. Read story

That is precisely the volume of oil exports expected from the Caspian -- from Kazakhstan and Azerbaijan combined -- after about a decade. The main fields involved will be Tengiz, Kashagan and Karachaganak in Kazakhstan, and offshore Baku in Azerbaijan.

As it appears now, much of this oil will pass through the East-West oil corridor championed by Washington, with its hub in Baku. It is why the U.S. has put so much diplomatic weight behind relationships with Georgia, Azerbaijan, Kazakhstan and Turkmenistan.

Oil prices are largely decided on the margin -- those last 3 to 5 million barrels of total daily world demand. In the next decade, the flow of Caspian oil will produce the equivalent of that margin.

Kazakhstan: Lining Up More Ducks

In case the point were not yet ultra-clear, Kazakhstan wants to make it so – it is deadly serious about getting its way on the supergiant Kashagan oilfield.


Kazakhstan wants cash and effective control of the field -- the largest discovery of the last three decades -- and is in discussions with the Italian-led consortium developing it.

As of now, Kazakhstan has suspended new work on the field for three months. Italian Prime Minister Romano Prodi plans to visit Kazakhstan early next month on a charm offensive.

But given the current state of the industry -- with the demand curve on oil far exceeding expected supply, and Western oil majors locked out of most oil-exporting countries -- Kazakhstan one way or the other will probably get close to what it seeks. The companies will request, and may be able to obtain, some concrete assurance that whatever new deal is set will not be a wedge for an ongoing series of ever-tougher demands down the road.

The Caspian republic’s latest communication of its posture is a law making its way through the rubber-stamp Parliament.

The Wall Street Journal on-line has a piece on the topic today. Here are the first two paragraphs: A proposed law that would allow the Kazakh government to annul natural-resources contracts appears aimed at pressuring Kashagan oil developers led by the Eni SpA amid tense negotiations, rather than as a broad-based threat to energy and mining companies, analysts and a person familiar with the matter said. The proposed amendment, which would give the Kazakh government the right to pull out of natural-resources contracts if there is a threat to national security and economic interests, is expected to be adopted in the next two weeks, lawmaker Valeriy Kotovich said. Read story

The assurance that the law is deal-specific -- meaning only for Kashagan -- cannot be regarded seriously. A renegotiation of terms on Kashagan is bound to whet Kazakhstan's appetite. Russia has led the way in this more assertive attitude. Look for future demands for better terms at both the supergiant Tengiz and Kashagan fields.

Georgia and Russia: The Bigger Battle to Come

The Economist is in a snit that the OSCE white-washed over Georgia's missile row with Russia. A studiously neutralist RFE/RL interview with the author of the offending OSCE report ends up making the Vienna-based mini-U.N. organization look egregiously non-judgemental.

The pieces are must-reading. Edward Lucas, the author of the Economist piece, is legitimately outraged. But the OSCE -- the Organization for Security and Cooperation in Europe -- was right to punt. The incessant friction between Russia and Georgia over border incursions is a diversion from the main issue, which is getting Georgia ready for full NATO membership.

The two neighbors are not going to become friends any time soon. The Kremlin's loyal spokesmen say that the Georgians' main foreign policy is irritating their northern neighbor. The Georgians in turn ascribe most of their ills to malign conspiracies from Moscow.

These competing claims informed their most recent series of disputes, in which Georgia accused Russian military jets of illegally penetrating Georgian airspace, and firing a missile that allegedly missed its intended target, a radar installation. In the most recent flare-up, Georgia said it had possibly shot down an invading Russian jet.

The record in general supports Georgia's assertions. Since the 1991 Soviet breakup, Georgia has been the victim of repeated aggressive acts from the north -- the dismemberment of the country through military support of Abkhazia; the severing of natural gas and electricity supplies; and the cutoff of trade and air service between the countries.

Yet Russia and Georgia themselves have seemed to try to cool the flareup. Neither has raised the issue of the apparent crash of the errant jet recently, for instance. That is wise from Georgia's standpoint when it has much work to do to achieve its ultimate foreign policy aim, which is tying itself formally to the West through NATO and EU membership.

The West has a long-standing interest in making Georgia's NATO membership happen; the EU portion will happen far down the road if at all.

