The breakup of the Soviet Union and the emergence of a number of independent states on the western and eastern sides of the Caspian Sea have opened enticing prospects for the development of these sovereign republics' abundant hydrocarbon resources. True enough, oil and gas were being produced by the USSR, but this activity was suffering from Communist bureaucratic incompetence and antiquated technology. The result was gross underproduction of what were subsequently found to be tremendous reserves of oil and gas.
The Caspian Sea is surrounded by two long-established countries: Russia in the north and Iran in the south, and, since approximately 1990, by the independent republics of Azerbaijan in the west and Kazakhstan and Turkmenistan in the east These three republics (formerly administrative units of the Soviet empire) are unequal in size, Azerbaijan being the smallest., about the size of a minor American state or a county, and Kazakhstan the largest, equivalent to several European countries. But if we speak of the Caspian oil and sea basin, we should add to these five countries certain adjacent, though not riparian states, such as Uzbekistan (squeezed in between Kazakhstan and Turkmenistan) and such smaller states of Transcaucasia as Georgia and Armenia and, tentatively, Chechnya. The latter, though fighting for independence, is still officially part of Russia.
To describe and analyze the totality of the Caspian oil and gas resources would require inclusion in the account of all the states just mentioned. But the task would be unduly complicated primarily because Russia's oil and gas production goes beyond the Caspian vicinity and, secondly, Iran, though a Caspian riparian state, produces most of its oil and gas in the southern, i.e., Persian Gulf, region and should be regarded first and foremost as a Gulf rather than a Caspian producer. For these reasons the purpose of this article is to concentrate on three former Soviet republics, now sovereign states: Azerbaijan, Kazakhstan and Turkmenistan, with only brief references to such adjoining non-riparian countries as Georgia, Uzbekistan and Chechnya.
Although the Caspian republics' oil and gas reserves had been neglected, mismanaged and underutilized under the former Soviet regime, today's Russia is not only intensely interested in them, but also displays clearly neo-imperialist tendencies toward these newly emancipated republics and tries either to become a partner in the freshly created oil, gas and pipeline international consortia or to compel them, once oil and gas are produced, to direct their outflow through Russian territory. Russia uses a variety of means to achieve its aim of domination. These include treatment of the independent entities via their inclusion as soi-disant Russian protectorates in the Commonwealth of Independent States (CIS), stationing of Russian troops in these countries, and interference in their internal policies, sometimes by sponsoring and aiding internal revolts and rival governments, applying blockades and boycotts against those governments that do not conform to Russian wishes, etc. Because these Caspian states (especially in Transcaucasia) are composed of many feuding ethnic and tribal groups, Russia stands to benefit politically from the exacerbation of these conflicts and derive advantage from the prolonged instability in the region. Two examples should suffice to illustrate this situation: the conflict between Azerbaijan and Armenia over the area of Nagomo-Karabagh (where Russia unmistakably took Armenia’s side), and the revolt of Abhazia against the Georgian government of President Edvard Shevardnadze (who barely escaped an attempt at assassination). Moreover, although much is being said today about the American-Russian partnership and the end of the Cold War, the Caspian area may prove to be one in which a true incompatibility of U.S. and Russian interests will become pronouncedly manifest
These newly independent states aim at an increase of their wealth by entering into agreements with American and European companies noted for their expertise in oil and gas exploration, production and marketing. This explains the formation of several international consortia But Russia looks askance at these joint ventures and either tries to muscle into them by seeming from the host governments a certain percentage of Russian participation or by questioning the right of these governments to exploit their resources. Thus, a sort of unholy alliance has emerged in this regard between Russia and Iran. Both of these countries especially object to the independent republics' offshore ventures, claiming that the Caspian Sea-a body of water without any connection to the oceans-is really an inland lake whose resources should be exploited and administered jointly by all five riparian states while keeping the outsiders out With this in view, in October 1994 Russia hosted in Moscow a conference of five Caspian states (Azerbaijan, Kazakhstan, Turkmenistan, Iran and Russia itself) during which they agreed under Russian pressure to establish a regional cooperation organization to regulate and use the Caspian Sea resources. This did not, however, prevent the three former Soviet republics from pursuing their separate and independent offshore ventures.
