The Caspian Power Game Is Back.

The US is stepping up its drive to secure energy supplies from Central Asia in a bid to counter Russia growing clout and thwart a mounting challenge from China, as signals of a tense new Great Game began to appear in May. The US is pushing for a great energy corridor from the Caspian to Europe to bypass Russia and Iran, with efforts in this regard mounting on the eve of the G-8 summit to be held at St Petersburg in mid-July. Preparations for the proposed energy corridor also involve the European Union (EU).

During a visit to Astana on May 5, US Vice President Dick Cheney pushed Kazakhstan for major new crude oil and gas pipelines from the country to bypass Russia and take Kazakh oil and gas to Europe through Azerbaijan and on to Turkey. Kazakhstan on May 4 gave an early signal it was interested in the concept following talks between Kazakh officials and visiting EU Energy Commissioner Andris Piebalgs.

The proposal is for the twin pipelines to be built under the Caspian Sea - an idea strongly resisted by Russia and Iran for environmental and geo-strategic reasons. The new push comes as EU consumer nations grow increasingly nervous about future supplies, with energy prices soaring to all-time highs, and concerns mount about dependence on Russia's gas monopoly Gazprom which has also become a major oil exporter.

Gazprom has locked in a monopoly hold on gas supplies out of Central Asia and Russia, while it supplies Europe with 25% of its gas needs. In a sign of the growing pressure, Cheney on May 4 lashed out at Russia in a speech in the Lithuanian capital, Vilnius, for using its energy resources as "tools of intimidation or blackmail". In the strongest statement yet by a senior US official, he said Russia was throwing its weight around "either by supply manipulation or attempts to monopolize transportation".

Washington's effort to secure additional Caspian energy supplies comes after several years of wavering US policy in the region due to concerns over increasing authoritarianism there. The administration of President George W. Bush recently offered an olive branch to visiting Azerbaijani President Ilham Aliyev, granting him his first visit to the White House since he succeeded his father as ruler in October 2003. Energy co-operation was one of the main issues on the agenda, as was a programme of reforms towards democracy.

Azeri & Kazakh Rulers Get Reprieve: The US democratisation process, however, is being pushed selectively - with allied rulers of energy-rich countries in the Caspian region spared the extra effort. Zeyno Baran, director of the Eurasian Policy Centre at the Washington-based Hudson Institute, in May was quoted as saying: "Cheney...has decided that this is getting ridiculous"; he was referring to Washington's previous balking over democracy concerns at high-level meetings with regional leaders. Baran said: "Soon there won't be any more democracies in the region to participate with. You can say all you want about how we will not take part in these great games, but Russia and China are taking part in them and there is a risk that the United States is losing out".

Gazprom has been signing off on a string of major new supply agreements with Uzbekistan and Turkmenistan. While President Vladimir Putin recently threatened to send more Russian energy east, China has been stepping up its activities in Central Asia as it seeks to secure supplies from Kazakhstan and Turkmenistan. China's CNPC in 2005 bought Kazakh oil producer PetroKazakhstan of Canada, and the first crude oil from Kazakhstan reached China recently via a major pipeline inaugurated in December. Turkmen President Saparmurat Niyazov in April paid a six-day visit to Beijing, where he signed off on a plan to send 30 BCM/year by a new pipeline to China beginning in 2009. Not satisfied, China is in talks with Kazakhstan over a gas pipeline from that country, too.

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

When Putin named energy security as a priority during Russia's presidency of the G-8 in early 2006, the expectation was that Russia could use its growing might as an energy supplier to leverage its interests and gain an increasingly important seat at the top table of global politics. But Russia's standoff with Ukraine over the New Year, in which it briefly cut off gas supplies, led to growing fears that Moscow was using its energy might as a political weapon. As a result, G7 nations have begun discussing energy security on a much broader level and have stepped up efforts to diversify supplies.

Gazprom's increasing wealth at a time of high energy prices is sparking new worries. Matt Sagers, director for energy economics at Cambridge Energy Research Associates (CERA), was on May 5 quoted as saying: "Nothing in terms of strategy is different. What is different...is that Gazprom now has muscle".

The Caspian is becoming a focal point in the search for new supplies because of its vast energy reserves and the fact that Caspian nations may be easier to reach than those in regions such as war-torn Iraq or West Africa. A State Department official was recently quoted as saying the US foray into Central Asia was more of an attempt to ensure diversity of supplies than a direct response to Gazprom's increasing clout, adding: "We have to help the European gas market function more efficiently".

