Powering Progress and Energy Expansion: 2023 in Review
Author: Haley Nelson
Dec 20, 2023
Although the Caspian Region is famously known for its vast energy reserves, prior to Russia’s invasion of Ukraine, progress in the Caspian Region’s energy industries had seemed to stagnate. European purchasers were content with purchasing more than 40% of their gas from the Russian market, and a surging interest in domestically produced renewable energy sources meant an uncertain future for the oil and gas products produced in the Caspian region. However, after Russia’s invasion of Ukraine and the imposition of sanctions, the countries that had traditionally depended on Russian energy resources were pressured into finding new suppliers.
The past year saw an uncertain and volatile geopolitical situation in the Caspian Region evolve into wider geopolitical competition. Russia, China, the Gulf region, Europe, and the United States recognized the energy potential of the Caspian and accelerated efforts to win over the energy-rich states. A long list of new energy developments unfolded in the region, thereby changing economic relations, altering power dynamics, and redirecting traditional trade routes.
Although Russia has become an undesirable partner to so-called ‘middle power’ countries hoping to establish stronger relations with the West, there are difficult barriers that Caspian countries need to overcome to sever their ties with Russia. Therefore, the region has not entirely disrupted its relationship with its Northern neighbor, and 2023 saw a continuation of some of the same energy dynamics that characterized relations in the region for decades.
To start off the year, on January 13 Kazakhstan's oil company, KazTransOil, announced that it would transport 300,000 tons of oil to Germany via Russian pipelines. This announcement came months after Russia halted gas exports via the Nord Stream 1 pipeline and ordered a suspension of Kazakhstan’s Caspian Pipeline Consortium pipeline, causing great concern in the European energy market. However, transporting oil to Germany through Russian lines deviates from the much-discussed objective of divesting from Russian-controlled transport routes through diversification. Although this decision sparked some pressures from abroad, in September 2023, Kazakh President Kassym-Jomart Tokayev announced the country had transported 500,000 metric tonnes of crude to Germany's Schwedt refinery through Russia’s Druzhba pipelines.
The Organization of Petroleum Exporting Countries Plus (OPEC+), on April 2, shocked the global oil market as it collectively agreed to cut production by more than 1.66 million barrels of crude oil per day, over 1% of the global oil supply. Russia led the production cut by 500,000 barrels per day, and Kazakhstan reduced its production by 78,000 barrels per day. For Kazakhstan, one of the Caspian region’s two OPEC+ members, despite potential revenue increase, compliance with this move is out of step with its growing relationship with the West.
In July, Russia’s state-owned Gazprom signed its first deal with Uzbekistan to supply Central Asia with 2.8 billion cubic meters of gas per year for the next two years. The new Russian contract reverses the pipeline flow that once transported Turkmen gas to Uzbekistan, Kazakhstan, and Russia. Changing the pipeline’s direction means Turkmenistan no longer will be able to use the Central Asia-Center (CAC) pipeline for transiting its gas. The agreement, forged between Gazprom Export and UzGasTrade, is set for two years, resulting in an annual total of 2.8 billion cubic meters. The agreement with Uzbekistan, anticipated to adhere to global market pricing, is incapable of replacing the substantial profits lost from European markets. Instead, it will further entrench Uzbekistan's reliance on Russian energy supplies, exacerbating the country's economic vulnerability.
While Russia’s deteriorating international reputation may not have completely upended regional dynamics, it has altered the way the Caspian region interacts with other regions. Europe, the Gulf region, and Asia have begun looking towards the region more than ever as the Russian influence wanes. And, the absence of Moscow's red lines has allowed the region to look outward. In 2023, the region struck several unprecedented deals and sparked new partnerships.
On July 17, the UK’s BP and State Oil Company of the Azerbaijan Republic (SOCAR) for the first time placed a joint bid with Israel's NewMed Energy in a licensing round for Israeli hydrocarbon exploration. This marked the first time SOCAR placed a bid for exploration in a foreign market.
Turkmenistan signed its first-ever deal to supply natural gas to the EU in Budapest on August 20. it's anticipated that Turkmenistan will dispatch modest quantities, potentially up to 1 billion cubic meters annually, to Iran through existing pipelines. This agreement signified the EUs first formal support of Turkmenistan's ambition to export its substantial gas reserves to the West.
Turkmenistan’s historic policy of neutrality has previously prevented unlocking the country’s full economic potential, especially to export its vast hydrocarbon resources to the European markets. However, within this past year, Ashgabat has begun to seek new partners in the West, namely in the European Union. In that respect, Hungary has been among the frontrunners in Europe seeking to import Turkmen gas: “We need energy to come to Europe from Central Asia, and for this, we need new sources, new routes, and new infrastructure,” said Orban during his official visit to Turkmenistan in June.
One of these potential routes includes the long-awaited Trans-Caspian Pipeline a proposed subsea pipeline, moving natural gas from Turkmenistan to Azerbaijan through a Caspian Sea route with a capacity of 30 billion cubic meters per year. The project’s future has been unclear since it was first proposed in 1996. However, since Azerbaijan and Turkmenistan resolved their Caspian Sea demarcation issue in the summer of 2021, Azerbaijan and Turkmenistan are slowly making progress on the deal. in late July, Turkmenistan’s Ministry of Energy announced that the state is “committed to the strategy of diversifying energy flows” and it “expresses its readiness to continue cooperation with partners in the implementation of the Trans-Caspian pipeline project.”
