Kazakhstan-EU Energy Co-operation Pact Signed.

The European Union on Dec. 4 agreed to improve ties with energy-rich Kazakhstan in a move seen as a bid to reduce its dependence on gas supplies from Russia and the Middle East. The two sides signed a memorandum of understanding (MoU) which would make it easier for the EU to import natural gas and crude oil from the vast Central Asian republic.

The 25-nation EU signed a deal to promote the peaceful use of nuclear energy in Kazakhstan, a country which holds one-fifth of the world's known reserves of uranium. After meeting with Kazakh President Nursultan Nazarbayev, Jose Manuel Barroso, president of the EU Commission, on Dec. 4 said: "Kazakhstan and the European Union have laid the foundations of constructive co-operation in the energy sector".

Kazakhstan, which was part of the Soviet Union, is expected to produce 3.5 million b/d of crude oil in the coming decade. It also has immense gas reserves. The US and the EU are both promoting the idea of Kazakhstan hav-ing a pipeline built across the Caspian Sea to export natural gas to Europe.

The pipeline would be built to Baku and from there it would run parallel with a pipeline being built to Turkey, a key transit country through which Central Europe is promoting the Nabucco trunkline for natural gas from Central Asia and the Middle East including Iran to reach the EU in the next decade.

However, Russia is strongly opposed to letting pipelines built across the Caspian, where the seabed is unstable and such installations would be exposed to grave hazards.

The accord was signed in Brussels during a visit there by President Nazarbayev. At the moment, the EU is counting on Russia as a vital supplier of energy. Kazakhstan says it wants to help the union diversify its imports and make it less dependent on Moscow.

Nazarbayev said: "The role of Kazakhstan as a reliable supplier to European and global markets is increasing". The EU has signed similar agreements with Azerbaijan and Ukraine.

Europe's drive to improve ties with Kazakhstan has raised questions about human rights and democracy. Nazarbayev has been his country's only ruler since it achieved independence in December 1991. But he has brought stability and prosperity to his country.

Like those of most other Central Asian nations, however, Kazakhstan's record on democracy and protecting human rights is poor.

Nazarbayev was re-elected with 91% of the vote in December 2005 balloting which international observers called flawed. The 2004 parliamentary vote produced a legislature without a single opposition lawmaker.

The EU, meanwhile, is trying to persuade Russia to ratify an international energy charter that regulates transit and investment in the energy sector and would allow for market competition between foreign and independent companies.

On Dec. 3 EU Energy Commissioner Andris Piebalgs signed the accord on nuclear co-operation, with a view towards increasing Kazakhstan's share of uranium sales in the EU to 20% from 3%. In the previous week Piebalgs, a Latvian who speaks fluent Russian, attended an EU-inspired meeting in Kazakhstan of regional energy ministers which produced a road map towards integrating their countries' energy grids and regulatory systems with the EU's. Yet in all this flurry of documents and initiatives, the thing Piebalgs and many EU countries want most - construction of a gas pipeline across the Caspian Sea that would connect the gas-rich countries of Central Asia directly to Europe - was not mentioned.

Kazakhstan is critical to building the home stretch of a new southern energy corridor that would carry gas from the Caspian and beyond to the EU, via the Caucasus and Turkey. Such a corridor for the first time would allow the countries of Central Asia to sell gas directly to the EU, rather than to Russian gas monopoly Gazprom, which can then re-export the gas at a high profit, as it does currently.

Russia accounts for 44% of EU gas imports, a proportion expected to rise significantly, especially after Russia builds a northern gas corridor directly to Germany, under the Baltic Sea. "The trans-Caspian gas pipeline for us is really important to take more seriously", Piebalgs said in an interview published on Dec. 4 by Dow Jones Newswires. He said that by 2015, Kazakhstan could be producing 106 BCM/year of natural gas, about 20% more than Germany consumes per annum.

Turkmenistan and Uzbekistan, which also could supply the pipe, already are big producers. A raft of pipelines to make this new East-West energy corridor are either in planning stages or under construction. A gas connector from Turkey to Greece and from there to Italy is being built. Another pipeline, Nabucco, is planned to take gas from Turkey north to Central Europe, Austria and beyond. Another, newer pipeline project, promoted since Gazprom cut off gas supplies to Ukraine in a price dispute last winter, would take gas across Georgia and directly to Ukraine and Romania via the Black Sea. But to make these pipe dreams a reality, there has to be gas to fill them.