Here is where it makes sense not to get too involved in these predictable sibling squabbles. Russia will accuse NATO of encirclement. The West will have to forcefully argue that it has a legitimate interest in Georgia's independence and stability. That will be a battle writ large.

Putin: Final Piece in Place

President Putin has all the pieces in place now to remain Russia's ruler in name or fact as long as he wishes. But does he want to? Given Putin's habitual caution, the rush to figure out his intentions is almost wholly in vain. We probably won't know for another four years.

Putin's selection of a retirement-age loyalist as prime minister seems to be the last in a three-prong strategy. It fits into the article of faith among both Russian and foreign analysts that Putin intends to rule over Russia in one way or another for the foreseeable future. Under an eminently reasonable scenario, Putin would return to eight more years of power in 2012, when he will be just 58. He could even do another round, his supporters say, returning for a third set of terms in 2024.

Here has been the puzzle: If Putin adheres to his pledge to honor the constitution and step down following the March elections -- which he almost certainly will do -- how can he be sure that his successor, after four years of the heady experience of governing a nuclear-armed petro-power, will surrender power?

Another bit of entirely reasonable logic heard in Moscow is that Putin isn't necessarily seeking to rule the country as long as he wishes. Instead, he simply wants to give his potential rivals the impression that he wants to in order to retain the option come 2012; following this argument further, Putin also would want to keep the sharks at bay and protect his personal and business interests over the coming years.

As recently as yesterday morning, the betting money was that fellow former spy Sergei Ivanov, one of his first deputy prime ministers, had the job of succeeding Putin in the bag. But what makes sense now is that Ivanov is prong one of Putin's strategy.

The Ivanov prong meets the prerequisite of loyalty to Putin, and the probabily of no or few changes in Russian foreign and domestic policy. So he is still in the running.

The second prong is Dmitri Medvedev, who as another first deputy prime minister is another presumed Putin heir. Medvedev has also displayed unflagging loyalty to Putin, and would be his choice if he wants a more liberal Kremlin. He also remains in the race.

The trouble with both Ivanov and Medvedev, however, is that both are relatively young. They are 54 and 42, respectively.

Loyalists so far to a fault, can they truly be trusted to step down four years from now should Putin wish them to?

Hence prong three. Russia's new prime minister, Viktor Zubkov, turns 66 on Saturday. He will be 70 in 2012, not at all a young age in Russia. Such a person would arguably be more amenable to retirement, or even if he did not wish to surrender power might simply not be healthy enough to continue.

When Putin selects his successor, if it is prong three, he will be asserting a cautious strategy.

Yet that still will not answer the ultimate question -- does he intend to return to power or not? He will not tip his hand until he needs to, meaning at this time four years hence.

The Pirate of Prague's Newly Restored Grin

Incredible as it seems, Viktor Kozeny could indeed ride again.

Accused of bribing Azerbaijan leaders, the Harvard-educated, lavish-living Kozeny has sat for almost two years in a Bahamas jail fighting extradition to the U.S. But now a U.S. prosecutor says the government may have to drop most charges against him. The reason -- the statute of limitations.

If it does, and Kozeny is freed or lightly sentenced, it will put a bow around the charmed life that he has led the last 17 or so years, in which he masterminded two of the most controversial investment schemes of the Gorbachev and post-Soviet era.

This story actually broke last month, but appears to have been largely overlooked. Tip to Paul Sampson for pointing it out to me. Here is the first paragraph of an AP story: NEW YORK — The government is seeking to resurrect its case against three men accused of offering hundreds of millions of dollars to top officials in the former Soviet republic of Azerbaijan to get favorable treatment in oil deals. Read story

Steve's comment: The 43-year-old Kozeny is famous for investment schemes in which lots of people lose most of their money.

He first attracted attention in the early 1990s when he swooped into his native Prague and persuaded hundreds of thousands of Czechs to invest their state-issued privatization vouchers with him, and become fabulously wealthy. Almost all lost most or all of their money, but Kozeny left the country worth tens of millions of dollars and never returned. For that Fortune magazine dubbed him "The Pirate of Prague."

Kozeny bought lavish homes in London, the Bahamas and elsewhere with the money.

