The Caspian Sea region, including the Sea and the littoral states surrounding it, is important to world energy markets because it holds large reserves of undeveloped oil and natural gas. The Caspian Sea’s mineral wealth has resulted in disagreements between the five countries over ownership of the resources, and the region’s huge energy potential has sparked fierce competition–between producers as well as consumers–over the final export routes for this oil and natural gas.
The Caspian Sea is located in northwest Asia, landlocked between Azerbaijan, Iran,Kazakhstan, Russia, and Turkmenistan. Since the breakup of the Soviet Union in 1991, the Caspian Sea–as well as the region surrounding it–has became the focus of much international attention due to its huge oil and natural gas reserves. The Sea, which is 700 miles long, contains six separate hydrocarbon basins, although most of its oil and natural gas reserves have not been developed yet. Although the littoral states of the Caspian Sea already are major energy producers, many areas of the Sea and the surrounding area remain unexplored.
The prospect of potentially enormous hydrocarbon reserves is part of the allure of the Caspian Sea region (which is defined here to include Azerbaijan, Kazakhstan, Turkmenistan, and the regions of Iran and Russia that are near the Caspian Sea). Proven oil reserves (defined as oil and natural gas deposits that are considered 90% probable) for the Caspian Sea region are estimated at 17-33 billion barrels, comparable to those in the United States (22 billion barrels) and the North Sea (17 billion barrels). In addition, the region’s possible oil reserves (defined as 50% probable) could yield another 233 billion barrels of oil. Most of Azerbaijan’s oil resources (proven as well as possible reserves) are located offshore, and perhaps 30%-40% of the total oil resources of Kazakhstan and Turkmenistan are offshore as well.
Natural gas reserves in the Caspian Sea region are even larger than the region’s oil reserves. Overall, proven natural gas reserves in the Caspian region are estimated at 177-182 Tcf. Possible natural gas reserves in the Caspian region are even larger than the region’s proven natural gas reserves, and could yield another 293 trillion cubic feet (Tcf) of natural gas if proven. Turkmenistan (101 Tcf) and Kazakhstan (65 to 70 Tcf) are among the top 20 countries in the world in terms of proven natural gas reserves.
Since they became independent in 1991, Azerbaijan, Kazakhstan, and Turkmenistan have sought to develop their national oil and natural gas industries. Although the Soviet Union attempted to exploit each of the republic’s energy resources, a lack of investment, deteriorating infrastructure, and out-dated technology resulted in declining rates of production in each of the countries at the time of the Soviet Union’s collapse in 1991. Over the last 10 years, however, Azerbaijan and Kazakhstan, especially, have received large amounts of foreign investment in their oil and natural gas sectors. With additional investment, the application of Western technology, and the development of new export outlets, oil and natural gas production in the Caspian region could grow rapidly.
Caspian Legal Status Remains Unresolved
In order for the Caspian Sea region to realize its full energy potential, however, the littoral states must first agree on the legal status of the Sea. Prior to 1991, only two countries–the Soviet Union and Iran–bordered the Caspian Sea, and the legal status of the Sea was governed by 1921 and 1940 bilateral treaties. With the collapse of the Soviet Union and the emergence of Kazakhstan, Turkmenistan, and Azerbaijan as independent states, ownership and development rights in the Sea have been called into question. Currently, there is no agreed-upon convention that delineates the littoral states’ ownership of the Sea’s resources or their development rights. The potential oil and natural gas wealth, along with the corresponding environmental risks of resource development in the Caspian, have heightened the stakes for each country.
As a result, several conflicts have arisen over mutual claims to different regions of the Sea, especially in its southern waters. In July 2001, Iranian military gunboats confronted a British Petroleum (BP) Azeri research vessel exploring the Araz-Alov-Sharg structure, ordering the ship out of waters Iran claims as its own. Azerbaijan, for its part, has objected to Iran’s decision to award Royal Dutch/Shell and Lasmo a license to conduct seismic surveys in a region that Azerbaijan considers to fall in its territory. In addition, Turkmenistan and Azerbaijan remain locked in a dispute over the Serdar/Kyapaz field, while Turkmenistan claims that portions of Azerbaijan’s Azeri and Chirag fields–which Ashgabat calls Khazar and Osman, respectively–lie within its territorial waters.