Gazprom's ability to buy gas from Central Asia for as low as $55 per 1,000 cubic metres and sell it for $240 or more to Europe thanks to its monopoly on all pipelines running west out of the region was "a perverse situation", the official said, adding: "This generates enormous rents that are distributed in non-transparent ways". He said this was not in line with the US reforms agenda, adding: "We can address that by increasing competition and diversifying pipeline routes". Russia should adhere to the principles of the Energy Charter and allow third-party access to pipelines, he said, noting that Russia had called on Ukraine to do exactly that during the price standoff. The official said: "What's good for the goose is good for the gander", playing down Putin's threats that Russia could send energy East if the West did not lift obstacles to its expansion in markets there. The official said it was clear "there's bargaining going on here". He said Russia was not going to give up on its most prestigious market, Europe, adding: "The Russian government has decided that energy could be the...tool to influence Europe... It has clearly established revenues there".

Putin's saber-rattling has sent shivers down Europe's spine, even if it would take a decade to build the infrastructure necessary to take Russian energy eastwards. Weafer said: "In 10 years' time, Europe is facing its greatest crunch. There will be a real energy crisis in Europe if it has not secured major new energy supplies by then". Russia is "taking into account the fact that China and India have a huge appetite for energy and will give favourable terms".

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

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

A big problem for any direct Kazakh route to the West oil and gas is that it would have to go under the Caspian Sea, the demarcation of which has yet to be agreed on by its littoral states, including Russia and Iran. Combined, Russia and Iran would be a threat to any pipeline project (see down1AzerCasp-Jul3-06).

US intentions were highlighted on April 28 when President Bush welcomed Azeri President Aliyev to the White House, stressing the importance of their security and energy ties. Cheney visit to Kazakhstan on May 5 was further evidence that the US wanted to shore up ties with key partners in central Asia, having lost access to a major military base in Uzbekistan in 2005. But an overall hardening of US policy towards Moscow could drive Russia and Iran, which together hold nearly half the world's gas reserves, into an energy-based alliance.

The FT on April 29 quoted a senior financier as saying Iran, competing with Gazprom to sell gas to the Caucasus, was considering a switch in policy by sending its gas to Russia through Central Asia because the US was blocking its access to Europe and India. Lack of investment by Gazprom means that Russia will be increasingly reliant on buying gas from Central Asia or Iran to help meet its subsidised domestic needs and export commitments.

Cliff Kupchan, analyst with the Eurasia Group consultancy, said he had a different understanding: that Russia and Iran would co-ordinate their gas export policies, with Moscow selling to the West and Iran to the east. Deals are proceeding at a bewildering speed. Turkmenistan in April signed a framework deal in Beijing to sell gas to China, while Kazakh President Nursultan Nazarbayev visited Moscow for an agreement to double the capacity of a major oil pipeline for exports to Russia.

However, US officials have dismissed suggestions that they were trying to "clip the wings" of Gazprom. The US has to tread carefully as its oil majors are competing for participation in Gazprom's Shtokman project under the Barents sea. The US has already started buying LNG provided by Gazprom.

"Interference of local authorities, disproportionate use of force to thwart rallies, arbitrary detentions, restrictive interpretations of campaign provisions". That was how the Organisation for Security and Co-operation in Europe (OSCE) evaluated the elections in Belarus earlier this year. The US subscribed to this assessment, saying the elections did not meet a "number of international standards". As a result, the president of Belarus has been banned from the US.

However, the OSCE quotes were about the autumn 2005 parliamentary elections in Azerbaijan. Unlike Belarus President Aleksandr Lukashenko, Aliyev did meet Bush in April and Aliyev's US visit posed many questions about the effectiveness of US efforts to promote democracy in the former Soviet Union (FSU). As things stand, Belarus and Azerbaijan will remain authoritarian indefinitely. The blame does not rest with Moscow alone. It is also with the American policy of attacking some ex-Soviet dictatorships while embracing others, which entrenches both.

While Bush was meeting Aliyev in Washington, the US Embassy in Baku was holding a seminar on how to topple the Azeri president. The Azeri opposition got its dose of the mantra on peaceful resistance, inspired by writings of Gene Sharp and successfully tested in Belgrade, Tbilisi, Kiev and Bishkek. A critic of the Azeri regime then wrote: The task of toppling Aliyev would be much easier if the US did not accord him photo ops in front of the White House. What should the Azeri democratic opposition (or the democratic opposition in any FSU state) make of the fact that Bush met a man who, just a few months earlier, was almost called a dictator by the State Department?

This short memory can be refreshed by reading reports from Human Rights Watch, which keeps a detailed account of violations occurring in Azerbaijan. Were Bush to look at some of those, he might discover that after Aliyev's election in 2004, he quelled most of the popular dissent and imprisoned seven of the opposition leaders.