Next, he turned up on the Caspian Sea. He decided that there were even greater earnings to be had, particularly in Baku. In 1997, he threw a now-famous party in Aspen, Colorado, where he persuaded some of America's most savvy investors and their friends that they could own, then flip, the state oil company of Azerbaijan, or Socar.

Those who tossed in a bundle totalling more than $200 million included Wall Street hedge fund doyen Lee Cooperman, former Senate Majority leader George Mitchell and Frederic Bourke of the Dooney & Bourke luxury handbag company.

The problem, as (almost) anyone who has set foot in Azerbaijan knows, is that there is no way the Azerbaijan government would part with its cash cow.

In October 2005, U.S. prosecutors charged Kozeny and two of the investors with bribery and money laundering. Specifically, the government said that the defendants provided financial incentives to a "senior Azeri official" (the late President Heydar Aliyev) in order to privatize Socar.

In June of this year, a U.S. district judge said the statute of limitations had passed on charges against Kozeny's two co-defendants, and dismissed most of them. And in an appeal last month, prosecutors said that, if the decision holds, most charges will also have to be dropped against Kozeny.

The appeal hasn't been decided yet. But those who follow the Azerbaijan case always wondered -- why, given Kozeny's history, did so many smart people entrust so many millions with him? To a person, his investors replied that they felt they had done their due diligence.

That rang hollow. The truth was that Kozeny dangled the prospect of an enormous windfall before Aspen's and Wall Street's moneyed crowd -- in addition to great fun and adventure -- and they simply grabbed for it.

Ten years later, there is the prospect of Kozeny going onto his next adventure.

Pakistan: It's About Power, Not Terrorism

For six years, the West has turned to Pakistan's General Musharraf to maintain stability in the world's laboratory of extremist Islamic terror. Events in Pakistan have rippled west and northwest to Afghanistan and Central Asia, to Europe all the way to Great Britain, and throughout the Middle East.

Now, Musharraf appears to be on the political ropes, with one of his main adversaries about to arrive at Islamabad Airport, and the other right behind him.

So should the West worry? The answer is yes and no -- for those worried about Pakistan itself, politics is about to revert to its venal and stormy norm; but nothing is likely to change in the national security sphere.

In a piece just filed on line, my friend Zahid Hussain of The Times of London says that Musharraf will try to defuse the arrival tomorrow (Monday) of Nawaz Sharif in Pakistan by putting him right back on a military plane to Saudi Arabia. Here is the first paragraph of Zahid's piece: Pakistani authorities are expected to deport Nawaz Sharif, the exiled former Prime Minister, back to Saudi Arabia as soon as he returns to Pakistan tomorrow in a bid to topple President Pervez Musharraf. Read story

Steve's comment: There is very little chance that Musharraf will salvage his position; he will have to step out of politics, opening the way for a political rematch between the country's pair of two-time prime ministers -- Sharif and Benazir Bhutto.

So much for the experiment with political reform that Musharraf claimed to be initiating with his 1999 coup against Sharif after the then-prime minister effectively almost murdered him and a planeload of passengers by refusing an airliner carrying them landing rights in the country.

The current degree of absurdity is illustrated by the industrialist Sharif's almost unchallenged depiction of himself as a fighter for democratic ideals. Few seem to recall Sharif's political beginnings as a 1980s creation of the ISI, the country's intelligence agency. Having lost favor with the Army since that impolite treatment of Musharraf in 1999, he is now painting himself as a man of the people.

Politics aside, Pakistan's bulwark of stability -- the Army -- will certainly salvage itself, with or without Musharraf (I think without). Washington and the rest of the West will continue to have their partner, to the degree Pakistan has been one, in fighting the al Qaeda radicals using Waziristan as a base.

Turkmenistan Casino

Turkmenistan is getting much attention for its ostensible new attitude toward Big Oil with the death of President Saparmurat Niyazov. Much of the attention focuses on the new Turkmen leadership's deals with competing geopolitical interests -- China, Russia, the U.S. But it remains to be seen whether the country's new leadership has the vision or skill to carve out genuine sovereignty after Niyazov's delusive and false policy of "neutrality."

