Publication: Prism Volume: 5 Issue: 16

By Sergei Kolchin

In the Soviet Union, Caspian oil was seen as the superpower’s strategic back-up. Back then, it was economically viable to develop the huge West Siberian reserves, which provided a reliable profit. Given this, few saw much point in troubling themselves with tackling the offshore deposits. But then geopolitical reality changed dramatically: Significant reserves of what used to be “Soviet” oil and gas ended up in Azerbaijan, Kazakhstan and Turkmenistan, and a keen struggle developed over the resources of the “new Persian Gulf.” It is difficult to believe that this new “Eldorado” appeared as soon as the Soviet Union had broken up into national segments.

The main fields were discovered in the Soviet era, and it was only because the information was classified that no one knew about them. Caspian oil is no myth, of course, though the size of the reserves is debatable. There are also question marks over the cost and the general wisdom of extraction given the saturation of the world oil market. The new independent states are understandably keen to play the “oil card,” hoping for an influx of Western investment. Kazakhstan’s president Nursultan Nazarbaev estimates the probable oil reserves in his segment of the shelf at 6-12 million tons and Turkmenistan’s leader Saparmurat Niazov is counting on no less than 4 billion tons. The Azeris put estimates of their reserves even higher–and they are already fully involved in creating oil-producing consortiums with the participation of western firms. The levels may in fact be considerably less than this (based on old Soviet figures indicating 270-460 million tons of extractive oil reserves).

Nevertheless, the press is full of stories of a “second” Persian Gulf with reserves of up to no less than 40 billion tons of oil, which is pretty much on a par with Saudi Arabian levels. In addition to this, most Caspian oil and gas deposits are either offshore, requiring major additional investment in extraction, or contain chemically complex oil varieties (such as the Tengiz field in Kazakhstan). But there has certainly been commotion surrounding Caspian oil, even if it was prompted more by political considerations. Russia lost the run-in for Caspian oil (mainly Azeri) to the West, but it now seems that there is no need to rue this too much, at least from the economic point of view. The president of the State Oil Company of the Republic of Azerbaijan (GNKAR) Natik Aliev notes that of thirty-three oil companies with which GNKAR signed nineteen contracts on the joint development of deposits from 1994-99, only two were Russian: LUKoil and the Central Fuel Company.

But since then Azerbaijan has seen not just the formation of new consortiums (in May, another three oilfield exploration and development contracts were signed with Exxon and Mobil, again with multibillion dollar potential–up to US$10 billion), but also the collapse of previously formed consortiums. There have been four such cases. Russia’s LUKoil was involved in one of these–the Karabakh project–and the same fate may befall another of the company’s projects–Shakh-Deniz. Oil is actually being extracted only on the very first of the new shelf deposits–Azeri, Chirag and Guneshli. In 1998 they yielded a total of 7.5 million tons of oil. But if we believe the old Soviet figures rather than the new Azeri ones for the reserves of these three deposits (75 million tons as opposed to 500 million tons), then they will soon be exhausted unless new deposits are brought into service. Against this background, the major Russian participant in Azeri projects–LUKoil–is gradually shifting its attention to the domestic sector of the Caspian shelf. A similar shift is happening on another, previously very delicate issue regarding interaction between Russia and Azerbaijan in the oil industry: the issue of the transportation of Baku oil. As we know, there are three main competing transportation options. First, to Novorossiisk via the operational pipeline through Chechnya. Second, to the Georgian port of Supsa: The pipeline became operational in April of this year, and it will be possible to pump about 115,000 barrels of Baku oil through it every day. Third, to the Turkish port of Ceyhan on the Mediterranean, but this can only be achieved if there are large volumes of oil to be transported, which is not yet the case, and will also require huge investment (the most conservative estimates suggest 2.5 billion dollars). This project, however, is actively supported by Azerbaijan’s leaders.

To begin with Russia was very put out by the idea of a “bypass maneuver”, especially the Turkish route, which could take away not just Azeri oil, but also Kazakh and Turkmen oil. Moreover, Moscow thought that the oil factor could help resolve the tense internal political conflict in Chechnya by establishing an area of mutual interest. But recently the new fuel and energy minister, Viktor Kaliuzhny, bluntly declared that the Baku-Novorossiisk pipeline should be closed down. Hopes that the pipeline would be a stabilizing factor in relations between Moscow and Grozny were clearly not to be fulfilled. Moreover, it had become a target for the criminal activities of Chechen groups, and stood idle for significant periods because of constant illegal attacks on the pipeline to steal the oil. The option once advocated by Boris Nemtsov for a bypass pipeline through Dagestan has also been shelved (the proximity of Chechnya means that it would be a waste of money).

But the main thing is that Russia seems finally to have understood that the battle for the transportation of Caspian oil certainly does not need to focus on using the unreliable and not particularly profitable Chechen route. (In 1998 Russia’s income from the transportation of Baku oil was just US$30 million.) It would be more sensible, for example, to step up the activity of the Caspian Pipeline Consortium (KTK). In May, near Novorossiisk, the first foundation stone was laid for the “Tengiz-Novorossiisk” oil pipeline, built by KTK. This should bring in US$23 billion for Russia over forty years.

Dr. Sergei Kolchin heads the sector of economic statistics and comparative international analysis of the Russia Academy of Sciences’ Institute of International Economic and Political Studies in Moscow.