Russia's interest in dominating the economies of these newly independent republics is expressed in still another way: By insisting that their oil and gas be exported by pipelines crossing Russian territory, thus providing it with a transit-fee income and allowing it, in case of any conflict, to stop the flow of oil and gas. These matters will be discussed in greater detail below.
There is a frequently heard assertion that the world, with its global reserves estimated at one trillion barrels, suffers from a glut of oil (a situation that may become aggravated if Iraq is allowed to engage in full production). The truth is, however, that the European demand for oil is insatiable and that, within a few years, it will be necessary to develop new sources of hydrocarbons to meet the growing demands of the European economy and consumers. There is good reason why the oil companies' annual reports invariably point with pride to new exploration and discoveries. Hence it is understandable why so many oil companies vie with each other to exploit the Caspian Basin resources, with reserves estimated at 68 billion barrels (bbl). They are still modest in comparison with the 600 bbl of the Persian Gulf area. However, they represent an impressive quantity. The estimated offshore reserves in the Caspian Sea are approximately 32 bbl of oil and 100 trillion cubic feet (tcf) of gas.1
Of the three newly independent states around the Caspian Sea. Azerbaijan is the oldest producer of oil, having pioneered already in the nineteenth century as part of imperial Russia Estimates of its land and offshore reserves are sometimes mentioned as 40 bbl. In imperial Russia, Azeri production amounted to one-half of the world's oil production in 190 l. But instead of increasing and modernizing its facilities, the Azeri production gradually decreased to represent only 3 percent of the total Soviet output in the last years of the Soviet rule. In 1994, its production was 195,000 barrels per day (b/d). Because of obsolete technology and other factors it decreased to 175,000 b/d in 1995 and was expected to stay at the same level in 1996.
However, after negotiations that began in 1993, an $8-billion agreement was signed on September 20, 1994, often called a "deal of the century" between the Azerbaijan government and eleven companies, creating a consortium to be called the Azerbaijan International Operating Company (AIOC). AIOC's participants are as follows: Amoco (U.S., 17 percent), British Petroleum (U.K., 17 percent), Unocal (U.S., 11 percent), Socar (Azeri, 10 percent), Lukoil (Russ., 10 percent), Pennzoil (U.S., 9.8 percent), Statoil (Norwegian, 8.5 percent), TPAO (Turkish, 6.75 percent), Exxon (U.S., 5 percent), McDermott (U.S., 2.5 percent), Ramco (U.K., 2 percent) and Delta (Saudi Arabian, 0.5 percent). Initially, when the deal was being negotiated, Russia was not included. However, after considerable pressure on its part, it was given 10 percent On the other hand, Iran was first included, but U.S. government opposition caused the revision of the agreement and the replacement of Iran by Exxon with its 5 percent While the initiative to form the consortium had come jointly from B.P. (British Petroleum) and Amoco, in the final count the American companies jointly hold 45 percent of shares. AIOC's aim is to produce 700,000 b/d by 20 l 0. The AIOC consortium will concentrate on the development of three offshore fields: Azeri, Chirag, and Guneshli. Their estimated reserves are 47.5 billion bbl.
Russia's interest in developing Azerbaijan's oil resources (profiting from the introduction of modem American technology and management) experienced a setback by being given only a l 0-percent participation. To compensate for this disappointment, Russia secured soon afterward a leading position in the second consortium aimed at the development of the offshore Karabagh field situated north of the AIOC fields. Its participants are Lukoil (Russ., 32.5 percent), Agip (Ital., 30 percent), Pennzoil (U.S., 30 percent), and Socar (Azeri., 7.5 percent).