Here is an interesting piece a week ago from Guy Chazan at The Wall Street Journal. And here is one this week on Eurasianet.org. Here is a key quote from an unidentified Pentagon official in the latter piece: "If there is a new Great Game being played in Central Asia, the most important part is Turkmenistan."

Steve's comment: The lofty "Great Game" similes make one suspicious. Is Gurbanguly Berdymukhammedov truly playing a new Great Game, or is he simply in over his head with so many suitors at his door?

We'll have to wait a year or two for an answer. One thing is clear -- the U.S. has been out-classed in terms of reviving a trans-Caspian natural gas pipeline. That simply is not going to happen any time soon.

The idea of a Chinese pipeline is the most interesting, in my view. It meets the U.S. requirement of evading both Russian and Iranian turf, and provides the region some balance in terms of export.


One whopper in the Eurasianet.org piece is worth visiting: the western diplomat who asserts that, unlike its competitors, Washington is not playing a "zero-sum game." For all parties the game is zero-sum.

Kashagan: Two Ominous Notes

Kazakhstan's Prime Minister Karim Massimov has made it official: The country is seeking at least to share control of the supergiant Kashagan oilfield. Two items in his announcement today were of special note: The decision comes from the very top and was not dreamed up by some ambitious underling; and Kazakhstan is prepared with an unspecified second strategy should its demand be refused.

The development is important not just for the single field, though it is the largest found anywhere on the planet in three decades. It is also a weather vane for how Kazakhstan will treat the other two supergiant projects in the country -- the Tengiz and Karachaganak fields -- and whether the assertive practice will spread over the Caspian to Azerbaijan.

If the Italian-led consortium refuses to grant Kazakhstan co-operatorship of Kashagan, Massimov said, "We have Plan B. I'll tell you about that later."

Here is the first paragraph of the Financial times story: Kazakhstan demanded greater control over the giant Kashagan oilfield in the Caspian Sea on Thursday, complaining that inadequate management of the project by a foreign consortium led by Italy’s Eni had damaged the Central Asian republic’s economy and reputation as a reliable global energy supplier. Read the FT piece. Here is Reuters. And here is the AFP story.

Steve's comment: Often in Kazakhstan, as well as in Russia and elsewhere in the former Soviet Union, it is not clear whether a middle-ranking minister is speaking for his aspiring self, or fulfilling orders from above.

In this case, Massimov was crystal clear: President Nazarbayev is playing general, and he wants to exert equal control over what happens at the field. Here is the key quote: "According to the Kazakh president's orders and demands, KazMunaiGas should be a co-operator. I will not say anything about percentages at this stage," Massimov told reporters.

Therefore, the companies have very little wiggle room.

But what if they should choose to try to finesse that little bit of wiggle space that they might have? Plan B.

What is Plan B? One can only conjecture, but it can't be positive for Eni or the consortium.

As a reminder: This is not a pure example of national assertiveness. The consortium itself invited such action through its ineptness -- being at least five and probably seven years late in bringing first oil to market, and as of right now racking up double the development costs.

Is Gazprom Trying Turkmenistan Shuffle on Exxon?

Gazprom is pushing Exxon to sell the natural gas from its huge Sakhalin-I field not to China, as the American oil giant prefers, but to the domestic Russian market. It's easy to get suspicious and see the drift of Gazprom's successful Turkmenistan strategy to Russia. It goes like this: Buy gas cheaply locally, and sell it at a profit in Europe.

Here is the first paragraph of the Reuters account: Russia's gas export monopoly Gazprom said on Tuesday it needs gas from Exxon Mobil's Sakhalin-1 project for domestic use, mounting pressure on the U.S. major to drop plans to export gas to China. Read story

Steve's comment: My own feeling is that this is precisely what Gazprom has in mind -- get Exxon to sell the natural gas at domestic prices, then effectively sell the same gas to Europe at a huge markup.

Russia has played this game with Turkmenistan since 1992. It claims that the Turkmenistan gas is going only to former Soviet customers who pay subsidized rates, and not to Russia's European customers. So it pays Turkmenistan a discount rate for its natural gas.

