Country Analysis: Caspian Sea region
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 break-up 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 identified 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). The Caspian region contains 10 bn barrels of proven oil reserves (defined as oil and natural gas
liquids deposits that are considered 90 % probable). In addition, despite a string of disappointing recent drilling
results, mostly in Azerbaijan, the region's possible oil reserves (defined as 50 % probable) could yield another 233
bn barrels of oil.
Overall, proven natural gas reserves in the Caspian region are estimated at around 170 tcf. Possible natural gas reserves in the Caspian region are even larger, and could yield another 293 tcf of natural gas.
Turkmenistan (101 tcf) and Kazakhstan (65 tcf) are among the top 20 countries in the world interms of proven natural
gas reserves. Although it is not technically part of the Caspian Sea region, nearby Uzbekistan (66.2 tcf in proven
natural gas reserves) also holds significant natural gas deposits.
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 11 years, however, Azerbaijan and Kazakhstan, in particular, 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 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.
Most of Azerbaijan's oil resources (proven as well as possible reserves) are located offshore, and perhaps 30 % to 40 % of the total oil resources of Kazakhstan and Turkmenistan are offshore as well. 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 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 Chirac fields -- which Turkmen officials call 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 of potential export pipelinesfrom 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.
In April 2002, a long-delayed summit of the Caspian littoral heads of state failed to produce a multilateral agreement on the sea's legal status, prompting several states to sign bilateral agreements in an effort to solve the problem.
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 Guneshli field, located 60 miles off the Azeri coast. Although the country's oil production fell after 1991 to just 180,000 bpd in 1997, Azerbaijan's oil production rebounded to 311,200 bpd in 2001 with the help of international investment in its oil sector.
Kazakhstan also 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 bpd, to 414,000 bpd, in 1995.
Boosted by foreign investment in its oil sector, Kazakhstan's oil production has increased steadily since then, with output of 811,000 bpd in 2001, most of whichcame 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 mm bpd in 2001. Production in the region
is projected to increase several fold, led by three major projects currently under development in Azerbaijan and
Kazakhstan: In April 1993, Chevron concluded a historic $ 20 bn deal with Kazakhstan to create the TengizChevrOil
joint venture to develop the Tengiz oil field, estimated to contain recoverable oil reserves of six to 9 bn
TengizChevrOil was producing approximately 250,000 bpd in June 2002, and the consortium is planning to invest $ 3 bn over the next three years to boost production capacity at the field now that Caspian Pipeline Consortium's Tengiz-Novorossiisk exportpipeline is operational. Given adequate export outlets, the TengizChevrOil joint venture could reach peak production of 750,000 bpd by 2010.
In what was described as "the deal of the century," in September 1994, the Azerbaijan International Operating Company
(AIOC) signed an $ 8 bn, 30-year contract to develop three Caspian Sea fields -- Azeri, Chirac, and the deepwater
portions of Guneshli -- with proven reserves estimated at three to 5 bn barrels.
Almost all of Azerbaijan's production increases since 1997 have come from AIOC, which produced an average of 120,000 bpd of oil in the first four months of 2002. In August 2001, AIOC and Azeri government officials signed an agreement to carry out an expansion, with oil production at ACG expected to reach 800,000 bpd 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. Exploration and preliminary drilling in the Kashagan block has produced spectacular
results, with analysts hailing the field as the largest oil discovery in the last 30 years.
Although Agip KCO released estimates in June 2002 that the Kashagan field holds between seven and 9 bn barrels of crude in proven reserves, as well as 38 bn barrels in probable reserves, both Kazakh officials and energy analysts have called that estimate "conservative." These projects, along with others currently underway, could help boost Caspian Sea region production to around 3.7 mm bpd by 2010.
EIA expects production capacity from the Caspian basin to exceed 6.5 mm bpd by 2020. Although not "another Middle East," as some analysts believed in the early 1990s, the Caspian Sea region is comparable to the North Sea in its hydrocarbon potential.