Azerbaijan is eager to cultivate good relations with Iran, whose northwestern Azerbaijan province is inhabited by about twice as many ethnic Azeris as the Republic of Azerbaijan. Hence, the government of Baku has invited Iran to develop the offshore ShahDeniz field. The common feature of all three independent Caspian republics is that, while rich in oil and gas, they have no direct access to the world's international waterways. Their production and exports must depend on a network of pipelines crossing other countries' territories. And here is where major political complications arise. In the case of Azerbaijan, its government(under President Abulfaz Elchibey) as far back as 1993 concluded an agreement with Turkey to export oil through Turkish territory rather than through Russian. This route (via Georgia) cost half the price of the Russian route. But. apart from the purely economic consideration, Azerbaijan had also, and foremost, a political motivation: It wanted to assert as strongly as possible its independence from Russia Thus for a long time it refused to join the Russian-sponsored Commonwealth of Independent States (CIS) and forbade the stationing of Russian troops on its territory. Eventually, under Russian pressure, it joined the CIS and allowed the arrival of troops, but it did so with considerable reluctance. Moreover, although the rule of the country was assumed by a new president, Haydar Aliyev, it did not repudiate the pipeline agreement with Turkey previously signed by Aliyev's predecessor. In choosing the Turkish route, Azerbaijan enjoyed the support of the United States because Washington was also reluctant to make the AIOC consortium too dependent on unpredictable Russian decisions and because of the American-Turkish alliance (by virtue of the Truman Doctrine and Turkey's NATO membership).
The shortest route to the Mediterranean would lead from Azerbaijan via Armenia and Turkey. Unfortunately, the feud (or actual warfare) over Nagorno-Karabagh has nullified this choice. Actually, Armenia is in possession of some 20 percent of Azeri territory, which constitutes a major obstacle to normal relations between the two countries. The United States has leaned toward Armenia in its conflict with Baku: the U.S. Freedom Support Act of 1992 has excluded Azerbaijan from receiving any American aid. And yet Washington has supported Azerbaijan in its decision to avoid the Russian territory for a proposed pipeline. This struggle between Russia and the United States ended in October 1995 in a compromise: Instead of choosing one route for the pipeline, the AIOC opted for two pipelines, one to cross the Russian territory and the other to cross Georgia and Turkey. The socalled "early'' oil of 80,000 b/d would use both the Russian and Georgian-Turkish pipelines. When the Georgian Black Sea Supsa port is constructed and connected to Turkey, the Georgian Turkish route will provide the main pipeline for oil exports. Actually, it is contemplated that Georgia will supply three terminals on the Black Sea: Batumi, Poti and Supsa There, oil will be loaded on tankers and carried to Turkey, to traverse its territory by pipeline to the Mediterranean port of Ceyhan (in the nor1heastem comer of the Mediterranean, not far from the existing terminal for Iraqi oil in Dortyol). Using these two routes, AIOC expects to raise its present modest production to 310,000 b/d by the year 2000. This deal will probably intensify the present Russian economic blockade of Azerbaijan. The Russian route would follow the existing pipelines linking Baku and Tikhoretsk and then require construction of additional pipeline via Krasnodar to a new terminal just north of Novorossiysk. Because Tikhorestsk is an important relaying point for older Russian pipelines coming from easterly directions, Kazakhstan may also become interested in utilizing this Russian route, but, as of this writing, it has not yet made a binding decision because of its involvement with the earlier-formed Caspian Pipeline Consortium, a separate organization whose consent to the utilization of the Russian route would be necessary.
In principle, then, the AIOC-Russia dispute over the routing of the pipelines seems to have been resolved. The decision has been made. But its implementation depends on the positive solution of two difficulties: the war in Chechnya, through which the existing pipeline from Baku proceeds to Tikhoretsk, and the rebellion against the government of Turkey by the Kurds, whose territory the projected pipeline would have to traverse. The United States, although favoring the Ceyhan route and in spite of its support for the Kurds in northern Iraq, is not likely to get too deeply involved in the Turko-Kurdish conflict, out of consideration for Turkish national sensibilities. Should this conflict degenerate from its present guerrilla-like hostilities into more serious warfare, the laying and utilization of the projected pipeline might encounter serious delays and difficulties. Moreover, should Russia attempt to annul or revise the two-route compromise, it may choose to obstruct the passage of oil through Georgia, even before it reaches Turkey, by intensifying its support for the Abkhazian rebellion against Shevardnadze's government in Tbilisi.
In a frantic search for a generally acceptable pipeline route, still another tentative solution has been offered. In view of Ankara's opposition to the passage of many tankers through the Turkish straits, it has been suggested that the Russian route may still be utilized but that tankers from Novorossiysk should sail to the Burgas port in Bulgaria and that a new pipeline should cross the Greek territory to the port of Alexandroupolis on the Mediterranean coast. The fourth solution—to link Azerbaijan directly with Iran (probably the simplest in technical terms)-is not taken seriously because of the U.S. government's unyielding opposition to such a route. Here is a clear example of the incompatibility of the official US dual-containment policy and American commercial interests.