Thus, the unresolved status of the Caspian Sea has hindered further development of the Sea’s oil and natural gas resources, as well as the construction ofpotential export pipelines from the region. Negotiations between the littoral states have made slow progress in ironing out differences between the countries: while Russia, Azerbaijan, and Kazakhstan have agreed on dividing the Sea by a “modified median” principle, Iran insists on an equal division of the Sea, and Turkmenistan agrees on the principle of dividing the Sea, but not the method. A proposed summit of the heads of states of the Caspian countries was postponed three times in 2001 when it became apparent beforehand that no final agreement could be reached.
Despite the lack of a multilateral agreement on the Sea, several countries are undertaking active exploration and development programs in what is generally considered to be their sector of the Caspian Sea. In particular, Azerbaijan and Kazakhstan have made substantial progress in developing their offshore oil reserves.Azerbaijan has signed a number of production-sharing agreements–both onshore and offshore–in order to develop its oil and natural gas industries. A significant percentage of Azerbaijan’s oil production comes from the shallow-water section of the Gunashli field, located 60 miles off the Azeri coast. Although the country’s oil production fell after 1991 to just 180,000 barrels per day (bbl/d) in 1997, with the help of international investment in the sector, Azerbaijan’s oil production rebounded to 317,000 bbl/d in 2001.
Likewise, Kazakhstan has opened its resources to development by foreign companies.International oil projects in Kazakhstan have taken the form of joint ventures, production-sharing agreements, and exploration/field concessions. After Russia, Kazakhstan was the largest oil-producing republic in the Soviet Union, but after independence, Kazakhstan’s oil production dropped more than 115,000 bbl/d, to just 414,000 bbl/d, in 1995. Boosted by foreign investment in its oil sector, Kazakhstan’s oil production has increased steadily since then, with output of 804,000 bbl/d in 2001, most of which came from three large onshore fields (Tengiz, Uzen, and Karachaganak). In addition, preliminary drilling in Kazakhstan’s offshore sector of the Caspian has revealed bountiful oil deposits, especially in the Kashagan field, raising hopes that Kazakhstan may become one of the world’s largest oil producers.
Overall, oil production in the Caspian Sea region reached approximately 1.3 million bbl/d in 2001. Production in the region is projected to increase severalfold, led by three major projects currently under development in Azerbaijan and Kazakhstan:
- In April 1993, Chevron concluded a historic $20-billion, 50-50 deal with Kazakhstan to create the Tengizchevroil joint venture to develop the Tengiz oil field, estimated to contain recoverable oil reserves of 6-9 billion barrels. Tengizchevroil produced 190,000 bbl/d in 1999, and production could increase to 340,000 bbl/d in 2002 now that the Caspian Pipeline Consortium’s Tengiz-Novorosiisk export pipeline is operational. Additional export pipelines likely will be needed, but given adequate export outlets, the Tengizchevroil joint venture could reach peak production of 750,000 bbl/d by 2010.
· In what was described as “the deal of the century,” in September 1994 the Azerbaijan International Operating Company (AIOC) signed an $8-billion, 30-year contract to develop three Caspian Sea fields–Azeri, Chirag, and the deepwater portions of Gunashli–with proven reserves estimated at 3-5 billion barrels. Almost all of Azerbaijan’s production increases since 1997 have come from AIOC, which produced about 100,000 bbl/d in 2000 from ACG. In the first three months of 2001, AIOC produced an average of 118,880 bbl/d of oil from the ACG deposits. The first phase of full-field development, which will increase production to 400,000 bbl/d, has been delayed pending a decision on export options, but oil production at ACG is expected to reach 800,000 bbl/d by the end of the decade. The planned Baku-Ceyhan Main Export Pipeline will be the main vehicle for ACG oil exports.
