Publication: Prism Volume: 2 Issue: 1

Caspian Oil–The New Great Game

by Rossen Vassilev

Moscow and Washington are increasingly drawn into a rivalry over the oil wealth of the Caspian Sea, comparable to the Great Game struggle in the 19th century between Russia and Britain for influence in Central Asia. Since the breakup of the USSR in December 1991, Russia, Turkey, and Iran, the historic regional powers, have been vying for predominance in the Caucasus, as each regards the oil-rich region as within its traditional sphere of influence. But now a fourth player, the West, has joined the competition in this remote, but strategically located corner of the former Soviet Union. which is believed to contain the world’s biggest known reserves of oil and natural gas outside the Persian Gulf and Russia itself. Some experts have predicted that the Caucasus could become the second largest energy supplier to the West (1), thus reducing present-day dependence on the Persian Gulf (although the latter’s proven oil reserves of 600 billion barrels admittedly dwarf the Caspian Basin’s potential of 68 billion barrels).

As a consumer of about 6 billion barrels of crude oil annually, the US is particularly interested in developing new sources of energy to avoid another worldwide fuel shortage, especially if the embargo on Saddam Hussein’s oil exports continues. But Russia, which is determined to maintain a predominant influence in the region, has responded to what it perceives as Western intrusion in its backyard with its own version of the Monroe Doctrine. Unstable and conflict-ridden Azerbaijan, whose huge share of the Caspian hydrocarbon wealth promises to make it a new Kuwait, is caught in the middle, as is neighboring Georgia, though to a far lesser extent.

Russia had maintained tight control over the energy resources of the region since the 19th century. Azerbaijan was the center of the oil industry of Imperial Russia, accounting for half of the world’s oil production in 1901. Although the Baku fields lost much of their earlier significance, Azerbaijan was still the Soviet Union’s second largest oil producer, after the Russian SFSR. The region produced just 3 percent of Soviet oil in 1991, but new exploration revealed the presence of significant amounts of recoverable oil and natural gas in the Caspian shelf, igniting a new struggle for control of these resources.

A US-led production-sharing agreement was signed in September 1994 for the exploitation of these deep-sea reserves, estimated at 4 billion barrels. The contract, worth nearly 48 billion, provides for the development of the off-shore fields Gyuneshli, Azeri and Chirag in the Caspian shelf near Baku, from which 32 million tons of the so-called "early oil" will be exported in the next seven years. The 11-company consortium established to develop this project includes Amoco (17 percent,), BP (17 percent), Unocal (11 percent), Azerbaijan’s SOCAR (10 percent), the Russian LukOil (10 percent), Pennzoil (9.8 percent), Statoil of Norway (8.5 percent), the Turkish Tpao (6.75 percent), Exxon (5 percent), McDermott (2.45 percent), British Ramco (2 percent), and Saudi Delta (0.5 percent). The project is expected to pump at least 511 million tons of crude over a 30-year period, yielding profits of $50 billion or more at current prices.

But the megaproject has run into Russian and Iranian opposition. Mutual defense agreements concluded with Armenia and Georgia have effectively extended Russian control over the Transcaucasus, except for Azerbaijan, which remains the only CIS country without Russian troops on its soil. Moscow’s strategy of reasserting its economic and military-political influence in the region includes the goal of dominating the production and transportation of Caspian oil to world markets. Its insistence on playing a special role in the region has led to growing friction with Baku. Originally excluded from the "contract of the century," Moscow appeared ready to torpedo the deal, claiming that Western economic penetration in the oil-bearing region posed a threat to its national security interests. As a result of heavy lobbying by Moscow, LukOil ultimately received a 10-percent concession, but the Russians, who are resolved not to play second fiddle to the West in an area that until recently was part of their empire, are unhappy that American companies hold a commanding 45-percent share of the contract.

To further squeeze Baku, the Russian Foreign Ministry has sent two diplomatic notes to the Azerbaijani government, accusing it of unilateral exploitation of Caspian mineral resources and threatening sanctions. Moscow maintains that the Caspian is not a sea to which international maritime law applies, but an international lake, whose legal status should he decided jointly by all five littoral states, thus giving the Russians an effective veto power over oil and natural gas extraction. With American backing, Baku has taken the opposite position, as did a draft convention proposed by Kazakhstan (which Moscow has rejected).

Nor has Moscow refrained from using more forceful methods to convince the Transcaucasian governments of the desirability of complying with its wishes. Russia is suspected of being behind efforts to destabilize Azerbaijan and Georgia as part of its long- term strategy to control the Caucasus and its oil wealth. Right from the beginning of the Chechen war, Moscow has closed the Russian-Azeri border, through which 70 percent of Baku’s foreign trade had passed (2). This effective blockade, which has reportedly cost Azerbaijan $250 millions in economic losses, was a reminder of the region’s vulnerability to Moscow’s blackmail and strong-arm tactics. The Russian secret service has been implicated in a series of recent coup plots and attempted presidential assassinations in both Azerbaijan and Georgia.