Kazakhstan’s oil reserves are estimated at 10-20 bbl, of which proven reserves amount to 6-9 bbl. The main oil fields are located at Tengiz, close to the northeastern sector of the Caspian Sea, and at the nearby Korolev, and also at Karachaganak in the northwestern part of the eow1tiy. Negotiations regarding the exploitation of the Tengiz fields began early between the then-existing Soviet government and the Chevron company, based in San Francisco. They were continued by Kazakstan under President Nursultan Nazarbayev after the achievement of independence and, in April 1993, resulted in the signing of an agreement that established a joint venture named Tengizchevroil. It called for an initial expenditure of $1.1 billion by the Chevron company. Later, the agreement was revised: of its own SO percent. Kazakhstan conceded 10 percent to Russia, and, in May 1996, it further reduced its participation by concluding an agreement with the Virginia-based Mobil company. Thus, as of this writing, Chevron was to hold 50 percent, Mobil 25 percent, Russia 10 percent and Kazakhstan 15 percent Mobil's entry was to c.ost it $1.1 billion, of which $500 million were to be paid at the beginning, while the remaining $500 million were to be paid gradually with the growth of production. Production itself is expected to be 92,000 b/d in 1996 and 192,000 b/d in 1998. The ultimate aim is to produce about 700,000 b/d by the year 2010.
Because there is not yet a suitable pipeline to carry the output to overseas markets, currently Chevron exchanges the extracted Tengiz product for Russian oil, which it markets abroad. However, Russia restricts the utilization of its own pipeline from Tengiz westward to 65,000 b/d.
The routing of the pipeline to carry the Tengiz crude is still an open question. As usual, Russia wants the pipeline to run through its territory, a solution opposed by Chevron. The first phase would include the stretch from Tengiz to Kropotkin. The second phase would call for a pipeline connecting Kropotkin with Tikhoretsk. As noted earlier, Tikhoretsk is an important junction, where existing- Russian pipelines bring oil from Samara (Russia), Lisichansk (Ukraine) and Baku (Azerbaijan). Finally, a new pipeline would link Tikhoretsk with Novorossiysk on the Black Sea. The routing of oil from Novorossiysk to foreign markets is subject to the same debate that is making Azerbaijan oil exports such a thorny question.
The task of conveying Kazak oil abroad has been undertaken by the Caspian Pipeline Consortium (CPC), which initially was set up in 1992 as a joint venture by Russia, Kazakstan and Oman. But on April 27, 1996, the CPC was reconstructed: 50 percent of participation remained in possession of these three countries while the other SO percent was divided as follows: Chevron 15 percent, Mobil 7.5 percent, Lukoil 12.5 percent Rosneft 7.5 percent, British Gas 2 percent, Agip 2 percent, Oryx 1.75 percent and Kazakrnuneigaz 1.75 percent. There is also a proposal emanating from Unocal and Delta (Saudi Arabia) which envisages building a pipeline through Afghanistan and Pakistan to some point on the Indian Ocean shore at the cost of 55 billion. The Afghan civil war would obviously be a major impediment.
Although Chevron appeared to be the most important investor in both the Tengiz land-based deal and in the Caspian Pipeline Consortium, Mobil's commitments were also impressive. In addition to its entry into the Tengiz venture, it also secured a concession covering 4.4 million acres of TuIpar blocks in northwestern Kimikstan (Karachaganak region). Its partners are three Kazak companies, but Mobil holds 50 percent The deal, signed in Almaty in April 1995, calls for an exploration program.
Furthermore, Mobil has become the only American company in the seven-member Caspian Sea consortium to carry out a marine seismic survey of 163,000 sq. km. of the Caspian Sea in its Kazak sector. The other six members are: Agip (Ital.), BP (Brit), Statoil (Norw.), British Gas (Brit), Shell (Brit) and Total (French).