But that is a ruse -- all natural gas goes into a single, collective pipeline system passing through Russia. Turkmen gas is indistinguishable from that produced anywhere in Russia. So in effect, Russia is earning export profit from the Turkmen gas, and the Turkmen have been the losers for 15 years.

In Exxon's case, it says that the deals it has in mind with China would pay more. Russia says the domestic market needs the gas, yet at the same time, Gazprom is having more and more trouble meeting its supply commitments to Europe. Where will some of the extra gas come from? Sakhalin-I perhaps?

Kazakhstan's Ten-Billion-Dollar (in penalties) Field

When Russia asserted its rights against Western oil companies working there, it looked for local control of its oil and natural gas fields. In the permutation of that trend in Kazakhstan, the language of negotiation is not just control, but big cash.

Reuters has nailed down the approximate compensation that Kazakhstan wants before lifting its suspension of development of the much-delayed supergiant Kashagan oilfield. "Certainly it will be more than $10 billion," Daulet Yergozhin, Kazakh­stan’s deputy finance minister, told the agency. Read story

Kazakhstan suspended work on the field last week, claiming environmental violations. Negotiations with the Italian-led consortium begin tomorrow (Wednesday).

Steve's comment: The outlines of the Kazakh demands, which have leaked out in dollops over the last few days, are breathtaking. If Yergozhin actually is speaking for the Kazakhs -- he may simply be floating trial balloons on behalf of the far larger figures behind him -- the talks are not going to be as easy as the Italians have suggested publicly.

The oil companies no doubt have been thinking of compensation in the neighborhood of a few hundred million dollars tops. Look for them also to oppose a suggestion by Yergozhin, published last week in The Wall Street Journal, that Kazakhstan be given joint or sole operatorship of the field.

Gazprom: To Fear or Not to Fear

The West often expresses the apprehension that Russia will use its energy for outside political leverage. The answer of course is that it already is -- its oil and natural gas is the source after all of its newfound confidence and influence in Europe. Yet the most vulnerable and victim-prone countries are Russia's former Soviet colonies. The upshot: The Caspian states need to keep up their guard.

Take a look at The Independent of London today, which has a good, long primer on Gazprom. The piece, by Anne Penketh, makes two conclusions: Gazprom is so unwieldy and large that it may end up being a paper tiger; and that, given the combination of Gazprom's management failures and its abiding need for continued profits from Europe, it will end up having to give someone the short end of the stick -- one of its former Soviet brothers.

A key quote for those who follow the non-Russian states comes from Pavel Baev of the International Peace Research Institute: "They are the victims of choice," he tells the newspaper. "A new gas war is predetermined."

Steve's comment: The world caught on to Russia's outside power during the last eighteen months or so when Europe's oil and natural gas supply was disturbed over disputes with Ukraine and Belarus, and the Independent piece focuses on those two former Soviet states.

But the Caspian states and foreigners who work there -- Azerbaijan, Kazakhstan, Turkmenistan and, as a transit country, Georgia -- have witnessed Moscow's willingness to wield the energy club since just a few months after the 1991 Soviet breakup.

Russia starved Georgia of natural gas. It cut off Turkmenistan's access to foreign export markets. It has done the same in Kazakhstan, reducing the value of its giant fields (Karachaganak, one of the world's ten largest natural gas fields, is absurdly reduced to exploitation as an oil field). To its credit, Azerbaijan has responded to Gazprom's threats by going off Russian gas cold turkey, and turning to the local supply.

Transneft's actions in terms of the region's oil exports is well documented and have been discussed previously.

Russia argues that its actions are market-oriented. Maybe. But one must add realpolitik -- Gazprom has been the cudgel to bring feisty neighbors (such as Georgia) into line. And there is no sign that the custom is changing soon.

Moscow's Red Lines: Kosovo, Missiles and Berezovsky

Russian Foreign Minister Sergei Lavrov has used the occasion of a university speech to lay down an implacable position on some of the most divisive issues between Moscow and the West. It was another indication that Moscow is engaged as much in policy as in image-building as someone no longer to be trifled with.