Although it had previously warned against foreign economic penetration of the region, Teheran did not emerge as an opponent of Western presence in the Caspian until last spring, when the US, fearful of Teheran’s growing clout, persuaded Baku to cancel Iran’s 5-percent stake in the international consortium. Infuriated by this affront, the Iranians, who had previously supported Baku in its conflict with Yerevan over Nagorno-Karabakh, retaliated by cutting Azeri oil imports and supplying energy and raw materials to Armenia, which had been under a crippling economic blockade by Azerbaijan and Turkey since 1990. This was a clear signal of Iranian hostility, for economic sanctions are Baku’s only potent weapon in its bid to reclaim the enclave.

In a further display of anger, Teheran has also accused Baku–unfairly it seems–of harboring irredentist claims on Iran’s East Azerbaijan province (where twice as many Azeris live as in the Republic of Azerbaijan itself); and it has openly called for the replacement of the secular government of Azeri president Heydar Aliyev with a fundamentalist Islamic regime. During last month’s visit to Baku by the Iranian deputy foreign minister Mahmud Vaezi, the rift in bilateral relations was partly healed, but the Iranians continue to link a full rapprochement to Azerbaijani concessions concerning Iran’s participation in Caspian oil ventures.

Given their mutual opposition to Azerbaijan’s honeymoon with the West, it was not unexpected that Russia and Iran should join forces in an attempt to keep the Caspian’s mineral wealth from being exploited unilaterally by Azerbaijan and Kazakhstan. A pattern of Russian-Iranian cooperation is emerging, which must be very disturbing to policy-makers in Washington. Moscow and Teheran signed a joint declaration on 30 October 1995, strongly opposing the division of the sea into national zones and insisting on the indivisibility of its mineral resources as the "common property" of all coastal states. (3) The Russians seemed unconcerned about the contradiction between this declaration and their growing business involvement in Azerbaijan’s Caspian oil projects.

In the meantime, President Aliyev had caved in to Russian and Iranian arm-twisting, Russia’s LukOil was given the biggest share (32.5 percent) of another, $1.8 billion project for the development of the deep-sea Karabakh oil field, putting it ahead of Pennzoil (30 percent), Italy’s Agip (30 percent), and SOCAR (7.5 percent). Much to the chagrin of the US, Baku also invited Teheran to take part in a smaller, $1.5 billion operation to develop the Shah-Deniz, oil field off Azerbaijan’s Caspian coast, as well as in other future oil ventures.

This reversal of Azerbaijani oil policy was a belated recognition of the fact that Baku cannot tackle its problems without the cooperation of its two most powerful neighbors. If President Aliyev had hoped that a close relationship with Washington would help him find an acceptable solution to the Karabakh dispute, he was obviously mistaken. Worse still, even as American oil companies are drilling for Azeri oil, Section 907 of the 1992 Freedom Support Act singles out Azerbaijan as the only former Soviet republic to be banned from receiving US assistance, including humanitarian aid.

Almost as important as Caspian oil is the question of how to transport it to Western consumers. The contest is over who will dominate the flow of oil and natural gas from the Caspian coast of Azerbaijan to international markets. The country that plays host to the pipelines will have ultimate control over this most promising new source of energy for the oil-hungry West. For this reason, Washington wanted Caspian oil to be piped through Georgia and Turkey. Ankara, a NATO member and Azerbaijan’s closest ally, fully supports this option, given the potential revenue of millions of dollars in transit fees and tariffs. The Turkish government has proposed to finance the extension of an existing Georgian pipeline to the Turkish port of Ceyhan and the Mediterranean Sea, thus securing an oil route to the West that is safe from terrorist threats and Russian subversion. But when Georgian president Shevardnadze backed the Turkish proposal, he was nearly killed in a bombing, in which Russian involvement was suspected.

Moscow, on the other hand, has pressured Baku to use a Russian pipeline running across Chechnya to the Black Sea port of Novorossiisk, not only for the significant economic benefits, but also because this would give it monopoly control over oil shipments from the region, which will be competing with Russia’s own energy exports to the West. Since oil from the Tengiz field in Kazakhstan will be shipped by oil tankers across the Caspian to Azerbaijan and then exported via Azeri terminals, what is at stake are oil supplies not only from Azerbaijan, but also from Kazakhstan and Turkmenistan. In a revealing move, the Russian government has indicated that if regional oil is transported through its territory, it will relax its opposition to Western oil development in Azerbaijan’s Caspian sector.

