Central Asian Oil Conflicts

▪ 1999

by Robert Corzine

      At the end of the 19th century, the Caspian Sea region in Asia was one of the biggest suppliers of oil to the world. Seven decades of Soviet rule in this century, however, effectively cut off the region—and its energy resources—from international markets. The big question in the late 1990s was whether the newly emerged Caspian and Central Asian republics of Azerbaijan, Kazakstan, Turkmenistan, and Uzbekistan would be able to overcome considerable political and economic barriers to become leading exporters of oil and natural gas in the 21st century.

      The uncertainty about the region's potential for development stemmed from several sources, not least of which were differing opinions about its eventual oil and gas reserve base. According to the International Energy Agency (IEA), estimates of proven oil reserves in the three Central Asian republics and Azerbaijan in Transcaucasia vary between 15 billion and 40 billion bbl, with an additional 70 billion to 150 billion bbl considered possible.

      Although some believed the region had the potential to rival the Middle East as an oil producer, the IEA was more circumspect. A more accurate comparison, it said, would be with the North Sea: "As such, it could be a significant alternative source of oil and gas supply, helping to increase world energy security." A combination of low oil prices and the complex politics of the area could, however, combine to delay or even stop the development of the region's energy reserves.

      The geopolitical fault lines of Central Asia and the Caspian region were reflected in the bitter debates that accompanied various proposals to build pipelines from the region. Political and commercial agreements on pipeline routes are a prerequisite for the region to achieve its full potential. They have, however, proved to be especially difficult to achieve, given the conflicting strategic interests of the countries involved.

      The most contentious issue in 1998 was a plan by the Azerbaijan International Operating Co. (AIOC)—the 11-member international consortium developing three offshore fields in Azerbaijan—to build a main export pipeline from the region. The U.S. regarded this pipeline as the foundation for an "energy corridor" across the Caspian Sea. It wanted the companies to support a plan to build a line from Baku, the Azerbaijani capital, to Ceyhan on Turkey's Mediterranean Sea coast. Additional oil and gas from Kazakstan and Turkmenistan could then be shipped across the Caspian through an undersea pipeline that would link up with the Baku-Ceyhan line.

      Advocates of the plan said it would secure the political and economic independence of the Caspian republics, as it would give them access to world markets without having to go through Russia or Iran, the two dominant powers in the region. The transit revenues would also underpin Turkey, the most important U.S. ally in the area.

      With a projected cost of $3.7 billion, the Baku-Ceyhan line would be, however, the most expensive of three options that were being assessed by the AIOC and the Azerbaijani government, the two bodies that would make the final decision. The AIOC was thought to prefer a more modest pipeline to Supsa on the Black Sea coast of Georgia, from where tankers would then take the oil to world markets via the narrow Bosporus Strait in Turkey. The Turkish government opposed this idea, insisting that the environmental dangers were too great to allow more tankers through the Bosporus.

      The pipeline debate was further complicated by the roles of Russia and Iran. Russia was wary of projects that might undermine its traditional political influence in the region, although it would probably not try to stop a Baku-Ceyhan project as long as significant volumes of Caspian crude continued to be exported via its territory.

      A pipeline through Iran was not one of the AIOC's options, but the Tehran government was busy in 1998 promoting Iran's potential as a "land bridge" between Central Asia and the Caspian region and the oil-export terminals on the Persian Gulf. As a first step Iran wanted to "swap" oil with Caspian and Central Asian producers. It would use the imported crude in its northern refineries and make available a similar amount of Iranian crude for export at Persian Gulf ports. Iran said that eventually it would be willing to switch all its inland refineries to Caspian and Central Asian crude and to reverse its oil pipelines in order to enable direct exports from the region. Iran was also eager to act as a conduit for gas exports from Turkmenistan to Turkey.

      The other pipeline project with a history of political wrangling was the Caspian Pipeline Consortium's (CPC) plan to build a nearly $2.5 billion line from the giant Tengiz field in Kazakstan to a new export terminal at Novorossiysk on Russia's Black Sea coast. The consortium finally received the go-ahead in November and was expected to be a litmus test of Russia's intentions in the region. Although Moscow would benefit substantially from transit revenues, Russian support for the CPC had often been lukewarm, given that the main beneficiary would be Kazakstan.

      It was not only pipeline routes that aroused strong passions in the region. The ownership of the Caspian Sea itself remained to be settled. Russia and Kazakstan solved their boundary dispute, but Turkmenistan and Azerbaijan continued to quarrel over the status of one offshore field, and Iran insisted that it be awarded one-fifth of the Caspian should the five nations that border the sea agree to split it into national sectors.

      As of the end of 1998, the legal dispute had not stopped any foreign projects from going ahead. It looked increasingly likely, however, that low oil prices would do so in 1999. If crude prices, which ended 1998 at just over $10 per barrel, do not recover to the $15-$20-per-barrel range, oil executives say, it will be difficult to justify the tens of billions of dollars that will be needed to develop the region's reserves.

Robert Corzine is the Energy Correspondent for the Financial Times.

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