Europe Adds to Central Asian Resource Frenzy

Written By Brian Hicks

Posted April 26, 2007

With the specter of Russian dominance haunting European energy markets, the EU’s problems pose a huge energy investment opportunity. This week, a group of European Union foreign ministers gathered in Luxembourg took a first step towards the resource-rich countries of Central Asia.

Central Asia is becoming an investor’s paradise. Oil production is on the upswing and other resources are bountiful, inviting a rush on the region.

Germany, which currently holds the rotating presidency of the European Parliament, catalyzed this effort to reach out to Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan.

All of these countries–along with Afghanistan–comprise Central Asia, a geographically vague area but one of extreme geopolitical importance. Most of the -Stans are also part of the Shanghai Cooperation Organization.

 

Central Asia (EIA map)

source: US Energy Information Administration

The SCO, with China and Russia at its head, is a 21st-century Warsaw Pact of sorts, grouping many states run by strongmen with deep roots in Communist Party structure. But because of peak oil, these thugs have now become as attractive as a supermodel. Kazakhstan, for example, is on everyone’s dance card.

Just a few months ago, I was speaking to a contact of mine at one of London’s most successful securities firms. His job is to create collateralized debt obligations (CDOs) that facilitate access to money by diffusing risk among several parties.

In other words, he is in the business of softening the blow to bond holders when debt defaults happen.

Kazakhstan, he told me, is one of his firm’s primary areas of financial focus.

You may not have heard of the country until British comedian Sacha Baron Cohen debuted as Borat, the fake Kazakh reporter who bumbled his way through an American journey and offended plenty along the way. If Borat had been dealing with oil men, you can bet they would have cut him slack just for being Kazakh.

With nine billion barrels of proven reserves, Kazakhstan’s underexplored landscape is one of the few areas where oil production is actually expected to rise over the next decade.

I cannot overstate the importance of this point. While countries and companies clamor deeper and farther offshore, these old Reds are sitting on what is perhaps Earth’s last bubbling crude.

In launching the first-ever EU strategy for Central Asia with a ten-page report that should be made policy this June, German Foreign Minister Frank-Walter Steinmeier says he intends to put rule of law, education, and training "at the forefront" of the group’s initiative.

Yeah, right.

The Real Reason

The EU imports 30% of its oil and 40% of its gas from Russia, which is a big problem for Europe since Mother Russia slapped Ukraine and Belarus with one-sided tax hikes in the past two years and got the spigot shut off for everyone to the west.

During my time in the former Soviet Socialist Republic of Estonia last year, I heard nothing but bad things about Russia. As Moscow craves restoration to the position of overlord over former satellite states, Estonia has exhumed Soviet soldiers for burial outside of town and shown favor to Germany’s WWII occupation, which it saw as a liberation from USSR rule.

Estonia has tied its energy security and that of neighboring Baltic states Latvia and Lithuania to the Nordic energy grid, with the Estlink project providing a major undersea conduit.

Energy options are in high demand worldwide, and in Europe even the political mushroom cloud of nuclear energy is now looming in a very real way as an alternative to Russian gas imports.

On that note, Kazakhstan officially expects a 31% jump in uranium production in 2007, giving it another saucy leg up on current EU suppliers.

"It may well be that in our new partnership the energy dialogue will be something that we seek to promote," Steinmeier tacked on to the human rights hedge.

As if human rights were the litmus test for patronage. The EU has turned a blind eye to Russia’s domestic problems and external belligerence for years. Uzbekistan was chastised by the EU for the killings of hundreds of civilians by government troops in that country’s capital in 2005. But there is now a dialogue between the EU and Uzbek officials, which will clear the political path for pipelines and such.

A Bull is Born

These countries are not in OPEC, which is an asset in market-based pricing and bilateral agreements, and newly-built infrastructure will assist new methods of transporting resources from Central Asia around Russia through the Caucasus Mountains.

The BTC pipeline, especially, will carry Caspian Sea oil from Azerbaijan through Georgia and on to Turkey’s Mediterranean coast. Kazakhstan, just across the Caspian, has let the Azeri government know that it would like to link up as well.

And with two thirds of Caspian Sea regional oil reserves resting in Kazakhstan, Europe should push for that country’s inclusion.

It may be that the EU is turning from one Communist Party veteran to others (Kazakhstan’s President Nursultan Nazarbayev was the chief of the Communist Party of Kazakhstan before assuming power as the leader of the newly free "democratic" state).

But on the other side of Central Asia is, of course, East Asia.

China is licking its chops, and taking a big bite already. The Shanghai Cooperation Organization is a resource alliance if nothing else, and China’s commitment to Sudan shows Central Asian leaders that Beijing doesn’t give a hoot what they do at home, as long as the uranium glows and the oil flows.

In that respect, the EU should be prepared for a tug-o’-war over Central Asia, and maybe for a real war as well.

But for uranium and oil, as well as base metals like lead and zinc where Kazakhstan ranks second worldwide, Central Asia is becoming an investor’s paradise and another driver in the worldwide resource run-up.

Regards,

sig

Sam Hopkins 

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