Unlike with oil, the Caspian region's natural gas resources were extensively developed during the Soviet era. 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 since export routes for Caspian natural gas -- such as the Central Asia-Centre pipeline -- 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 bn cf 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 bn cf in 1999, then skyrocketed to 1.64 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 32 %, from 1.51 tcf in 1992 to 1.99 tcf in 2000.
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. However, since Uzbekistan is landlocked and 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, mainly through the Tashkent-Bishkek-Almaty pipeline.
With the emphasis on Azerbaijan's oil potential, the country's natural gas sector often has been overlooked. In the
past, Azerbaijan has imported natural gas from Russia, Turkmenistan, and Iran to meet domestic needs, but consumption
has been on the wane since the collapse of the Soviet Union, and in 2000, Azerbaijan's natural gas consumption and
production were roughly equivalent at 200 bn cf. Azerbaijan is continuing to import natural gas, but the 1999
discovery of the Shah Deniz field will soon change that.
The Shah Deniz field, which is thought to be the world's largest natural gas discovery since 1978, is estimated to contain between 25 tcf and 39 tcf of possible (not proven) natural gas. Development of the field, which will cost upwards of $ 2.5 bn including related infrastructure, should produce the first natural gas by 2004, making Azerbaijan a significant net natural gas exporter. Already, Azerbaijan has secured an agreement with Turkey to export Azeri natural gas via a planned Baku-Erzurum pipeline.
As investment continues to pour into the Kazakh natural gas sector, the country's natural gas production is set to increase dramatically. In August 2001, the Kazakh Ministry for Energy and Mineral Resources approved a 15-year strategy for developing the country's natural gas sector that would increase natural gas production fivefold. According to the strategy, which the Kazakh government approved, Kazakhstan is aiming to increase its natural gas production to 1.2 tcf by 2005, to 1.66 tcf by 2010, and to 1.84 tcf by 2015. Key to this strategy is the development of natural gas reserves at Kashagan, Karachaganak, and Tengiz. Provided that the necessary infrastructure is built, Kazakhstan soon could become a major natural gas exporter as well.
Overall, natural gas production in the Caspian Sea region reached nearly 2.1 tcf in 2000. Projects currently underway
could help boost Caspian Sea region natural gas production to over 6 tcf by 2010, and the enactment of laws barring
the flaring of associated natural gas may increase the region's total production.
In 1999, Azerbaijan enacted a law requiring that each oil production project in the country include a plan to develop its natural gas potential, while Kazakhstan is requiring Agip KCO to capture and use all the associated natural gas from the Kashagan block. Previously, natural gas had been flared off in both countries instead of being piped to consumers because of a lack of a developed infrastructure to deliver natural gas from offshore fields.
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 2001, Kazakhstan's net oil exports were 631,000 bpd, while Azerbaijan's were 175,200 bpd. Overall, Caspian Sea region oil exports in 2001 amounted to about 920,000 bpd (of the 1.3 mm bpd 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 mm bpd in 2010, and possibly another 2 mm bpd on top of that by 2020.
With regards to natural gas, Turkmenistan led the way among Caspian Sea region producers with net exports of 1.38 tcf in 2000. Overall, Caspian Sea region natural gas exports totalled just 1.2 tcf 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.
Existing export options
In order to boost oil and natural gas exports from the Caspian Sea region, a number of issues willneed to be addressed. During the Soviet era, all of the oil and natural gas pipelines in the Caspian Sea region (aside from those in northern Iran) were designed to link the Soviet Union internally and were routed through Russia.
Prior to 1997, exporters of Caspian region oil had only one major pipeline option available to them, the 240,000-bpd Atyrau-Samara pipeline from Kazakhstan to Russia. Smaller amounts of oil were exported by barge and by rail through Russia, as well as by a second, smaller pipeline from Kazakhstan to Russia. In the decade since the collapse of the Soviet Union, several new oil export pipelines, such as the Baku-Novorossiisk, the Tengiz-Novorossiisk, and the Baku-Supsa pipelines, have been constructed, and the Atyrau-Samara pipeline recently was upgraded to increase its capacity to 300,000 bpd.
