March 7, 2014

TSG IntelBrief: Ukraine Crisis Highlights Shifting Geopolitics of Energy Networks

• The transformation of pipeline networks from vertical to horizontal is a massive change to the existing geopolitical structure surrounding the Central Asia energy sector

• Chinese investment in new oil and gas pipelines in Central Asia is offering new energy export routes for Central Asian states other than the Soviet-era pipeline networks

• The emergence of the US as a new global exporter of energy has the potential to diminish geopolitical influence of Russia and key exporters in OPEC.

Screen Shot 2013-10-18 at 10.00.05 AM



Russia’s Politics of Energy

A significant dimension of the Ukraine crisis is Russia’s diminishing influence over the transport of energy through the states of the former Soviet Union into Europe. Land-based energy transport routes are feasible only when there is a guaranteed supply and demand, with two or more buyers and sellers involved with a major source or provider. In this context, the most important characteristic of energy transport infrastructure in Central Asia is its vertical integration with Russia and the absence of horizontal transport routes among former Soviet states. (A vertical network exports products from multiple countries to global markets via a single source, whereas a horizontal network involves transport and exchange of products among countries of a region through an integrated transportation network.)

Russia has created a vertical system in which it is the necessary interlocutor and upon which the energy needs of most of Europe depend.

Russia has used its position to manipulate the supply of energy into Ukraine, Central Asia, and Europe in the past. In both 2006 and 2009, in response to bitter contract disputes with Ukraine, Russia suspended the delivery of gas to the country, effectively withholding heat from millions of needy consumers. Russia currently supplies around 30% of Europe’s energy needs—half of which comes through pipelines that traverse Ukraine. However, Europe is also Russia’s biggest energy consumer. Russia’s tendency to use as a political weapon its control over the energy supply has only encouraged countries in Europe and Central Asia to seek out sources of energy that bypass that control.

In the long term, alternative pipelines and suppliers, and the increasing capability of European infrastructure to accommodate liquefied natural gas (LNG) will diminish Russia’s energy stranglehold over the continent. Russia, however, will be left vulnerable by the flight of its largest energy consumers. Profits from Russia’s energy sector make up about 50% of its federal budget.  

The system is slowly changing—an evolution that will have far-reaching geopolitical implications. The development of horizontal energy transportation infrastructure that traverses Central Asian states, bypassing Russia, is at the heart of the crisis today. For Russia, the goal is to preserve its control over Europe-bound energy transport routes in Ukraine and the ability to influence, if not hamper, the development of a horizontal Central Asian energy transport infrastructure. Moscow is primarily concerned with the extended viability of the Soviet-era energy transport network in Central Asia, which is vertically connected to Russia.


China’s Central Asian Energy Ambitions

Today, Russia’s eastern flank is witnessing the Chinese development of horizontal pipeline networks through Central Asia. The most prominent of these pipelines is the Central Asia-China Gas Pipeline (CACGP), Completed in 2009 by China, Turkmenistan, Uzbekistan, and Kazakhstan. The CACGP is a 1,833-km natural gas pipeline that extends all the way to China’s Xinjiang province. The pipeline is a first of its kind not to pass through Russian territory.

China is also investing in other energy transport projects in Kazakhstan, Uzbekistan, and Turkmenistan—including the offer of loan guarantees, like the $4 billion loan for the development of Turkmenistan’s South Yolotan gas field, the country’s largest. This will diversify the region’s customer base, and diminish the importance of the Soviet-era pipelines that allow Russia to dominate the export of the region’s energy resources to international markets.


US Impact on Energy Transport Routes

Last year the US became the world’s leading producer of energy, surpassing Russia. According to the International Energy Agency (IEA), by the end of next year the US will overtake Saudi Arabia as the largest producer of crude oil. The US is also at the heart of the technological revolution in shale-based hydrocarbons developments, which promises to increasingly shape global oil and gas markets and bring about a global decrease in prices. With the US on its way to becoming a net energy exporter, the geopolitical influence of key global and regional powers such as Russia, Iran, and Saudi Arabia is bound to decline.

Parallel to the boom in US production of shale gas and oil is the development of massive infrastructure across the US to export LNG to global markets, chiefly Europe and Asia. This will transform the global dynamics of energy by diversifying European and Asian energy sources other than those in the Middle East and Russia. This would enable European and Asian consumers of Russian and Middle Eastern energy to negotiate for better pricing, thus further limiting the ability of energy producers to leverage their energy resources to score geopolitical gains.


• With developments towards a new horizontal pipeline network in Central Asia, Russia will have to negotiate with China for new energy export arrangements   • Russia will gradually cease to be the key exporter of energy resources of such countries as Turkmenistan, Kazakhstan, and Uzbekistan   • In the short term, Russia has demonstrated its willingness and capability to use energy issues to implement its political will with Europe. However, as this crisis is occurring at the start of spring, Russia has less leverage over Ukraine and Europe than it otherwise might have   • In the long term, Russia’s ability to manipulate the supply of energy to Europe will be compromised by the transforming energy infrastructure in Central Asia and by the European desire to diversify its sources of energy.



We welcome the opportunity to discuss your requirements and explore how our intelligence services can assist you in achieving your strategic objectives. For more information, please contact us at:

 Screen Shot 2013-10-21 at 9.32.42 AM