To sum up, the American involvement in Kazakstan is impressive due to the serious commitment of such major companies as Chevron and Mobil. But again, as is the case in Azerbaijan, the American investors opposed pipeline dependence on Russia, which puts the interests of both parties at odds with each other. By the same token, Russia's participation, though modest (10 percent only inTengizchevroil and I 2.5 percent in Caspian Pipeline Consortium), is indicative of an intention to extend its economic and political influence in Kazakst.an and generally in the Caspian Sea basin.
Though a relative newcomer on the international oil and gas scene, Turkmenistan possesses major reserves of oil (estimated at 320 million bl), and huge amounts of gas (700 billion cubic feet of associated gas plus 1.9 trillion of non-associated gas).
Because Iran is the only country lying between Turkmenistan and the open seas, it was natural for the two countries to seek mutually profitable arrangements. First of all, in 1994, an agreement was reached for delivery of Turkmen gas to Iran; in return Iran would sell the equivalent amount of its own gas for Turkmenistan's account abroad.
As in other Caspian republics, the pipeline routing is the problem on whose solution major development of the Turkmen gas fields will depend. A number of projects have been considered. First, in August 1994, the governments in Ashgabat and Tehran reached an agreement for a $9.7-billion pipeline, 4,000 km long, to bring Turkmen gas to the Iranian ports in Kangan and Bandar Abbas. On the other hand, the Exxon company has planned to connect the oil fields of Turkmenistan with the Yellow Sea through the territories of Uzbekistan, Kazakst.an and China Such a pipeline would have to cross Xinjiang, the Turkic-speaking western province of China, and run near the Chinese oil basins of Tarim and, further east, Qaidam, possibly connecting into these basins, and eventually reaching Japan. The Mitsubishi company would play an active role in financing this project Another American group, the US-CIS Alexander Haig consultancy company, had planned a natural gas pipeline from Turkmenistan to Europe via Iran and Turkey, but was obliged to abandon the plan after the U.S. government forbade all business with Iran.
In late October 1995, the Los Angeles based Unocal, in a joint venture with the Jedda based Delta company, signed an agreement with Turkmenistan to construct a $3 billion, 812-mile-long natural gas pipeline that would cross Afghan territory and abut the Indian Ocean in Pakistan. The throughput aim was 2 billion cubic feet a day. On its part, Turkmenistan would give these companies a concession to exploit at least 25 trillion cubic feet (700 billion cubic meters) of gas. The same two companies (Unocal and Delta) have also submitted a plan to build a $5-billion oil pipeline also to run through Afghanistan and Pakistan to the Indian Ocean.
Another contender for the development of Turkmen gas reserves is France, which has an agreement with the Ashgabat government to develop the Samane-Tepe gas field and construct a gas-proces.sing and petrochemical plant in Seidi, Turkmenistan.
Aware of international interest in its hydrocarbon resources, the government of Turkmenistan under President Saparrnurat Niyazov organized a conference in Vienna on September 2 28, 1995, to discuss various alternatives of a proposed intercontinental pipeline that would cross Turkish territory. It was attended by a good number of Western companies including Exxon, Mobil, Texaco, BP, OMV, Ruhrgas, RWE, Mannesman, Siemens and a number of banks. Moreover, Hungary also expressed interest in the project, inasmuch as a stretch of the pipeline would pass through its territory. There was a general interest in starting the pipeline construction without much delay, possibly in 1995-96.
In this and other projects for pipelines from Central Asia and Transcaucasia to the West, there has been a clearly discernible tendency (except for some members of the Caspian Pipeline Consortium to bypass the Russian route, even though the alternatives involved negotiating with many governments and crossing numerous boundaries. In this diplomatic struggle, the United States and Turkey appeared as leaders of the non-Russian alternative. Turkey, in fact, has displayed a good deal of initiative in this respect In the summer of 1995 Turkey's prime minister, Tansu Ciller, paid visits to presidents Islam Karimov of Uzbekistan and Haydar Aliyev of Azerbaijan, in each case advocating the passage of pipelines through Turkey. Similarly, the Turkish foreign minister, Erdal Inonil, visited Ashgabat (Turkmenistan) to convince his hosts to build a pipeline to Iran to be continued to Turkey and possibly further west. The Iranian stretch has turned out to be a bone of contention, because of the U.S. government's refusal to accept it Germany, Britain and Austria, however, appeared to favor this plan. In its quest for a pipeline route across its territory, Turkey seems motivated by two main considerations; an ethnic-linguistic affinity to the Caspian Sea states and a desire to benefit from substantial transit f which might have a major positive impact on its economy. The ethnic-linguistic affinity does not necessarily signify a rebirth of the old fashioned Pan-Turanism. Strict adherence to Pan-Turnanism would embroil Turkey in complicated political and tribal intra-Asian feuds, an alternative definitely rejected by the founder of modem Turkey, Kemal Ataturk. But tactful Turkish influence in those Turkic-speaking states may save them from undue dependence on religious fanaticism emanating from Iran and help them in their resolve to maintain the newly-won independence against the revival of Russian imperialism.