Here is the first paragraph of the Agence France Press story: Russia will not back down on "red line" issues including the future of Kosovo and opposition to US plans for an anti-missile defence system in central Europe, Foreign Minister Sergei Lavrov said Monday. Read story

And an important quote from the piece: Lavrov said that some were worried by "the rapid rebirth of our country as one of the leading countries of the world. However, this does not mean that it's necessary to think up yet another myth about the Russian threat."

Steve's comment: Lavrov made the remarks today at Moscow State Institute of International Affairs. For those accustomed to negotiating with Moscow, whether during the Soviet or post-Soviet period, it is nothing new for it to "stick to our position until the end," as Lavrov put it.

Its immovable positions, he said, include a refusal to hand over Andrei Lugovoi to Britain in the case of the Alexander Litvinenko murder, rejecting Kosovo independence unless Belgrade itself agrees, and opposing Washington's plans to install an anti-missile shield in Poland and the Czech Republic (on the last item, one wonders about the hulabaloo on either side over an as-yet unproven system).

Lavrov also resurrected Moscow's chagrin over Britain's sheltering of oligarch Boris Berezovsky, whom he called one of several "odious characters" from Russia living there.

As a whole, these do not differ fundamentally from postures Russia has taken previously during the post-Soviet period. What is different is that it appears unlikely this time to shift position. And that appears to be as much show as principle.

Russia's Just Complaint

The Globe and Mail of Toronto's Eric Reguly has a good read on the fight for who will next lead the International Monetary Fund. The upshot: The West may have to stand aside on this battle with Moscow.

Reguly's piece begins: Russia is throwing its newfound weight around and the rest of Europe doesn't like it. The most recent Economist magazine called Russia a "neo-KGB state." The European Commission wants to restrict foreign companies' (read: Russian) access to the European Union's natural gas and electricity networks. Their businessmen are regarded as feral capitalists who will stop at nothing to fulfill their desires. Russia is throwing its weight around global - that is, American and European - institutions too. It doesn't like what's happening at the International Monetary Fund. In this case, Russia is not to be feared. It doesn't think the next IMF boss should automatically be a Western European and it has a point. Read story

Steve's comment: As a last negotiating stance, the Europeans are offering a fig leaf: If the Russians and the rest of the world go along this time with their nomination (of Frenchman Dominique Strauss-Kahn), a non-European can be chosen next time around.

That's a false concession -- a feint. Russia makes the strong point that Washington and Europe need to understand that the rest of the world -- growing economically in a far different way from the mid-1940s -- isn't going to, and shouldn't, go along with second-class status forever. Moscow has nominated former Czech prime minister Josef Tosovsky.

The West is going to have to explain why Strauss-Kahn should get the unquestioned nod.

The Caucasus Three Years After Beslan

Three years after the siege of Beslan, in which some 334 people were killed at a schoolhouse, Russia’s Caucasus belt belies President Putin’s claim to bringing peace to the country.

Chechnya itself is comparatively peaceful after two ferocious wars over the last 13 years. But now the republics to either side of Chechnya are the scene of routine bombings, ambushes and murder.

In the latest incident, a car bomb today killed four policemen in Ingushetia, west of Chechnya. Read The AP story

Steve's comment: Perhaps no one could pacify the northern Caucasus. But there is little evidence that Putin, who prides himself on ultra-competence, has attempted anything more than the usual -- the appointment of governors whose prime qualification is loyalty to him.

Today's car bomb is a prism into the highly complex nature of the region's turbulence. The unrest in Ingushetia goes back at least to the 1940s and Stalin's expulsion of the Ingush to Kazakhstan and Siberia. Ever since the Ingush were permitted back, there has been a struggle over territory with the Ossetians next door. It erupted into outright warfare in 1992, a civil conflict that I witnessed. Russia as usual is caught in the middle, but principally sides with the Christian North Ossetians.

The bomb today was aimed at Ingush policemen nominally allied with Russia. It is possible therefore that it was aimed at intimidating Moscow and pro-Russian locals.

In a nice piece a week ago, Chris Chivers did a good job of connecting the dots of the unrest in Dagestan and Ingushetia to Chechnya.

One may argue with the approach, but the last time Russia attempted to find a middle ground with the Caucasus populations was a decade ago. Tomorrow, relatives of the 186 Beslan school children who died alongside their parents, teachers and friends will say again that the government could have done more to save lives.