The claim that the Caspian region is tremendously important to U.S. interests requires some examination. First, which U.S. interests are we talking about: commercial or political? Second, the area is large, with the northern Caspian comprising Russia and Kazakhstan and the southern Caspian incorporating Azerbaijan, Armenia, Georgia, Iran and Turkmenistan. For U.S. political interests, the emphasis is definitely on the latter; for commercial interests, the emphasis is more nuanced. The most significant U.S. commercial interest today in Central Asia is in Kazakhstan. Also, U.S. political interests in the Caspian may not necessarily be in the best political interests of all of the countries of this region.
It was the May 1997 election of a moderate president in Iran that made the United States take a more aggressive political approach in the Caspian region. President Khatami's election changed the investment landscape of this region for our European allies, who began a concerted political effort to create a place for their commercial interests in the southern Caspian, including Iran. The U.S. political effort was to create a place for its companies in the Caspian so they could be used as shields against doing business in Iran. A strange dance ensued, pitting our European allies and their political/ commercial interests against a U.S. "geostrategic agenda" bent on drawing a boundary in the Caspian above Iran.
It was at this point that the U.S. government published inflated and unsubstantiated numbers alleging that the Caspian region held over I 00 billion barrels of oil reserves which required our immediate political attention. It was also at that point that President Clinton's adviser on Russia and the Caspian, under secretary of state Strobe Talbott, delivered his first major policy speech dealing with the Caspian. When the countries of the Caspian region began to tum their attention toward Iran as an exit route for their oil and gas, the United States granted their leaders official visits. Between July 1997 and April 1998, Presidents Aliyev of Azerbaijan, Nazarbayev of Kazakhstan and Niyazov of Turkmenistan, all passed through Washington to hear the U.S. government lecture them about alternative export routes. By November 1997, east west oil routes and the Baku-Ceyhan pipeline, bypassing Iran, had become the new religion in the Washington policy making community. A TransCaspian gas pipeline was touted as the solution for Turkmen gas to access Turkey, so as to avoid Iran. When Azerbaijan was unlikely to be able to provide all the oil that was needed to fill a one-million-barrel-a-day oil pipeline, a TransCaspian oil pipeline from Kazakhstan was seen as the solution that would complement a Baku-Ceyhan pipeline and provide the additional oil.
Resolving regional conflicts in NagornoKarabakh and Abkhazia became another U.S. imperative. Never mind that as a country, we were unable to solve our own differences with Iran, a conflict which has a much shorter history than these other regional conflicts. The United States has been determined to end these conflicts in order to construct multiple east-west pipelines (oil and gas), which we see as being in our best political interests. The United States will also mediate the Caspian Sea dispute between Azerbaijan and Turkmenistan, to which a resolution is essential for a TransCaspian gas pipeline to even be considered. East-west routes are now a given in U.S. policy circles, and the certainty of their realization has led to all sorts of activities on the defense side, like "Partnership for Peace" military exercises and the extension of our defense umbrella to this region. The United States is appointing Caspian czars and ombudsmen to crisscross the region delivering messages about U.S. policy agendas. The United States has been adamant about pressing for a place for its commercial interests, principally in Azerbaijan. Commercial interests are political instruments.
Are the interests the U.S. government seeks to promote balanced between the political and the commercial? What does the United States really want in the Caspian? Is it oil and gas? Is the effort really worth it? Is the United States accomplishing anything? Is it accomplishing the right things? Is it time to reassess our policies because events are bypassing U.S. goals? What would have made sense in January 1997 may have no teeth to it by January 1999 - either politically or commercially.
Since the Former Soviet Union (FSU) opened to Western investors in 1992, there has been a migration of both commercial and political interest from Russia to Kazakhstan, then Azerbaijan and now Turkmenistan. Kazakhstan is the most resource-rich country among the former republics and could prove to be the most important oil and gas story in the region, in terms of the likely size of its resource base. Unlike Azerbaijan, all of Kazakhstan's existing oil and gas production is onshore, which does not expose it to the battles being fought over the Caspian' s legal status. Furthermore, it has sizable remaining oil and gas reserves onshore.
