Ukraine’s Drone Strikes Against Russia Could Accelerate Central Asia’s Rise As An Alternative Transit Hub For Asia-Europe Trade

For instance, Ilham Shaban, head of the Baku-based Caspian Oil Research Center, suggested in May last year that a short subsea pipeline connecting Turkmen offshore gas fields to Azerbaijan’s Azeri-Chirag-Guneshi block can be constructed, while also noting that he finds the possibility of the construction of such a subsea pipeline very low in the near term.

However, if the crisis in Ukraine continues to endanger Europe’s energy security in the near term then the prospects for a trans-Caspian pipeline could improve.

Coming to the oil markets, Russia has been serving as a transit country for Europe’s oil supply from the Central Asian region. For example, some 98 percent of Kazakhstan’s oil exports transit through Russia.

As stated earlier, the recent Ukrainian drone attack on the Tengiz-Novorossiysk pipeline, is expected to cause 30 percent reduction in the volume of oil pumped from Kazakhstan. Now, this is not the first time the Central Asian nation has faced disruptions to its oil shipments since the onset of Russian military actions in Ukraine.

In 2022, Russia suspended the transit of Kazakh oil through its territory on four separate instances, citing various reasons, ranging from damage to the port due to storm to removal of World War II-era underwater mines from the Black Sea. However, many analysts suspect that there are political underpinnings to instances of Moscow’s suspending Kazakh oil transits, particularly in light of Astana’s refusal to endorse Russia’s annexation of Ukrainian territories.

So, after one such suspension of Kazakh oil’s transit through the CPC pipeline in July 2022, which was ordered by a Russian court on grounds of “irregularities in paperwork guiding elimination of oil spill emergencies”, the Kazakh President Kassym-Jomart Tokayev felt the need to emphasize the importance of diversifying oil supply routes.

In November 2022, Kazakhstan’s national oil company KazMunayGas (KMG) reached an agreement with Azerbaijan’s SOCAR to transport 1.5 million tons of Kazakh oil annually for five years through the Baku-Tbilisi-Ceyhan (BTC). Accordingly, exports via the BTC pipeline began in April 2023.

In March 2024, KMG and SOCAR reached an agreement to gradually increase the oil transit volume through Azerbaijan to 2.2 million tons annually.

In November 2024, Energy Minister Almasadam Satkaliyev indicated that that Kazakhstan is assessing the opportunity to elevate its annual oil supply via the BTC pipeline to 20 million tons.

An instance of this was observed in late January, when Kazakhstan dispatched its inaugural shipment of oil from the Kashagan oil and gas field to the Azeri port of Baku, for it to be further transported to the Mediterranean Sea via the BTC pipeline.

However, Kazakhstan has had to limit its aspirations for exporting oil via the Caspian Sea owing to a lack of tankers and Azerbaijan’s statement late last year that the BTC can only support 2.2 million tons per year of Kazakhstan’s oil due to the high sulfur content in Kazakh crude that erodes pipes.

An additional challenge to Kazakhstan’s ambitions for oil exports via the Caspian Sea lies in the high transportation costs associated with the BTC pipeline, which is approximately three times more expensive, amounting to around US$120 per ton compared to US$38 via the CPC. These additional expenses are incurred when transporting oil by rail to Aktau and then shipping it to Baku.

This is because pipeline transport remains the most cost-effective method, with costs ranging from US$2 to US$4 per barrel, depending on distance and infrastructure. Conversely, rail transport generally incurs costs 2-5 times that of pipeline transport. Maritime transport costs can vary greatly based on distance, but it is generally less expensive than rail and more costly than pipeline transport.

To effectively increase oil export capacity at a lower cost, Kazakhstan would need to undertake extensive infrastructure upgrades at its Aktau port, however, experts caution that higher costs linked to the BTC route could pose economic risks unless there is a rise in oil prices.

“The main problem is the delivery of oil to Baku. From the fields, it is transported by tankers to Aktau, then by tankers shipped across the Caspian Sea. This is a time-consuming process that incurs storage and waiting costs. Expanding supplies to 20 million tons will require infrastructure upgrades. Today, the port of Aktau can handle only five to six million tons of oil per year. The port’s capacity will have to be expanded three times to increase volumes, and additional storage and loading terminals will have to be built. This will require significant capital investments,” oil and gas analyst Abzal Narymbetov told Kazinform news agency.