Russia is offering to expand its pipeline, called Blue Stream which runs across the Black Sea to Turkey. But that would only increase the EU's dependency on Gazprom. Iran, with the world's second-biggest gas reserves, after Russia, could hook up to Turkey's grid and send gas to Europe, but relations between Tehran and the EU are poor. Iran was the only Caspian country not invited to the recent meeting in Astana. Connections to bring gas from Iraq and Egypt to Turkey also are possible but equally uncertain. Gazprom, at least, is sceptical about the EU's pipeline ambitions.

At a recent conference on the EU's external energy policy in Brussels, Gazprom Deputy Chairman Alexander Medvedev, head of Gazexport, joked about the Nabucco project, saying: "with names like that, pipelines don't get built". The EU itself remains divided over pipeline routes. Poland, for example, strongly opposes Germany's Baltic Sea project. But developing a southern energy corridor to the EU alongside Russian ones to the north has, in the view of many European officials and analysts, turned Turkey, Georgia, Azerbaijan and Kazakhstan into important strategic partners for the EU.

It is one reason some EU states want to make sure a suspension of EU membership talks with Turkey to be imposed this month, due to Ankara's failure to open trade with Cyprus, is not allowed to kill Turkey's membership hopes altogether. Piebalgs is eager to secure a new southern gas route as soon as possible.

Kazakhstan could choose to pipe its gas to China instead of Europe, even if the cost and distance involved would be far higher than crossing the Caspian. But Kazakhstan President Nazarbayev is proving cautious. Closely allied to Moscow, Astana is wary of inviting the retribution which has met Georgia's snubbing of Russian power. Nine oil- and gas-pipeline projects mentioned in an early draft of the Astana meeting's road map were all taken out, largely for fear of angering Russia over the trans-Caspian issue.

"It's too early to start talking about a trans-Caspian pipeline", Kazakh Energy Minister Baktykozha Izmukhambetov said in an interview published by Dow Jones, adding that the first thing to do is to agree with Russia on expanding capacity in the existing Russian pipeline routes.

Izmukhambetov agreed that Kazakhstan had a strong interest in selling its gas directly to Europe, but he noted that the EU and US were launching feasibility studies for a potential trans-Caspian gas route. Only once those are complete will it be possible for Kazakhstan to judge if the project is commercially viable, and only then could negotiations with Russia start, he said.

The EU made an earlier feasibility study for a shorter trans-Caspian gas-pipeline route from Turkmenistan to Azerbaijan, but that has since been abandoned because of Turkmenistan's refusal to get involved. Izmukhambetov said all of the Caspian's littoral states, including Russia, would have to agree for the project to go ahead. Piebalgs is hoping to get the Russians involved, arguing that it is in their interest to have as many pipelines as possible to ship their own gas to Europe. Asked if the pipeline could be built without Russian involvement, Izmukhambetov said, "No", adding: "From my personal point of view, the Russians are not likely to be interested in taking part".

When the EU created its regional energy integration initiative in 2004, Kazakhstan declined to sign, as did Russia. Russia still attended the Astana meeting as an observer, but Kazakhstan enthusiastically hosted the meeting. When a US-backed consortium built an oil pipeline from Azerbaijan to Turkey against fierce Russian opposition, Kazakhstan refused to get involved. But in June 2006, with the pipeline completed against all expectations, Kazakhstan signed up and is now building capacity to ship crude oil across the Caspian and feed it into the 1m b/d BP-operated pipeline, which can carry crude oil from Baku to Ceyhan on Turkey's Mediterranean coast, via the Georgian capital Tbilisi. "They are always trying to be very prudent in their relations with Russia...and perhaps that's not wrong", said Piebalgs of Kazakhstan. But he added, "after the Baku-Tbilisi-Ceyhan pipeline was built, nothing is unrealistic".

In addition, Piebalgs said, the EU was only just starting to develop a common energy policy. The EU only got serious about gas-supply routes this year, he said, after Russian supplies to Ukraine and Georgia were cut off in January, and a Russian pipeline to Lithuania's oil refinery shut down in the wake of Lithuania's decision to sell the refinery to a Polish, rather than a Russian, buyer in the summer.

Russian officials insist the loss of gas supplies to Western Europe in January was due to Ukraine's theft of transit gas; that the pipeline to Georgia was blown up by Chechen or other terrorists; and that the refinery hitch was technical. Nevertheless, said Mr. Piebalgs, "this all indicates that you are very vulnerable if you don't diversify".