It is believed that control over this pipeline route was a major reason for the Russian invasion of Chechnya. But now Chechen rebels are threatening not to allow Caspian oil to be pumped across their country. The current flare-up of Chechen fighting may be directly linked to the issue of the Russian pipeline. (4)

Turkey, too, openly opposes Moscow’s preferred route and has recently imposed restrictions aimed at preventing Russia from transporting large volumes of Caspian oil through the Bosporus and Dardanelles, claiming that increased tanker traffic would aggravate pollution and the danger of accidents in the crowded straits. (5) To circumvent this new obstacle, Russia has proposed to build a Trans-Balkan pipeline running from the Bulgarian Black Sea port of Burgas to the Greek port of Alexandroupolis on the Aegean.

Iran has offered its own pipeline system leading to the Persian Gulf as the cheapest and safest transit route for Caspian oil, but this otherwise attractive option has been vetoed by Washington for political reasons.

After protracted political maneuvers, Baku and the Western oil companies announced last October a compromise obviously designed to appease both Washington and Moscow. The early oil production from the Caspian, estimated at 80,000 barrels a day, will flow through the Russian and Georgian pipelines. But–in a victory for Ankara–once the Georgian pipeline running from Baku to the Black Sea port of Supsa is connected to Turkey’s Mediterranean coast, it will become the main route for oil exports, which are expected to reach a maximum capacity of 700,000 barrels a day by 2010.

The US decided in favor of the two-pipeline proposal after Aliyev had begun to waver in his resolve to resist Russian bullying. A week before the announcement, a worried President Clinton spoke with his Azeri counterpart, urging him that the Russian route should not be the only one used to export early oil production. Aimed at reconciling the rival Russian and Turkish proposals, the dual decision was an acknowledgment of the geopolitical reality that although the West had the capability to extract and transport Caspian oil, Russia could sabotage any Western plans for the region that did not take into account its demands and interests. Washington was nevertheless pleased with this solution, because the choice of the Georgian pipeline as the main transit route over the long run meant the establishment of the first oil route to Western markets that was independent of the Russian pipeline system. Of course, Moscow may still insist that the dual routes be used for transporting later output.

Before the Western oil companies invest billions of dollars in Caspian ventures, however, they must have reasonable assurances of future political stability in the region. But there are two inescapable realities that the West must face. First, the domestic requisites for political stability are lacking in Azerbaijan and Georgia, both of which are plagued by economic chaos and intractable secessionist insurgencies. Baku is especially vulnerable to a continuation of the Karabakh conflict, which has thoroughly destabilized its politics and society. Recent elections in both countries have consolidated, but not legitimized the rule of their respective presidents. Again, Azerbaijan is more vulnerable to future strife than Georgia, because the Azeri elections were neither fair nor free, and the fact that major opposition groups were excluded from participation increases the probability that the anti-Aliyev opposition may resort to violent, extralegal means to gain power. Similarly, the "winner-take-all" principle inherent in their presidential systems is a recipe for instability, leading to polarized politics and a ferocious, no-holds-barred struggle for control of the presidency.

The second reality is that no matter what any of the Caucasian states, Iran, Turkey or even the US does, Russia will remain the dominant power in the region for a long time to come and its influence is likely to grow. Russia’s bid to control both the pipeline routes and a larger share of the Caspian oil projects has already been strengthened by its troop presence in Chechnya. Moscow could always exploit domestic sources of instability to keep the Caucasus in a state of permanent turmoil. This prospect could become a reality if, as is most likely, either Zyuganov or Zhirinovsky–both bent on restoring the old Soviet Union–is elected Russia’s next president.

Famous for his survival instincts, Aliyev must be calculating the advantages of striking a deal with Russia, similar to the one reached earlier by his Georgian counterpart. After the breakup of the Soviet Union, Tbilisi severed all ties with Moscow and refused to sign the CIS Treaty. But when secessionist conflicts and civil war threatened to destroy Georgia, President Shevardnadze reversed policy vis-a-vis Moscow, joining the CIS and permitting a Russian military presence in his country. To stay in power and see his embattled nation benefit from its mineral riches, the wily president of Azerbaijan may be forced to compromise with his powerful northern neighbor, even if this means giving Moscow a decisive say in regional affairs.

In the game for economic and political leverage in the region, the problem for the West is that Russia, as the regional hegemon, holds all the cards that it needs to regain dominance over Caspian oil.


1. The Washington Post, 1 October 1995, p. C2

2. Nezavisimaya gazeta, 21 March 1995

3. IRNA, 1 November 1995

4. Segodnya, 11 October 1995

5. OMRI Daily Digest, Part I, 18 December 1995

Rossen Vassilev is a former Bulgarian diplomat who specializes in Eastern Europe and the Caucasus.