Kazakhstan's proven oil reserves are between 8 and 10 billion barrels, but estimated onshore oil reserves are between 15 and 30 billion barrels. The offshore potential is not yet known, but drilling has started this October. In terms of a comparison: Kazakhstan's proven reserves fall below Norway's 11 billion barrels, but its estimated reserves make it two or three Norways. What is most striking about Kazakhstan, is that its proven gas reserves of near 64 trillion cubic feet (tcf) are also enormous and well in excess of Norway's 48 tcf. With production of about 515,000 b/d in 1997, Kazakhstan's oil output is but a fraction of Norway's 3 million b/d. Gas production of about 211 billion cubic feet/year (6 billion cubic meters/year) is also a fraction of Norway's 1.4 trillion cubic feet/year (41 billion cubic meters/year).
The most important U.S. commercial interest is in Kazakhstan. This is where Chevron signed the first Production Sharing Contract (PSC) in the FSU in September 1993 for the onshore Tengiz/Korolev fields and formed the TengizChevroil joint venture. To date, this remains the most significant foreign partnered PSC anywhere in the FSU in terms of reserve size. Chevron was correct in identifying the Tengiz field, with its estimated 6 to 9 billion barrels of recoverable oil reserves and upwards of 10 tcf of gas reserves, as an important company-builder. Tengiz is among the largest oil fields in the world today. New drilling at Tengiz this year could prove up more reserves. Chevron's interest is 45 percent. It is partnered with Mobil (25 percent), LukArco (5 percent) and Kazakhoil (25 percent). This is a U.S. company-led project. Tengiz today yields over 180,000 b/d of oil and accounts for over one-third of the oil produced in Kazakhstan. By the year 2000, Tengiz's output will exceed 240,000 b/d.
Chevron was the first company to embark on the "pipeline game" in the Caspian region and probably understands this game better than any other company. When Chevron signed its PSC, it correctly identified the Russian route for oil exports as the most politically and commercially expedient for Tengiz crude. It was politically expedient not because of U.S. political interests but because of Russia's proximity and deep-rooted ties to Kazakhstan. While its proximity was a blessing of sorts, Russia's ties to Kazakhstan have proven to be somewhat of a curse. Chevron had to move up the learning curve alongside the Kazakh government to navigate through the postindependence currents as Kazakhstan broke free from Soviet control.
Chevron's goal remains the construction of a major oil pipeline from Tengiz to the Russian Black Sea port of Novorossiysk. Referred to as the Caspian Pipeline Consortium (CPC)1 project, it has had its share of difficulties, but in 1998 CPC seems to be seeing the proverbial light at the end of the tunnel.
Kazakhstan's road to independence has been fraught with detours. Thus, the realization of a pipeline from Kazakhstan across Russia has been complicated by forces within Russia that have tried to delay and/or derail its construction. To ensure the commercial success of TengizChevroil, Chevron has worked tirelessly and with great creativity over the last five years to forge a multiplicity of exit avenues for Tengiz production. Until the CPC project can get built, it is transporting oil out through existing Russian pipelines to the Baltics and the Russian Black Sea ports, where higher quality Tengiz crude is exchanged for lower-quality (and lower-priced) Urals Blend. Chevron is also tankering oil to Baku and railing it to Batumi, Georgia, where it can directly lift the higher-quality oil from Tengiz. Chevron has spent a great deal of effort and ingenuity on negotiating transport rates so as to be able to keep its operations "economic and commercial" in a period of depressed oil prices. This has been a tremendous challenge, and it is beating the odds, which a year or two ago were certainly not in its favor. This month (October 1998) should see some announcements as to whether CPC construction will begin and whether a start-up date of sometime in 2001, for the first 560,000 b/d of planned capacity, can be met.
U.S. POLITICAL INTERESTS: HELP AND HINDRANCE
Chevron has been lucky in some ways. For one thing, when it embarked on its pipeline quest through Russia, the U.S. government had a strong pro-Russian bias in terms of establishing close relationships between the Russian and U.S. governments. There was the Gore Chernomyrdin Commission and other important administration backing. Strobe Talbott, President Clinton's trusted aide on Russian affairs, considered Russia as the foremost U.S. regional partner. Thus, the United States did not interfere with, or try to obstruct Chevron's plans, at least not until November 1997.