One option for lowering costs, again, is to construct an oil pipeline under the Caspian Sea, which however faces challenges due to the legal and geopolitical complexities associated with the Caspian Sea that have been discussed before.

“Without an agreement between the five Caspian littoral states, the construction of an oil pipeline is impossible. Therefore, Kazakhstan is left to rely on tanker transportation, which significantly increases costs,” said Narymbetov.

Conversely, according to Rashid Zhaksylykov, the chairman of the Presidium of the KazService Association of Oil Service Companies, the CPC route remains the sole economically viable option in the near future.

“No route that we could offer or implement would be more profitable than the CPC. Of course, we are pushed by an external factor – threats from Russia, when they start discussing the closure of the CPC. But every pipeline has its real capacity. For example, the Caspian pipeline can pass up to 80 million tons of oil per year, and even if nothing happens there, we will continue to supply oil,” Zhaksylykov told Kazinform.

In his view, the BTC route would only be justified if oil prices were to rise.

“If oil will cost below US$40 per barrel, then deliveries through Baku will be economically unreasonable. However, if the price of oil was US$70-80, then deliveries through Baku would become profitable for Kazakhstan. Ultimately, everything depends on the price pressure in the market,” said Zhaksylykov.

That said, despite the oil transit via the Caspian Sea incurring costs that are threefold compared to pipeline transport through Russia, the Kazakh government appears inclined to absorb these costs in order to expand its freedom of action as well as its leverage when dealing with Russia.

By 2023, Kazakhstan had doubled its oil and gas condensate supplies bypassing Russian ports to 3.73 million tons compared to the 1.91 million tons in previous year.

Experts suggest that Kazakhstan’s actions could have longer-term implications for Russia that would be more consequential as compared to their immediate impact on oil transit routes.

Among these experts is Ilham Shaban, who foresees a major boost to Azerbaijan’s role as a critical player in the regional energy transport network through increased utilization of the BTC pipeline or other existing routes.

“This could lead to higher transit revenues and bolster Azerbaijan’s geopolitical influence in energy markets. Collaborative efforts with Türkiye on alternative routes could strengthen regional partnerships and drive economic growth,” Shaban is cited as saying in a report in December 2024 by Astana Times.

“Türkiye, in turn, stands to benefit both economically and strategically. As an energy transit hub, increased oil flows through Turkish ports and pipelines could generate substantial transit revenues. Moreover, Türkiye’s role in energy negotiations spanning Europe, the Caucasus and the Middle East would likely expand, further solidifying its status as a regional power,” he further said.

Spillover From Energy Markets Could Reduce Russia’s Significance In Global Transport And Logistics

The apprehensions regarding the reliability of Russian transit routes for the Central Asian energy exports seem to be influencing other sectors of global trade and commerce.

For example, in addition to oil, Kazakhstan has also been sending other cargo westward via the Middle Corridor, also known as the Trans-Caspian International Transport Route (TITR), which passes through Central Asia, the Caspian Sea, and the South Caucasus.

Kazakhstan’s state-owned nuclear company, ‘Kazatomprom’ has been using the Middle Corridor for delivering its material to western customers since 2018. Also, on January 10^th of this year, a subsidiary of Kazakhstan’s national oil transporter, ‘KazTransOil JSC’ announced that it transshipped 3 thousand tons of Kazakhstani ammophos via the TITR, marking the first time that this mineral fertilizer was exported via this route.

Likewise, other Central Asian countries could follow Kazakhstan’s lead in sending their cargo westward via the Caspian route rather than through Russia, which could further expand Turkish and Western influence in the region.

For example, in December 2022, Uzbekistan, for the first time sent a train loaded with copper to Europe along the Middle Corridor via the Turkmenistan-Uzbekistan route using the Turkmenbashi port of Turkmenistan from where the containers were transferred onto a ship to be ferried across the Caspian Sea to Azerbaijan’s port of Baku, to be transported across Azerbaijan, Georgia, Turkey, and finally to Europe.

Also, in January this year, Uzbekistan’s President issued a decree to enhance trade along the routes alternative to those passing through problematic countries (read Russia), and among the alternative trade routes included were: 1) Turkmenistan – Iran – Turkey – EU, 2) Turkmenistan -Azerbaijan – Georgia – Europe, 3) Andijan – Osh – Irkeshtam – Kashgar, and 4)Uzbekistan – Afghanistan – Pakistan.

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