Nevertheless, the Caspian region's relative isolation from world markets, as well as the relative lack of export options, continues to hinder exports outside of the former Soviet republics. Of the 920,000 bpd exported from the region in 2001, only about 400,000 was exported to consumers outside of the former Soviet Union.
Natural gas exports from the Caspian region have been even more limited. All of the export pipelines from the region
pass through Russia, requiring Caspian region natural gas exporters to make agreements with Gazprom, the Russian
monopoly that owns the pipelines, in order to export their natural gas.
Since Gazprom is also a competitor with the Caspian region for hard currency natural gas markets, the company has used its position to negotiate better deals and to limit pipeline access for Caspian region natural gas. Turkmenistan's economy, which is concentrated mainly in oil and natural gas, experienced a huge 25.9 % decrease in its gross domestic product (GDP) in 1997 when Gazprom denied Turkmenistan access to its pipeline network over a payment dispute.
Since Gazprom has reserved the hard currency markets of Europe for itself by limiting pipeline access for Caspian
region natural gas producers, most exports from the region have remained in the Newly Independent States (NIS). Due
to the ongoing transition process to a market economic system in much of the NIS, the majority of these former Soviet
republics have been unable to pay existing world prices for natural gas supplies.
Thus, in order to export their natural gas at all, 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 the Russian pipeline system to ex-Soviet states that cannot pay fully in cash or are tardy with payments for supplies already received.
In 1997, Turkmenistan and Iran completed the $ 190 mm Korpezhe-Kurt Kui pipeline linking the two countries, thereby
becoming the first (and so far, only) natural gas export pipeline from Central Asia to bypass Russia.
Although Gazprom and Turkmenistan resolved their pricing 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.
New export options
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 pipelines are 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 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 to 15 years in Europe is expected to grow by little more than 1 mm bpd. Oil exports eastward, on the other hand, could serve Asian markets, where demand for oil is expected to grow by 10 mm bpd over the next 10 to 15 years. In particular, Chinese oil consumption is projected to rise dramatically.
To supply this Asian demand, though, would necessitate building some of the world's longest pipelines. Geographical considerations would force any pipelines to head north of the impassable mountains of Kyrgyzstan and Tajikistan across the vast, desolate Kazakh steppe, thereby adding even more length (and cost) to any eastward pipelines.
An additional way forCaspian 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. With the ouster of the Taliban in Afghanistan in December 2001, proposals to build a Trans-Afghan natural gas pipeline and the Central Asian Oil Pipeline have re-emerged, but neither pipeline is realistic in the short-term.
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. Turkmenistan and Kazakhstan also have initiated low-volume oil "swap" deals with Iran, delivering oil in tankers to refineries in Iran's northern regions in exchange for similar volumes of crude at Iranian ports in the Persian Gulf. However, any significant investment in Iran would be problematic under the Iran and Libya Sanctions Act, which imposes sanctions on non-US companies investing in the Iranian oil and natural gas sectors. US companies already are prohibited from conducting business with Iran under US law.
North or Northwest?
For its part, Russia itself has proposed multiple pipeline routes that utilize Russian oil pipelines to transport oil to new outlets being developed on the Baltic and Black Seas. In addition to the Caspian Pipeline Consortium's Tengiz-Novorossiisk pipeline, 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 will 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 natural 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 already have expressed their desire to diversify their export options.
Bosporus/Black Sea issues
A major problem with additional Caspian oil exports heading west is the increasing congestion in the Bosporus Straits. Turkey has raised concerns about the ability of the Bosporus Straits, already a major chokepoint for oil tankers, to handle additional tanker traffic. 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 passthrough the Bosporus Straits in order to gain access to the Mediterranean and world markets.
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 to 400,000 bpd by the end of 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 conflicts, 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 has been cracking down on Islamic fundamentalism in Uzbekistan, tensions between rivals Pakistan and India remain high, 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.