Kazakhstan's pipeline diplomacy

Keeping the oil flowing reliably will require placating and persuading a whole host of parties: Western governments, Russia, and Ukraine.

To keep the pipelines flowing, Kazakhstan’s diplomatic outreach needs to go into overdrive.

A report in the Financial Times last week suggested that Russia could in a reprisal over Ukraine’s strikes on its energy infrastructure look to cripple important infrastructure needed by the West.

The newspaper singled out the Caspian Pipeline Consortium (CPC) oil pipeline, which rises in Kazakhstan but lies mostly on Russian soil and has its terminus at the Russian Black Sea port of Novorossiysk, as an example.

There is no underestimating the importance of the CPC route to Kazakhstan: at last count, it carried around four-fifths of the country's oil exports. The vulnerability runs deeper than even that figure suggests. Almost 90 percent of the oil flowing through CPC is Kazakh.

If the pipeline stopped working, it would arguably be a marginal loss for Russian oil companies. U.S. and European shareholders of the oil fields that feed their product into CPC — which include the likes of Chevron, ExxonMobil, Shell, and Eni — might be less sanguine.

SIDENOTE: One Russian-controlled oil training company, Litasco S.A., a subsidiary of Moscow-based LUKoil, ceased using CPC almost altogether in 2023. With Western sanctions in place, the logic of an Europe-facing export strategy has withered. With those complications in mind, Litasco in May sold the ISAB oil refinery in Sicily to a Cypriot private equity firm, G.O.I. Energy.

Addressing the FT report, Almasadam Satkaliyev on Tuesday assured reporters that the Kazakh government is busy at work keeping CPC safe by reaching out to all relevant parties.

“We are in communication with the embassies of European states, and with our colleagues from the Russian Federation over ensuring stable operations with this pipeline,” Energy Minister Almasadam Satkaliyev said on Tuesday. “Similar consultations are ongoing through diplomatic channels with the Ukrainians.”

Much has been made of Kazakhstan’s efforts to develop oil export routes bypassing Russia, but potential on that front is limited. Magzum Mirzagaliyev, the chairman of state oil and gas company Kazmunaigaz, admitted as much in an interview last month.

President Kassym-Jomart Tokayev “set out the task of developing the so-called Middle Corridor or Trans-Caspian International Transport Route, which entails transportation across the Caspian Sea. As part of developing that route, we began last year to transport oil in the direction of Baku and further along the Baku-Tbilisi-Ceyhan oil pipeline. Our plans are to increase transportation volumes along this route,” Mirzagaliyev said. “But that in no way means that we are looking for an alternative to the Caspian Pipeline Consortium oil pipeline. CPC remains reliable, stable and, most importantly, the fastest way to deliver our oil to export markets.”

That was, of course, before Ukrainian armed forces intensified their campaign of lobbing exploding drones at Russian refineries. In more bad news for Russian oil companies, India has latterly been spurning their product and opting for U.S. crude instead.

Russia may now be strongly tempted to use its leverage. It would not be the first time it has taken aim at CPC. Deliveries through the pipeline were interrupted repeatedly in 2022, ostensibly for technical reasons, giving rise to speculation that Moscow was penalizing Astana for failing to show solidarity over its invasion of Ukraine.

Less well-known, meanwhile, is that Russia also relies on Kazakhstan to export its oil, albeit fairly small amounts.

The lower house of parliament, the Majilis, on Wednesday ratified a 10-year agreement with Russia allowing for the annual transit of 10 million tons of oil to China. The oil will be supplied by Rosneft.

Kazakhstan is charging $171 million in transit fees per year. To get even more specific, the fee will be $2.10 per ton to send oil to the northern Kazakh city of Pavlodar, and then $15 per ton from Pavlodar to China. 

This is a noteworthy nugget mainly for the fact that Kazakhstan in turn pays Russia “less than” $15 per ton in transit fees for sending oil along state-owned Transneft pipelines. That oil eventually lands at a refinery in the eastern Germany city of Schwedt.