At that time, then-Energy Secretary Frederico Pena went to Baku, Azerbaijan, to celebrate the first oil production by the Azerbaijan International Operating Company (AIOC) and spoke out in favor of non-Russian and non-Iranian "multiple pipeline routes." This coincided with U.S. efforts to step up its role in conflict resolution, principally between Azerbaijan and Armenia over Nagorno-Karabakh. The United States also became much more aggressive about asserting its political ties to and interest in Georgia. These U.S. machinations were not lost on either Russia or Iran, which have both become much more aggressive since then in staking their claims in this region.
Most important for Chevron, the realization of the U.S. political goal of building a major oil pipeline from Azerbaijan to Turkey via Georgia depended on the availability of oil to fill the pipeline. With future production in Azerbaijan still speculative, the U.S. government had set its sights on using crude from Tengiz that would be transported to Baku through a new pipeline to be laid under the Caspian Sea. This gave birth to the U.S. government's TransCaspian oil-pipeline project, which provided both Russia and Iran an added impetus to disrupt any resolution to the Caspian 's legal status. It was an added headache for Chevron, which did not want to divert attention away from CPC, nor did it want to stir doubts about its commitment to CPC with the Russian government. The TransCaspian oil pipeline was viewed by Russia as competition for the CPC. Subsequently, the United States downplayed the role of Tengiz crude in supplying a TransCaspian oil pipeline, but it faced the same dilemma as in Azerbaijan: future Kazakh production (other than Tengiz) for major supplies to fill a TransCaspian pipeline were speculative. Therefore, this project, so essential to making a Baku-Ceyhan oil pipeline a reality, has no immediate commercial underpinning and can today be relegated to one of the U.S. government's "pipe dreams."
By the time Mobil entered the TengizChevroil joint venture in 1996 and Arco in 1997 via Lukoil, Chevron had already developed the exit-route strategy for CPC and was embarking on the realization of other transport options. The "too many cooks in the kitchen" syndrome, which has plagued the (AIOC) project, was much less of a problem in Kazakhstan, although the diversity of the CPC's makeup has posed some problems. TengizChevroil was a less politicized project as far as the United States was concerned because it was a safe distance from Iran. The one danger that loomed for a brief period in 1997 involved a swap contract between the Kazakh government and Iran for the supply of Tengiz crude to the Tehran refinery. The crude did not meet the necessary quality specs and was allocated from the Kazakh government's share. In order to undertake swaps, Chevron would have to apply for a license with the U.S. Treasury Department's Office of Foreign AssetsControl (OFAC), but so far it has chosen not to do so. In any case, it would not make sense for it to apply, given that Kazakh crude supplies have not been acceptable for Iranian needs. The license application process is another means the United States has at its disposal to discourage U.S. companies from dealing with Iran, even though swaps are legal. Foreign companies do not have to apply for a license and have begun to undertake swaps from Turkmenistan into Iran. The United States views swaps as a mechanism that takes much-needed oil supplies away from a future east-west pipeline.
In the process of negotiating access to markets, Chevron has done every other company a favor in this region. By being the pioneer in designing various exit-route options, it has demonstrated that depending on only one route means vulnerability to delays and potential failure. Multiple exit routes are a must, and these do not just run east to west.
AZERBAIJAN AND THE AIOC
The only other success story to date in the Caspian region is the southern Caspian's AIOC three-field development project. AIOC signed its PSC for the Azeri, Chirag and deepwater Guneshli fields in September 1994, exactly one year after Chevron signed for Tengiz. However, while the TengizChevroil joint venture is a highly commercial project, which is politicized only in the context of KazakhRussian relations, everything about AIOC is political - except for the commercial prospects linked to the large size of its oil reserves. In fact, Azerbaijan's oil sector is the most politicized of this region.
Azerbaijan to date has signed twelve offshore PSCs and three onshore, with 27 companies from 13 countries. With each PSC, Azerbaijan's President Aliyev has sought to achieve certain political objectives. By bringing in so many diverse companies, he has broadened international political support for his government and has put in place a wide range of interests that are wedded to keeping him in power. The AIOC project, however, is the only offshore project with known reserves. The other PSCs are al I speculative, with the latest two which were drilled - the second and fourth offshore PSCs - showing disappointing results: some gas but no commercial oil deposits. This has taken some of the euphoric edge off of the oil sector in Azerbaijan and has complicated the U.S. political agenda.
