THE CASPIAN MISSES OUT ON THE CURRENT OIL BOOM

By Sergei Kolchin

The world energy crisis of 2000–though it is not yet officially known as such–caught the primary energy consumers unawares. The sudden leap in oil prices demanded an immediate hike in oil production, for which OPEC countries also turned out to be unprepared. A situation similar to that of the crises in the 1970s arose. History shows that while this will not be a long-term or chronic situation, oil exporters did significantly swell their profits and hard currency proceeds. This was also true for Russia–a magic wand for her economy.

The high prices on the world oil market seem likely to persist throughout the autumn and winter, though a great deal will depend on the climate. But no one is so bold as to predict that oil prices will remain consistently high for a long time. The ability of the market to adapt to fluctuations in crude oil prices is very great, as attested by the above-mentioned experience of the 1970s.

Yevgeny Kharutkov, a prominent Russian oil market specialist, believes that “it is only possible to predict–or rather guess–what the average world oil price will be in 2001 by accident.” On top of this he stresses: “The possibilities for regulating production in OPEC countries are objectively limited; OPEC cannot produce more than its production capacity allows.” This amounts to 27.6 million barrels per day, while current production stands at 26.2 million barrels.

Under these circumstances, one would have thought there would be extra opportunities for the new oil and gas producing countries–particularly the Caspian states of the CIS (Azerbaijan and Kazakhstan).

However, I have already written that the theory of a “second Persian Gulf” on the Caspian is greatly exaggerated, and that multinational oil companies view this basin more as a strategic reserve for the distant future: The opportunities for turning investment into real oil flows are not sufficiently straightforward, and the oil then has somehow to be transported to the international market.

Recent reports from the post-Soviet Caspian states in many ways confirm that these conclusions are justified. It therefore seems that the new owners of Caspian oil have missed the train of high oil prices.

Take Azerbaijan. Its main oil operator–AMOK–intends to be producing 6.5 million tons of oil per year by the end of 2001, which is of course a drop in the ocean of world demand. True, Azerbaijan eventually ensured the transportation of their crude oil via Georgia, avoiding Russia, to Turkey–a route very actively lobbied by the West, particularly the Americans. But as soon as it became clear that Azerbaijan’s estimates of their reserves and production capacity were a little high, to put it mildly, the position of these same western partners began to shift in an unfavorable (for Azerbaijan) direction.

To begin with, at a Washington conference entitled “Azerbaijan–gateway to Eurasia”, a spokesman for the influential company Exxon Mobil stated that the ambitious project to export oil from Baku to the Turkish port of Ceyhan was not in tune with the company’s interests.

Exxon Mobil is part of the AMOK concern and is the major oil owner in Azerbaijan. In their turn, the aggrieved Azerbaijanis also made a number of blunt statements. First, the head of the State Oil Company of Azerbaijan (GNKAR), Nagik Aliev, said that certain countries and companies were “putting obstacles and problems” in the path of an implementation of the Baku-Ceyhan project, and on this occasion he was clearly not talking about Russia, which had previously been accused of delaying the project. Then the Azerbaijani president himself, Geidar Aliev, flatly accused Exxon Mobil of blocking the project and called on the company’s directors not to “trip up” the other participants. But the main thing was that the concern announced that it was not prepared to finance construction of the pipeline. “The project should be economically viable and backed up by oil reserves, and we are not yet entirely convinced that these exist,” said Terry Kuntz, president of Exxon’s CIS subsidiary.

Finally, the last nail in the coffin of Azerbaijan’s hopes for funding for its transportation project was driven home by presidential candidate George W. Bush, who said that, given that the massive reserves claimed to exist on the Caspian shelf had not been confirmed, it made more sense to transport Caspian oil via Russia and Iran (in other words, along routes previously slated).

Under these circumstances, Baku no longer objects to launching the Transneft system, especially if a pipeline is built to avoid Chechnya. Azerbaijan also intends to buy two billion cubic meters of natural gas from Russia and to export the oil released by this deal via Russia. Meanwhile, Azerbaijan is not yet fully meeting its commitment to pump oil through Russia’s pipelines. Clearly, linking supplies of Russian gas with transit shipments of Azerbaijani oil will require Azerbaijan to be more scrupulous in meeting its obligations.

Meanwhile, the aforementioned Nagik Aliev, while noting investors’ continued interest in Azerbaijani oil (nineteen agreements have been signed), was forced to admit that a serious problem remains with real investment in oil production in the country: “Assessing the potential of GNKAR itself, I would say that it is not great… Today the country has practically no resources of its own with which to develop the oil industry.” Meanwhile, the influx of foreign capital leaves much to be desired. It can therefore be assumed that over the next few years Azerbaijan will not be in a position to greatly increase its volume of oil production.