· Although signed with less fanfare in 1997, the offshore Kashagan block being developed by the Agip Kazakhstan North Caspian Operating Company (Agip KCO, formerly OKIOC) may turn out to be more lucrative than both the Tengiz and the ACG group of deposits combined. Preliminary drilling in the Kashagan block has produced spectacular results, with analysts estimating possible oil reserves of up to 40 billion barrels (10 billion barrels of which are thought to be recoverable). Although Agip KCO has released estimates of Kashagan’s potential output that are significantly below earlier expectations (around 1.2 billion recoverable barrels), oil analysts are hailing the field as the largest oil discovery in 30 years.
These projects, along with others currently underway, could help boost Caspian Sea region production to around 3.7 million bbl/d by 2010. By 2020, production could increase by another 2 million bbl/d. Although not “another Middle East,” as some analysts have claimed, the Caspian Sea region certainly is comparable to the North Sea in its hydrocarbon potential.
Unlike with oil, the Caspian region’s natural gas resources were extensively developed under the Soviet Union. Caspian Sea region natural gas production, not including major Central Asian natural gas producer Uzbekistan, was 3.9 Tcf in 1990, but the collapse of the Soviet Union led to downturns across the region. After 1991, Caspian region natural gas, mostly from Turkmenistan, became a competitor with Gazprom, the Russian state natural gas company. Since Gazprom owned all the pipelines and export routes for Caspian natural gas were routed through Russia, Caspian natural gas was squeezed out of the hard currency market.
As a result, Turkmenistan’s incentives for increasing its production of natural gas disappeared. The country’s output dropped throughout the 1990s, plummeting from 2.02 Tcf in 1992 to just 466 billion cubic feet (Bcf) in 1998, when the country was locked in a pricing dispute with Russia over the export of Turkmen natural gas. With high world natural gas prices and a Turkmen-Russian agreement on Turkmen exports in place, the country’s natural gas production rebounded to 788 Bcf in 1999, then skyrocketed to 1.66 Tcf in 2000. Turkmenistan has plans to boost natural gas output substantially over the next decade, contingent on securing adequate export routes, such as the proposed Trans-Caspian Gas Pipeline.
Uzbekistan is the third largest natural gas producer in the Commonwealth of Independent States and one of the top ten natural gas-producing countries in the world. Since becoming independent, Uzbekistan has ramped up its natural gas production nearly 30%, from 1.51 Tcf in 1992 to 1.96 Tcf in 2000. The country’s natural gas reserves are estimated at 66.2 Tcf, with the richest natural gas district in the Uzbek section of the Ustyurt Region. In order to offset declining production at some older fields such as Uchkir and Yangikazen, Uzbekistan is speeding up development at existing fields such as the Kandym and Garbi fields, as well as planning to explore for new reserves. Since Uzbekistan is landlocked and since its natural gas competes with Russian and Turkmen natural gas, Uzbekistan is limited in its ability to export. Instead, Uzbekistan has concentrated on supplying the Central Asian natural gas market.
As increasing exploration and development in the Caspian Sea region leads to increased production, the countries of the region will have additional oil and natural gas supplies available for export. Already, in 2000, Kazakhstan had net oil exports of 457,000 bbl/d while Azerbaijan had 155,000 bbl/d in net oil exports. Overall, Caspian Sea region oil exports in 2000 amounted to about 800,000 bbl/d (of the 1.3 million bbl/d produced). With numerous oil projects in the region slated to boost production in the coming years, the region’s net exports could increase to over 3 million bbl/d in 2010, and possibly another 2 million bbl/d on top of that by 2020.