The AIOC project has 4 billion barrels of proven oil reserves, which lie offshore. This very fact throws it into the debate over the Caspian Sea's legal status: the Azeri and Chirag fields lie in waters contested by Turkmenistan. Instead of being like TengizChevroil, where three U.S. companies and one Russian company are partners, AIOC has ten foreign companies as partners from no fewer than seven countries (the United Kingdom, the United States, Russia, Turkey, Saudi Arabia, Japan and Norway). Notable for its absence is Iran, which lost a chance for a 5 percent stake in 1995, when the U.S. government persuaded Azerbaijan to bring in an American company instead. This has made Iran more adamant about posing its own legal challenges to resources in the Caspian, creating added uncertainties for Azerbaijan's offshore developments. This was a case where Azerbaijan's political objectives didn't align with U.S. objectives, yet President Aliyev decided to acquiesce to U.S. demands.
Until August 1998, AIOC was a U.K.U.S.-led consortium, with BP and Amoco holding a rotating operatorship. This too had been done because the U.S. government wanted a U.S. company to have a leading role. Amoco was, therefore, given top billing next to BP. But with a newly merged BP-Amoco controlling 34 percent of AIOC, the make up of this consortium has changed, with the U.S. companies' stake dropping from 40 percent to just under 24 percent (Amerada Hess, Exxon, Pennzoil and Unocal). Britain has taken the lead in the AIOC.
About $2 billion have been spent by the AIOC partners to date, with output reaching about 75,000 b/d. Spending at TengizChevroil may be at levels comparable to those of AIOC, but output is more than double; hence its operating costs are much lower. At today's oil prices, AIOC is hard-pressed to turn a profit.
AIOC's high-quality sweet crude currently reaches export markets through a northern Russian route via Dagestan and Chechnya to the Black Sea port of Novorossiysk, where (like crude from Tengiz) it is exchanged for lower-quality, lower-priced Russian Urals Blend crude. Russia wants to increase the volumes transported through this northern route from AIOC to 200,000 b/d. Whether it succeeds depends largely on whether any measure of political stability can be achieved in Dagestan and Chechnya.
A second export route will be in operation by the end of 1998, which will initially be able to carry up to 100,000 b/d of AIOC oil to Georgia's Black Sea port of Supsa. This could eventually be increased to 250,000 b/d. The advantage of the Supsa pipeline is that it will be dedicated to AIOC's oil and able to capture a premium for Azerbaijan's high quality crude, much as Chevron is able to do by shipping Tengiz crude to Batumi.
Too many companies and too many countries with too many conflicting goals have made daily operations at AIOC a game of political diplomacy rather than commercial expediency. Accumulation of a significant stake in AIOC by a strong company, like BP-Amoco, which can assume a much-needed leadership role, may be the salvation of this consortium. BP and Amoco individually were the lead companies in Azerbaijan, even before their merger. Now united they are well-placed to make a difference, at a time when all of the commercial and the country interests want to see real progress.
AZERBAIJAN, TURKMENISTAN AND U.S. INTERESTS
It is in the southern Caspian that the broader geostrategic interests of the United States are being defined and fought over. U.S. commercial interests have been inserted to boost U.S. geostrategic (i.e., political) interests. These are largely related to isolating Iran (i.e., keeping Iran out of oil and gas development projects and bypassing Iran for oil-export routes). The east-west (Baku-Ceyhan) oil pipeline route is the embodiment of this "broader U.S. geostrategic interest," as are TransCaspian oil and gas pipelines, which bypass Iran.
Turkmenistan comes into the picture because it has begun to undertake oil swaps with Iran, but mostly because it has major gas resources, which as of December 1997 have begun to find a route to market via Iran. The United States would like to prevent Turkmenistan from increasing its reliance on an Iranian exit route. Since March 1997, Turkmenistan's access to exports through a northern Russian route has been severed by the Russian gas company Gazprom. There are ongoing negotiations to try to patch this up, but there is so much bad blood with Russia that Turkmen President Niyazov wants to secure alternative outlets. And where you sit geographically has a lot to do with where you can ship your gas. Turkmen gas production in 1997 collapsed to one-fifth the levels reached in the early 1990s, causing enormous financial losses. The only way for Turkmenistan to rectify this situation in the near future is to begin looking for market access in and across Iran. But with east-west oil routes looking increasingly questionable the United States is staking its claim to east-west gas routes. At this point, it may be fighting a losing battle.