Nevertheless, on the eve of Azerbaijani Independence Day, two agreements were signed, on the creation of a sponsor group and on transporting oil through Azerbaijan. Similar documents were signed in Tbilisi and Ankara.

The sponsor group comprised AMOK, British Petroleum (25.4 percent), Unocal (7.5 percent), Statoil (6.4 percent), TRAO of Turkey (5 percent) and a number of other companies. Tellingly, Exxon Mobil and Russia’s LukOIL did not want to join the sponsor group. The group’s official partner will be Mepco (Main Export Petroleum Company), which will construct the pipeline. The estimated cost of the Baku-Tbilisi-Ceyhan pipeline is US$2.4 billion. It is designed to operate for forty years and will transport up to 50 million tons of oil per year, but it is already clear that Azerbaijan will be unable to fill the pipeline with oil from its new offshore fields. So the development and transportation of Azerbaijani oil remains a problem.

Another potential supplier of Caspian oil–Kazakhstan–also began by making sensational announcements about its huge reserves of hydrocarbons. In fact, this is still going on. Kazakh leaders claim that a huge oil field with reserves of seven billion tons of hydrocarbons has been opened in the East Kazhagan zone of the Kazakh sector of the Caspian. But western experts involved in the exploration of this field believe this claim to be a form of posturing.

It must be said that Kazakhstan is more cautious than Azerbaijan in its “Western priorities” for transporting energy resources, sticking to the Caspian Pipeline Consortium project. Yet Kazakhstan’s oil and gas fields are not that much better prepared for large-scale production than Azerbaijan’s. The Tengiz development project has not reached its projected capacity, as is also the case with Karaganak and other high profile projects. Gas plays a larger role in Kazakh oil and gas projects. Nevertheless, Kazakhstan has achieved more impressive results in the volume of oil production than its counterpart across the Caspian. Kazakhoil estimates that oil exports from Kazakhstan this year will total about 27 million tons, which is about 80 percent of the country’s oil production.

This is impressive, considering the transportation problems. There has also been a perceptible rise in oil extraction, which increased by 11.5 percent in the first six months of the year. Export proceeds for the same period totaled about two billion dollars. Even so, the use of archaic methods of transportation (mainly rail) noticeably reduces export efficiency. Some Kazakh oil goes through Russia’s pipeline system, but not enough. Last year Kazakhstan pumped over 11 million tons through Russian pipelines, but this corresponds approximately to the volumes of oil that were typically transported in the Soviet period.

Kazakhstan has the back-up option of exporting through Iran. About three years ago, Iran and Kazakhstan came to an agreement on the supply of Kazakh oil to refineries in northern Iran, which were forever suffering shortages of crude oil. In exchange, Iran was to send similar volumes (with adjustments for quality) for export from the Persian Gulf. Initially this system did not work for purely technical reasons: Iranian oil refineries were not equipped to process Kazakhstan’s highly viscous and sour crude. But in principle, if certain technical improvements are made, it is perfectly workable.

The quality of Kazakh oil also impeded joint transportation projects between Russia, Kazakhstan and Azerbaijan, the latter objecting to mixing its light crude with Kazakhstan’s heavy crude. According to Transneft representatives this problem has now been resolved. There will be what are termed “batch deliveries.”

But the main transportation solution, as mentioned above, is the implementation of the Caspian Pipeline Consortium project. Kazakhstan is also banking on new shelf projects, where, incidentally, the oil is gauged to be of better quality than that on the mainland. In ten years Kazakhstan plans to extract 20-25 million tons of oil per year on the shelf.

However, all this lies in the future, as does full development of Tengiz, Karaganak and Uzen. And though Kazakhstan undoubtedly received better dividends from favorable world oil prices in 1999-2000 than Azerbaijan did, it too proved to be unprepared to occupy the niche in demand which opened up. On top of this, the costs (primarily on transport) ate up part of the profit.

The recent meeting between Presidents Vladimir Putin of Russia and Nursultan Nazarbaev of Kazakhstan boosted optimism on the Kazakh side. It seems that Kazakh oil and gas are an integral part of Russia’s transport system, and this will provide the country with much-needed revenue. There are technical limitations–above all the throughput capacity of Russia’s oil and gas pipelines–but in any case, relations between Russia and Kazakhstan are developing along different lines from those with Azerbaijan.

The main conclusion to be drawn from this assessment of the role of Caspian oil in the international oil market is that it is not yet a significant factor. Consequently, the newly independent oil-producing states of the CIS–having failed to boost investment projects (which have been under discussion since the early 1990s)–have not felt the full benefit of the current favorable price conditions on the international market.

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.