With regards to natural gas, Turkmenistan led the way among Caspian Sea region producers with net exports of 1.2 Tcf in 2000. Overall, Caspian Sea region natural gas exports totaled just 980 Bcf in 2000, since both Azerbaijan and Kazakhstan have yet to tap their full natural gas production potential (and Kazakhstan is currently a net natural gas importer). With Azerbaijan’s Shah Deniz field in development, along with increased investment to develop infrastructure and markets for the region’s natural gas, Caspian natural gas exports could increase by another 2-3 Tcf by 2020.
Current Lack of Alternative Routes
However, in order to boost oil and gas exports from the Caspian Sea region, a number of issues will need to be addressed first. All of the oil and natural gas pipelines in the Caspian Sea region (aside from those in northern Iran) that were completed prior to 1997 were routed through Russia and were designed to link the Soviet Union internally. With the collapse of the Soviet Union in 1991, the republics that had been customers for Caspian natural gas are unable to pay world market prices for natural gas supplies due to the economic transition process. In addition, natural gas exports to other Newly Independent States (NIS) have been limited because the pipelines pass through Russia and require agreements with Gazprom, the Russian natural gas monopoly that owns the pipelines and is a competitor with Caspian natural gas.
Thus, with a lack of export options, in order to export their natural gas, the Caspian region’s producers have had two options: either sell their natural gas to Russia at below-market prices or pay Gazprom a transit fee, then export those supplies via theRussian pipeline system to ex-Soviet states that cannot pay fully in cash or are tardy with payments for supplies already received. Turkmenistan’s economy, which is concentrated mainly in oil and natural gas, experienced a huge 25.9% drop in GDP in 1997 when Gazprom denied Turkmenistan access to its pipeline network over a payment dispute. Although Gazprom and Turkmenistan resolved the dispute in 1998, in order to reach its full natural gas export potential, Turkmenistan and other Caspian region natural gas producers must solve the problem of how to pipe their natural gas to consumers and receive hard currency at market prices in return.
Similarly, prior to 1997, exporters of Caspian oil had only one major pipeline option available to them, the 210,000-bbl/d Atyrau-Samara pipeline from Kazakhstan to Russia. In addition, smaller amounts of oil were shipped by rail and barge through Russia, as well as by a second, small pipeline from Kazakhstan to Russia. The Caspian region’s relative isolation from world markets, as well as the lack of export options, has thus far stifled exports outside of the former Soviet republics. Of the 700,000 bbl/d exported from the region in 2000, only about 300,000 was exported outside of the former Soviet Union.
Construction of New Export Routes
In order to bring much-needed hard currency into their economies, Caspian region oil and natural gas producers are seeking to diversify their export options to reach new markets. With new production coming online as well, new transportation routes will be necessary to carry Caspian oil and natural gas to world markets. To handle all the region’s oil that is slated for export, a number of Caspian region oil export pipelinesare being developed or are under consideration. Likewise, there are several Caspian region natural gas export pipelines that have been proposed. Although there is no lack of export option proposals, questions remain as to where all these exports should go.
The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a European Union (EU) conference in 1993. The EU conference brought together trade and transport ministers from the Central Asian and Caucasian republics to initiate a transport corridor on an West-East axis from Europe, across the Black Sea, through the Caucasus and the Caspian Sea to Central Asia.
In September 1998, twelve countries (including Azerbaijan, Bulgaria, Kazakhstan,Romania, Turkey, and Uzbekistan) signed a multilateral agreement known as the Baku Declaration to develop the transport corridor through closer economic integration of member countries, rehabilitation and development of new transportation infrastructure, and by fostering stability and trust in the region. The planned Baku-Ceyhan Main Export Pipeline to transport oil from Azerbaijan to Turkey and then to European consumers is the main component of this cooperation.
In addition, the EU has sponsored the Interstate Oil and Gas Transport to Europe (INOGATE) program, which appraises oil and natural gas exports routes from Central Asia and the Caspian, and routes for shipping energy to Europe. INOGATE is run through the EU’s Technical Assistance to the Commonwealth of Independent States (TACIS) program.