In the southern Caspian, U.S. geostrategic interests collide head on with those of both Russia and Iran. They are also beginning to collide with Azeri, Turkmen, U.K. and other geostrategic interests. There is a short list of problems and issues:
- AIOC is an offshore project. To remove the ongoing uncertainty posed by challenges not only to fields within AIOC but to future offshore developments in Azerbaijan, a final solution for the Caspian Sea's legal status is necessary. But this requires a certain amount of goodwill and a desire on the part of the five littoral states (Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan) to reach a mutually beneficial solution. Until now each country has been able to hold the others hostage to its whims and demands. The political jockeying over a resolution to this issue has been intense. In short, no final solution is in sight. Moreover, added to the legal-status concerns now are environmental concerns. The drumbeat has begun, particularly on the part of Russia, to stir the "environmental pot" with respect to both oil and gas drilling and constructing TransCaspian pipelines.
- AIOC is the only project in Azerbaijan with known reserves. Azerbaijan today looks to be a future gas story. The next offshore PSC that will be drilled is for Shah Deniz. Results should be forthcoming in the next couple of months, and they are eagerly awaited. If Shah Deniz shows gas, then the oil euphoria will definitely be erased. AIOC and primarily BP-Amoco will have to determine the most efficient and least costly options for transporting its oil to a variety of markets through multiple export routes - north and west and perhaps even south, but not necessarily through Georgia to Turkey. In the future, if more oil can be brought onstream from other PSCs, other exit routes may be needed. As for the gas, contract provisions will have to be designed to make it attractive for the Western investors to develop these reserves, which will be needed in Azerbaijan's domestic markets in addition to being exported. However, Azerbaijan's gas would pose competition to Turkmenistan's gas, in the same way that both Iran's and Russia's gas pose competition. The construction of a TransCaspian gas pipeline makes little sense for Turkmenistan, when its gas for export can in the future be displaced by gas from Azerbaijan.
- Despite stepped-up U.S. efforts to become more proactive in mediating regional conflicts to smooth rights of way across a Baku-Ceyhan land route (i.e., Nagorno-Karabakh and Abkhazia), little progress has been made. All sides in these conflicts seem to have hardened their positions. Moreover, new conflicts are cropping up, such as that in the Armenian enclave of Javakhetia, located in Georgia. Javakhetia is along a Baku-Ceyhan pipeline route, since the pipeline would traverse this enclave as it heads south into Turkey from Tblisi. Javakhetia is demanding autonomy from Georgia. It also has a Russian military base. In order to build TransCaspian pipelines, ongoing disputes between Azerbaijan and Turkmenistan over offshore fields that straddle both their waters in the Caspian also need to be resolved. Little headway has been made in this regard and it is unlikely that the United States can resolve the differences between President Aliyev and President Niyazov.
The isolation of Iran is over for all but the United States. With the issuance in May 1998 of a national-security waiver for Total, Gazprom and Petronas and their investment in Iran's South Pars gas field, the U.S. policy of excluding Iran from the Caspian also began to unravel. Since then, two non-U.S. companies have begun to ship some oil from Turkmenistan on an exchange basis into Iran. The oil is sent to Iran's Tehran refinery, with the companies receiving comparable volumes at Iran's southern port of Kharg Island. In September, Britain's Monument Oil lifted its first 250,000-barrel cargo from Kharg Island. President Khatami's ground breaking visit to the United States, September 19-22, led to the restoration of full diplomatic relations with the U.K., when his foreign minister issued a statement alongside the British foreign minister making it clear that the Iranian government did not intend to carry out the fatwa against British author Salman Rushdie. This clears the path for British companies to invest in Iran.
1 Eight Western companies are participating in the (CPC) for a 1.3 million b/d pipeline from the Tengiz field to Novorossiysk - Chevron, Arco through LukArco, Mobil, Shell with Rosneft, BG, Agip, Oryx and BP Amoco with Kazakhoil. This is in addition to Russian companies Lukoil and Rosneft and Oman Oil Company (OOC).