IMPLICATIONS OF HUGE OIL DISCOVERY IN KAZAKHSTAN.

Caspian countries and the international oil industry stand on the threshold of a huge oil find in Kazakhstan. The Offshore Kazakhstan International Operating Company (OKIOC), a Western consortium, has reportedly discovered one of the world’s largest oil fields at East Kashagan, in the northern part of Kazakhstan’s continental shelf. Estimates of the amount of oil in that deposit, however, are still tentative after drilling the first well. But even conservative estimates anticipate that East Kashagan’s reserves may match the total proven oil reserves in the North Sea at this stage. The same estimates suggest that East Kashagan contains “several times” more oil than Tengiz, Kazakhstan’s biggest known oilfield and one of the world’s top ten. Tengiz has recoverable reserves of 6 to 9 billion barrels and is being successfully developed by Chevron and Mobil after a series of failures by Russian companies. At East Kashagan, the estimates seem likely to go up, rather than down, once exploratory drilling hits the bottom of the deposit and moves inside the field from its periphery. OKIOC plans, furthermore, to start exploration at three other promising oilfields in Kazakhstan’s offshore area.

OKIOC launched full-fledged exploration at East Kashagan as recently as August 1999, and had to suspend work during the winter months when the northern part of the Caspian Sea froze. The consortium is made up of the Agip, British Gas, British Petroleum Amoco, Exxon Mobil, Totalfina, Shell, Statoil, Phillips Petroleum and Inpex companies–most of them holding equal stakes in the project. That, more or less, is the likely shape of the consortium which will develop East Kashagan and market the oil, perhaps opening the consortium’s door to Russian interests for a piece of the action. Barring political obstruction, the field’s development might take up to five years to reach the stage of commercial production.

The significance of this discovery and its international implications are manifold. First, it dramatizes the difference between Soviet Russian failure and Western success in tapping Kazakhstan’s oil deposits and, thus, in putting that country on the path to development. Second, East Kashagan should disprove the recent, almost trendy pessimism regarding the size of Caspian oil resources. That pessimism in some cases goes hand in hand with objections to the planned Baku (Azerbaijan)-Ceyhan (Turkey) pipeline–a project which meets the national interests of Caspian countries and is favored by the United States government, but not by partisans of an export route through Iran. Third and conversely, the East Kashagan discovery boosts the case for a prompt start on Baku-Ceyhan. To become commercially profitable in the absence of U.S. subsidies, that pipeline will need to put through an estimated 1 million barrels of oil per day. The international oil projects in Azerbaijan will not produce that amount soon. Kazakhstani oil can, however, cover the deficit and ensure that the overall quantities available for Baku-Ceyhan overcome the profitability threshold. For that to happen, the oil would need to be routed by barge or undersea pipeline across the Caspian to Azerbaijan. While Tengiz oil is already committed to export via Russia, the oil from other Kazakhstani projects–such as East Kashagan–is not so committed. And, fourth, by bringing the Baku-Ceyhan project closer to implementation, the East Kashagan discovery indirectly enhances the prospects of the trans-Caspian natural gas pipeline for the export of Turkmen gas via Azerbaijan and Georgia to Turkey. The Baku-Ceyhan oil pipeline and the Turkmenistan-Turkey gas pipeline are two interrelated sides of the planned Caspian energy corridor, in which the two parallel pipelines would enhance each other’s commercial profitability (International Petroleum Agency, Dow Jones Newswires, May 18-24).

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