A review of the Caspian Basin resources and potential would perhaps be incomplete without mentioning, however briefly, Uzbekistan, a country with a long tradition of independent statehood going back to the Middle Ages.2 Uzbekistan enjoyed considerable political and military influence, not only in its immediate vicinity but extending as far as the Middle East and Turkey in particular, reaching a peak with Tamerlane in the fourteenth century. It is located in the geographical center of Central Asia, surrounded by Kazakhstan, Turkmenistan, Kyrgyzstan, Tajikistan and a small stretch of border with Afghanistan. Territorially, it is nearly the size of France and is inhabited by 23 million people (Kazakhstan and Afghanistan each have 18 million).
Moreover, whereas other Central Asian states have fairly large Russian populations (40 percent in Kazakhstan alone), Uzbekistan's Russian element constitutes less than 10 percent of its people. The country can boast of major urban centers such as Tashkent, its capital; Bukhara, Khiva, and the almost legendary Samarkand, immortalized in James E. Flecker's poetry.3 Of all ex-Soviet Central Asian republics, Uzbekistan has become the most developed, with a variety of industries and institutions of higher learning. Although its natural resources cannot compare with the huge reserves of oil in Kazakhstan or gas in Turkmenistan, it has considerable amounts of these hydrocarbons. Because of its reliance on oil imported from Turkmenistan, under the presidency of Islam Karimov, it is aiming at energy independence. Thus far it has not entered into international Caspian Basin oil and gas agreements, partly because its priorities have been different, especially its need to become self-sufficient in food. It must also undo the damage caused by the excessive Soviet emphasis on cotton monoculture, which had catastrophic effects on the ecology of the Aral Sea About 60 percent of its water was lost, resulting in disease-bearing desiccation, sand and salt storms and other unfortunate consequences. However, as the most populous and developed state in the area, with a deeply-ingrained sense of historical continuity and even, at times, of its own greatness, it is certain to reappear as a major stabilizing country in Central Asia and set an example for the surrounding region. Its oil resources, now exploited at the rate 100,000 b/d, are expected to rise by 40 percent in the not-too-distant future, making its entry into the international market a virtual certainty.
If we add together the estimated reserves of the countries surrounding the Caspian Sea, whether directly adjacent to it or non-riparian (Uzbekistan) and combine them with offshore resources, a sum of 100 billion barrels of oil would not seem exaggerated. Total capital expenditure during the next 15 years has been estimated at close to $42 billion. This would constitute the second major center of hydrocarbons next to the Persian Gulf area. If managed by experts experienced in Western methods of exploration, production, refining and marketing, these resources may not only create in the Caspian Sea Basin a tremendous source of wealth, but also contribute to the much-needed political stability of the region. They may also provide American companies with rare opportunities to expand their business in a strategic region of the world while bestowing benefits to local sovereign states and all other participants in joint ventures.
1 Statistics in this essay have been drawn from a number of trade journals, such as Platt’s Oilgram News, Oil and Gas Journal, Business Week, The Oil Daily and the Energy Economist. Figures cited by these journals are not invariably identical. The author has relied on those that arc most frequently repeated, but in a few cases some inconsistencies might have crept in.
2 An excellent article on Uzbekistan has been published by S. Frederick Starr, under the title "Making Eurasia Stable" in Foreign Affairs, January-February 1996.
3 Especially recommended for this historical romantic approach arc Hassan, a play; The Golden Journey to Samarkand, a poem, both by James Elroy Flecker, and The Golden Road to Samarkand by Wilfrid Scawen Blunt.