How to Save Democracy From Technology
Ending Big Tech’s Information Monopoly
For 13 years, the shadows of NATO supply planes have flecked Central Asia. As the war in Afghanistan stretched on, troops, equipment, and fuel passed through or over Central Asian territories on a daily basis. The drawdown of NATO’s fighting capacity last January should have brightened the skies. But, as it turned out, there were worse storms brewing over the horizon.
As NATO, a guarantor of stability, retreats west, Central Asian states have become increasingly vulnerable to external and internal pressures. China and Russia see this as an opportunity to play chess in a sophisticated game to win influence in the region. The maneuvering between them will likely play itself out over oil and gas resources and export routes, particularly through the region’s largest hydrocarbon producer, Kazakhstan. Prolonged Western sanctions against Russia and sustained low oil prices will only serve to complicate matters.
Before oil prices started falling and Russia was hit with waves of international sanctions, Russian President Vladimir Putin started to build alliances with international oil companies, believing that he was solidifying Russia’s position in global energy markets and other resource-rich regions, especially in Central Asia. In August 2011, the Russian national oil champion Rosneft reached a strategic partnership deal with ExxonMobil. Overnight, the world’s largest private oil company, ExxonMobil, whose involvement in Caspian oil production and transportation had previously mostly annoyed Moscow, emerged as Russia’s potential long-term ally in the region. Then, in November 2013, Rosneft reached an oil swap deal with Kazakhstan’s national oil company, KazMunaiGaz, to supply Caspian oil to China as part of Russia’s energy commitments to Beijing.
As a result of these deals, Russia’s dream of using a Kazakhstan–China oil pipeline as a way of locking Kazakhstan into Moscow’s energy relations with Beijing looked set to become real. Old divisions between international oil companies and Central Asian export routes would bridged and, together, a common energy space would become a foundational pillar of the Eurasian Economic Union, which Kazakhstan and Russia, together with Belarus, were to unveil in January 2015. Kazakhstan, with its heavy involvement with the major oil companies and control over vital oil and gas export routes, found itself occupying an important role in Moscow’s strategy in Central Asia.
But then, everything changed.
Nazarbayev had envisioned the Eurasian Economic Union as an opportunity to synchronize Russian and Kazakh energy strategies toward China and thereby benefit from more favorable terms.
When Belarus, Kazakhstan, and Russia established the Eurasian Economic Union, they anticipated the creation of a $2.7 trillion economy that would control over 25 percent of global energy resources. The union therefore believed it would easily attract new members, including Armenia, Kyrgyzstan, and Ukraine. The first two subsequently opted to join. But Ukraine was deeply divided over whether to sign on with the Eurasian Economic Union or the European Union, and so, when President Viktor Yanukovych opted to throw in his lot with Putin, protests erupted and led to his removal.
European and American sanctions against Russia followed the start of the conflict in Ukraine, thus changing the dynamics within the Eurasian Economic Union. Producers and traders in Belarus and Kazakhstan sought to cash in on Russia’s retaliatory ban on European and American foods by importing prohibited foreign goods and then reexporting them to Russia. At the same time, sanctions, low oil prices, and a 40 percent devaluation of the Russian ruble led to an influx of cheap Russian goods, especially fuel products, into Kazakhstan, which threatened to undermine the country’s own domestic refining sector.
For President Nursultan Nazarbayev in Kazakhstan, this was a problem. He had envisioned the Eurasian Economic Union as an opportunity to synchronize Russian and Kazakh energy strategies toward China and other export markets and thereby benefit from more favorable terms. Indeed, the union was aimed at giving Kazakhstan and Russia, the two largest oil and gas producers in the former Soviet space, vast economic opportunities.
As the calculus changed, though, two power triangles emerged. The first one involved China, Kazakhstan, and Russia, and the second involved the international oil companies operating within those domains.
Russia started to develop deep energy ties with the fast-growing Asian market long ago. By 2002, the now-defunct private Russian oil company Yukos was shipping two million tons of oil by rail to China each year. By 2004, Yukos was able to supply 3.8 million tons and 2.7 million tons of crude by rail to CNPC and Sinopec respectively per year. Yukos also planned to replace expensive railway deliveries with an export pipeline that would transport up to 20 million tons of oil to China per year by 2005, with capacity reaching 30 million by 2010.
The pipeline, for which Russia and Kazakhstan had started discussions with China in the late 1990s, proceeded in fits and starts. On the Kazakh side, the export pipeline between oil-rich Western Kazakhstan and Western China was built in stages between 2003 and 2009, with the first oil delivered in 2006. The same year as Kazakh crude oil hit the Chinese market, Russia started building the East Siberia-Pacific Oil Pipeline (ESPO), which delivered its first oil to Pacific Ocean in December 2009 followed by oil supplies into inland China in January 2011.