As the two Caspian states begin to work toward the pipeline deal, the State Oil Company of the Azerbaijan Republic (SOCAR) has opened an office in Turkmenistan. Azerbaijani Minister of Economy Mikayil Jabbarov stated that SOCAR’s office in Ashgabat intends to support the energy activities of Turkmenistan "by implementing the joint interests of our countries in the energy sector."
While Hungary has also entered into a deal with Azerbaijan's State Oil Company (SOCAR) for the supply of 100 million cubic meters, it seems that all parties are on the same page. This agreement between Hungary and Azerbaijan encompasses a storage arrangement for 50 million cubic meters of gas. SOCAR has already commenced filling storage facilities in Hungary, as confirmed by Hungarian Foreign Minister Szijjarto. While Hungary expresses its interest in Turkmen gas to replace its traditional producers, the presence of SOCAR offices in both Hungary and Turkmenistan could likely lead to the establishment of the Trans-Caspian Pipeline; a monumental event for the Caspian region.
Another new partner that has been added to the region is the Gulf States. In January 2023, United Arab Emirates' Abu Dhabi (AD) Ports Group signed a strategic partnership agreement with KazMunayGas to develop Kazakhstan’s Caspian fleet and coastal infrastructure for its energy exports. Similarly, in April 2023, AD Ports Group discussed prospects for cooperation with Azerbaijan. Further involvement of the Gulf-based companies in the region can provide the necessary technical know-how to help Caspian countries to operate a viable alternative route to bypass their traditional, Russia-oriented export routes for natural gas and crude oil.
The Caspian Sea's second-largest reserve of natural gas, the Absheron gas and condensate field, was inaugurated in Baku, on August 31. The inauguration of the Absheron field production helped signify this new wave of international partnerships. Shortly before the field opened for production, the Abu Dhabi National Oil Company (ADNOC) finalized an agreement for the acquisition of a 30 percent stake in the Absheron gas basin, while the Azerbaijani-owned SOCAR and the French energy corporation, TotalEnergies, maintained their equal shares of 35 percent. According to SOCAR President Rovshan Najaf, the deal serves as a broader testament to Baku's reliability as an international energy partner.
However, while foreign interest has rapidly grown throughout 2023, the region is still challenged by unresolved energy infrastructure issues. The winter of 2022-2023 hit the region particularly hard because of the continuous crisis, creating risks of heating and electricity insufficiency and impacting both the economy and the lives of citizens. Despite being rich in natural resources and major gas exporters, most Central Asian countries have been compelled to halt their gas exports due to significant shortages and escalating domestic demand. This energy shortage threatens the region with winter heating problems, with Uzbekistan and Kyrgyzstan facing particularly high risks among Central Asian nations. Although the two countries have been actively finding solutions through seeking foreign assistance from countries like Russia and China, their support cannot fully resolve the crisis and export obligations.
Starting in January of 2023, Turkmenistan, usually one of the warmest countries in Central Asia, was left without heated homes and its pipelines were frozen as temperatures dropped below –25 Celsius. As temperatures dropped well below freezing, at the Galkynysh gas field, gas hydrates began to form in the pipes and pumps, escalating the reduction of Turkmenistan’s gas exports. Because of the pipeline problems, gas exports to Uzbekistan were suspended, China and Afghanistan received reduced flows, and Iran's eastern and northeastern regions experienced low gas pressure.
Uzbekistan, reported on January 12 that gas imports from Turkmenistan were suspended, causing mass gas outages in Tashkent. This shortage, however, revealed an ongoing pattern in Uzbekistan's energy sector.
Because Uzbekistan faces gas insufficiency with increasing domestic demand, on June 19, Uzbekistan and Russia signed a gas agreement to supply Russian gas to Uzbekistan through Kazakhstan starting from October 2023. The agreement, forged between Gazprom Export and Uzgastrade, is set for two years, resulting in an annual total of 2.8 billion cubic meters through the Central Asia-Center (CAC) pipeline. The decision to procure gas from Russia exposes vulnerabilities in Uzbekistan's energy infrastructure and domestic economy.
Kyrgyzstan similarly faced repeated energy shortages throughout 2023. Witnessing the unavoidable risk, Kyrgyzstan President Sadyr Japarov declared a state of emergency in the energy sector in July 2023 for the period between August 1, 2023, and December 31, 2026. Kyrgyzstan has taken some preventative measures by importing electricity from Kazakhstan, Uzbekistan, and Turkmenistan. Kyrgyzstan Energy Minister Taalaybek Ibraev expressed, however, that covering deficits through neighboring countries is not a sustainable solution.
With their vulnerability to energy risks, underdeveloped infrastructure, and unstable energy reserves, addressing the current situation and taking measures to mitigate future energy risks is becoming a priority for the region. The Caspian Region has begun to look toward new sources of energy to help diversify sources, reduce Russian reliance, and establish stronger domestic energy controls.