However, there is some question as to whether Europe is the right destination for Caspian oil and natural gas. Oil demand over the next 10-15 years in Europe is expected to grow by little more than 1 million bbl/d. Oil exports eastward, on the other hand, could serve Asian markets, where demand for oil is expected to grow by 10 million bbl/d over the next 10-15 years. To feed this Asian demand, though, would necessitate building the world’s longest pipelines. Geographical considerations would force these pipelines to head north of the impassable mountains of Kyrgyzstanand Tajikistan across the vast, desolate Kazakh steppe, thereby adding even more length (and cost) to any eastward pipelines.
An additional way for Caspian region exporters to supply Asian demand would be to pipe oil and natural gas south. This would mean sending oil and natural gas through either Afghanistan or Iran. The Afghanistan option, which Turkmenistan has been promoting, would entail building pipelines across war-ravaged Afghan territory to reach markets in Pakistan and possibly India. The Iranian route for natural gas would pipe Caspian region natural gas (from Azerbaijan, Uzbekistan, and Turkmenistan) to Iran’s southern coast, then eastward to Pakistan, while the oil route would take oil to the Persian Gulf, then load it onto tankers for further trans-shipment.
North or Northwest?
For its part, Russia itself has proposed multiple pipeline routes that utilize Russian oil pipelines to transport oil to new export outlets being developed on the Baltic and Black Seas. Russia’s Baltic Pipeline System became operational in December 2001, and the country is working with Croatia to connect the Adria pipeline with the southern Druzhba pipeline. Reversing the flows in the Adria pipeline and tying it to the southern Druzhba route would allow oil exports from the Caspian to run via Russia’s pipeline system, across Ukraine and Hungary, and then terminate at the Croatian deep-sea Adriatic port of Omisalj. In addition, Russia already has the most extensive natural gas network in the region, and the system’s capacity could be increased to allow for additional Caspian region gas exports via Russia.
However, there are political and security questions as to whether the newly independent states of the former Soviet Union should rely on Russia (or any other country) as their sole export outlet, and Caspian region producers have expressed their desire to diversify their export options. In addition, most of the existing Russian oil export pipelines terminate at the Russian Black Sea port of Novorossiisk, requiring tankers to transit the Black Sea and pass through the Bosporus Straits in order to gain access to the Mediterranean and world markets.
Turkey has raised concerns about the ability of the Bosporus Straits, already a majorchokepoint for oil tankers, to handle additional tanker traffic. Already,Turkey has stated its environmental concerns about a possible collision (and ensuing oil spill) in the Straits as a result of increased tanker traffic from the launch of the Caspian Pipeline Consortium’s Tengiz-Novorossiisk pipeline in March 2001. The first tanker with CPC oil was loaded at Novorossiisk in October 2001, and exports are expected to increase significantly in 2002. As a result, there already are a number of options under consideration for oil transiting the Black Sea to bypass the Bosporus Straits.
In almost any direction, Caspian region export pipelines may be subject to regional conflict, an additional complication in determining final routes.Despite the ouster of the Taliban government in December 2001, Afghanistan remains scarred and unstable after 23 years of war. The Azerbaijan-Armenia war over the Armenian-populated Nagorno-Karabakh enclave in Azerbaijan has yet to be resolved. Separatist conflicts in Abkhazia and Ossetia in Georgia flared in the mid-1990’s. Russia’s war with Chechnya has devastated the region around Grozny in southern Russia. In addition, the Uzbek government is cracking down on rising Islamic fundamentalism in Uzbekistan, tensions have increased between rivals Pakistan and India, and the Caspian littoral states themselves have taken to bickering over territorial claims in the Sea.
Nevertheless, several export pipelines from the Caspian region already are completed or under construction, and Caspian region exports are already transiting the Caucasus. While the hope is that export pipelines will provide an economic boost to the region, thereby bringing peace and prosperity to the troubled Caucasus and Caspian regions in the long run, the fear is that in the short-term, the fierce competition over pipeline routes and export options will lead to greater instability.