On the Russian side, progress was hindered by Russian debates over the route that the future pipeline would take. Construction was further delayed by a tax-evasion scandal at Yukos in 2003–06 and the resulting consolidation of most of its assets under the umbrella of Rosneft. After Yukos’ demise, Rosneft used the old company’s assets to continue supplying oil to China—to the tune of 9.5 million tons of oil per year by 2009. The Russian state oil champion initially signed up to boost supply to 15 million tons per year between 2011 and 2030. And later, in 2013, that arrangement was eclipsed by two further mega-deals, which increased Rosneft’s total commitment to China by an additional 30 million tons per year until 2037.
However, there was uncertainty about both the timing of several of Rosneft’s new oil projects and about whether Rosneft could realistically boost output from its existing fields and enlarge its export infrastructure to the necessary size. And so, before Rosneft even reached its deals with China, it had consulted Kazakhstan about the possibility of using the Kazakhstan-China oil pipeline to supply Kazakh oil to China under a swap agreement between Rosneft and KazMunaiGaz. Rosneft and CNPC eventually agreed that, in addition to oil from the Skovorodino-Mokhe oil line that connects China and East Siberia, Russia would supply oil via “other routes”—that is, the Kazak pipeline—to refineries in Western China.
Energy interdependence has forged wider and deeper links between China, Kazakhstan, and Russia.
Under the Russian-Kazakh oil swap arrangement, KazMunaiGaz now ships an annual volume of seven million tons of its oil to China in partial fulfillment of Rosneft’s agreement. That oil comes to China via the Atasu-Alashankou oil pipeline. This volume could increase to ten million tons per year, and the agreement is to last between five and ten years.
The benefits of the agreement to Kazakhstan, Russia, and China are clear. Kazakhstan can now rely on Rosneft as a pillar of political and economic support in Moscow. At the same time, the Russian state oil company has become an additional communication channel between Astana and Beijing. This means several things for Kazakhstan. For one, having good relations with both China and Russia enables the country to counterbalance them, aligning with Russia to get what it wants from China and vice versa. And that helps Nazarbayev, who was recently reelected, maintain economic growth and stability. Nazarbayev’s son-in-law and Kazakhstan’s unofficial energy tsar, Timur Kulibaev, personally oversees the country’s energy relations with Russia and China, sits on the board of Gazprom, and has been behind oil swap deals with Rosneft President Igor Sechin. The inter-elite relationship between Astana, Beijing, and Moscow ensures that, despite lower energy prices and sanctions against Russia, all three corners of the triangle remain committed to their energy partnership and to cooperation in other areas.
For its part, Russia has turned Astana into an important partner in the Kremlin’s relations with Beijing and other Central Asian producers, which has helped boost Nazarbayev’s commitment to the Eurasian Economic Union. In addition, Rosneft saw its oil swap agreement with Kazakhstan as a way of putting pressure on the Russian pipeline monopoly, Transneft. Although in 2013 Putin gave Rosneft the political blessing to steer Russia’s Asia-Pacific export strategy, Rosneft has struggled with Transneft over the expansion of the relevant export infrastructure. Transneft wanted to finance the expansion by raising tariffs; Rosneft, however, argued that Transneft should do so by issuing shares to oil companies, including to Rosneft. If Rosneft gained equity in Transneft, it knew that it could have a lock on the sector. Rostneft’s oil swap deal with Kazakhstan came at the right time; the agreement enabled Rosneft to push Transneft to a negotiation table. In the end, both Transneft and Rosneft agreed to co-finance further export infrastructure expansion.
For Beijing, the main benefits of this triangle are not just oil and, potentially, gas. Energy interdependence has also forged wider and deeper links between China, Kazakhstan, and Russia. In Beijing’s eyes, these new economic ties will help promote stability and security in the region and help harmonize the interests and agendas of those within the power triangle. Russia may have been weakened by Western sanctions, but Beijing would still like the Kremlin as a partner, not a competitor in Central Asia.
In addition to the emerging energy triangle between Astana, Beijing, and Moscow, Rosneft has been busy building another power triangle—this one between Kazakhstan, Russia, and major international oil companies, particularly ExxonMobil.
Before the West imposed sanctions on Russia, ExxonMobil was Rosneft’s principal partner in new hydrocarbon development in the Arctic (complex offshore), West Siberia (tight oil and gas as well as shale oil and gas), East Siberia (green fields), and the Far East (LNG). Now ExxonMobil plays a growing role in Kazakhstan’s most challenging project, Kashagan. The Kremlin hopes that the company’s technological, logistical, environmental, and managerial approaches to Kashagan’s development can be applied to some Russian offshore projects.
The Kashagan project is ten years behind schedule and its costs have ballooned to an estimated $136 billion, which has led to a serious delay in the flow of revenue to Kazakhstan’s state coffers. To address the problems, ExxonMobil plans to conduct a complete overhaul of the corporate structure of the international consortium developing Kashagan. Starting in 2016–17, the petro giant will supervise the creation of a new entity that will replace the current operating company; using a robust system of quality control, ExxonMobil will then manage all interactions within this new (more unified) corporate structure; it will attract additional international financing for the project; and it will secure a 20-year extension to the existing North Caspian production sharing agreement, which currently expires in 2041.
Beyond speeding the path to profits, Exxon Mobil’s new role in Kashagan will give Kazakhstan an additional channel in its relations with Rosneft and CNPC, in terms of both potential oil-swap deals and other energy projects and cementing useful political connections. It will also lend economic stability to the country and thereby make it even more attractive for other businesses and especially foreign investors.
For its part, ExxonMobil will get a chance to further boost its profile in the global energy industry. Its involvement in Kazakhstan’s North Caspian region and the Russian Arctic illustrates not only its ability to effectively deal in “difficult” jurisdictions but also to tackle highly challenging offshore projects with complex geology, logistics, climates, and sensitive habitats. Further, a successfully completed world-class project will boost the company’s standing in future negotiations with Astana, Beijing, and Moscow as well as elsewhere. It will also place ExxonMobil in a good position to negotiate between Moscow (Rosneft), Astana (Kamunaigaz), and Beijing (CNPC), not to mention the United States. Most important, via its continued involvement in Kashagan, ExxonMobil would secure its exposure to strategic Caspian, Central Asian, Russian and Asian markets. Of course, neither does Exxon want to fall behind other oil firms, especially following Shell’s recent decision to buy BG Group. This latter acquisition comes with a chest full of prized assets for Shell, including a large stake in Kazakhstan’s giant gas and condensate field, Karachaganak, which is located in northwest Kazakhstan.
Any attacks would likely be focused on the major source of state wealth, oil and gas, and the means for its delivery, pipelines.
But all those benefits will only come in times of high oil prices and in the absence of Western sanctions, which currently prohibit technology transfer by international oil companies to Russia. For now, though, sanctions and low oil prices have resulted in the de facto halting of international involvement in Russia’s key hydrocarbon projects and a break on new investment. Naturally, the biggest concern for the Kazakh leadership is therefore how to shield the country from Western sanctions while remaining attractive to foreign investors. In the Kazakh energy sector, the situation remains stable due to the existing good working relations between government and major international oil companies. The fact that further Kashagan development has been shelved until 2016–17 could also give enough time for improved Russia’s relations with the West and a firming of a more stable oil price. For Russia, continued Western involvement in Kazakhstan’s oil and gas sector gives it a way to continue to interact with international oil companies—a channel which, if used well, could help speed up Moscow’s reengagement with Western oilmen once the sanctions are lifted and oil prices recover.
If all that weren’t complicated enough, the withdrawal of NATO combatants from Afghanistan could add yet another problem, one that troubles both east and west. That is the potential spread of Islamist militants north out of Afghanistan. Leaders in the region particularly fear the radicalization of the young in Central Asia.
There are, of course, parallels between Central Asia and other regions that have recently faced radicalism: inequality, corruption, social alienation, a spread in religiosity, and the continuing rise of mass communications. These all concern the region’s regimes. In Russia, the threat is in the North Caucasus states; for Kazakhstan and its neighbors, it is potentially internal; and for China, it is separatists in Xingjian Province. Any attacks would likely be focused on the major source of state wealth, oil and gas, and the means for its delivery, pipelines. Even in a Europe where hydrocarbon demand is decreasing, the loss of an existing or potential supplier would have serious effects. That would also be the case in both Russia and China, the latter more so. With the possible loss of supply or delivery pipelines, it would become increasingly dependent on expensive and vulnerable ship-borne gas and oil.
While not laboring the point, radicalization might overturn current forecasts about economic development based on Central Asian hydrocarbons, just as international sanctions on Russia and low oil prices have shaken the energy dynamics within Central Asia. Despite all this, demand for the region’s hydrocarbon wealth will likely remain constant, and might conceivably grow as the area’s population expands and urbanizes. However, even as the focus of demand for oil shifts East, Western investors in Central Asia and Kazakhstan especially will continue to seek a return on their enormous capital outlays. How all this will play out is hard to predict, as is who will guarantee and protect both production and export routes and pipelines in the future.
It is therefore in the commercial and political interests of Russia, Kazakhstan, other Central Asian states, and China to cooperate. It is also in the West’s own interest to see this process continue. But disagreements and maneuvering between the participating parties can be expected to continue, even as a new and unwelcome cloud, that of militant Islam, might well cast its shadow east. If it does, NATO might long for the days when it regularly flew over the region.