Caspian Energy

Summary by Patrick McCrann

As a part of its Director's Lunch Series, the Belfer Center invited Nurlan Kapparov, former president of the National Oil Company of the Republic of Kazakhstan (KazakhOil) and former Kazak vice-minister of energy and mineral resources, to give a talk entitled "Caspian Energy." Mr. Kapparov previously represented state interests in TengizChevrOil (a Kazakh-American joint venture) and the Offshore Kazakhstan International Oil Consortium (OKIOC). He was the chairman of the board of directors of National Atomic Company KazAtomProm, as well as the head of Kazakhstan's delegation on delimitation of the Caspian Sea with the Russian Federation.

Instead of dealing with the Caspian energy situation as a whole, Mr. Kapparov's talk focused primarily on the oil resources of Kazakhstan. Prior to starting his presentation, Kapparov took the time to stress that Kazakhstan was the first ex-Soviet state to promise practical support for the United States' war on terrorism, offering the country's "strategically vital aerodromes and bases for a potential strike on Afghanistan." Kapparov echoed the words of Kazakh president Nursultan Nazarbayev and said that "Kazakhstan is ready to support an action against terrorism with all the means it has at its disposal."

Beginning with basic background information on Kazakhstan and the Caspian Sea, Kapparov provided projected extraction figures (both in barrels per day and billions of dollars per year) and potential transportation routes for Kazakh oil. Using the most recent data gathered for Kazakhstan's five major offshore fields (Kashagan, Aktote, Kairan, Kashagan SW, and Kalamkas A), Kapparov indicated that if these fields will be developed with primary depletion recoverable reserves would be approximately 24 billion barrels of oil. If Kazakhstan is able to successfully re-inject gas into the fields -- a process that yields more oil -- the country's potential recoverable reserves could climb as high as 42 billion barrels from the fields that are included in the OKIOC consortium alone. Kapparov noted that by the year 2020, this oil could bring up to $35 billion per year in income to OKIOC. The total potential oil income could increase Kazakhstan's budget to more than twenty times its current level. Kapparov also showed on the map that Kazakhstan has many other petroleum structures in its sector of the Caspian Sea. He emphasized that Kazakhstan has not yet started the licensing round on other blocks that might have the same reserves as OKIOC.

Kapparov acknowledged that the shallow waters that predominate the Kazakh portion of the Caspian Sea place certain constraints on the oil extraction process. The first constraint involves environmental factors, as shallow-water extraction is more complicated than deep-water extraction. Kapparov stressed Kazakhstan's concern for the environment, describing the Caspian as "a unique ecosystem which is the habitat for hundreds of kinds of plants and animals." The second constraint has to do the weather -- the Caspian freezes over for four months a year, preventing work during that time.

Kapparov subsequently tried to place the importance of Caspian petroleum resources within the overall international context. He described Caspian oil as geopolitically significant, based on the assumption that more active oil production in the region would help to lessen the importance of Persian Gulf producers. This trend would enable countries such as the United States to diversify their sources of oil, providing security in an otherwise unstable field.

Kapparov noted that the region's most persistent problem remains the legal status of the Caspian Sea itself. Since the countries surrounding the Caspian have not agreed on each country's jurisdiction over the seabed and its oil and gas reserves, there is still strong regional tension. Iran's recent actions against Azerbaijani-based BP ships working in the southern Caspian are only the most recent examples of this tension. Kapparov articulated the hope that the United States, which is already exerting a strong mediating influence in the region, would play a role in resolving this issue. Kapparov supports demarcation of the Caspian between Iran and former Soviet countries according to the old agreements that were signed between Iran and the USSR. Kapparov is also hoping that Kazakhstan, Russia, Azerbaijan, and Turkmenistan will work together to solve this problem among themselves as soon as possible.

Kapparov then talked about the challenges involved in bringing Caspian oil to market. He described the transportation of hydrocarbons as "difficult, geopolitically sensitive, and expensive," which has led to some degree of intrigue regarding the current and proposed routes for transporting oil from the Caspian Sea. From Kazakhstan's perspective, the current pipeline capacity is sufficient, since it is only exporting 2 million barrels of oil a day. However, the country will eventually be exporting up to 7 million barrels a day. Consequently, a strategy of pursuing multiple transportation solutions makes not only sound commercial and strategic sense (since reliance on a single production route or a small group of options leaves a producer such as Kazakhstan open to too many potential constraints). It is, in fact, necessitated by the sheer quantity of the country's remaining reserves. As Kapparov candidly noted, "In Kazakhstan we say 'happiness is multiple pipelines.'"

In his conclusion, Kapparov reemphasized the importance of the Caspian region to the world's energy market. Acknowledging that Kazakhstan's fate does depend on the actions of the United States and the other G7 countries, he underscored the fact that Kazakhstan is committed to "developing and implementing domestic policies to continue both our economic growth and the social welfare of our population."

During the subsequent question and answer session, Michael Lelyveld of RFE/RL asked why the government of Kazakhstan insisted upon maintaining a monopoly system over the routing of oil. Kapparov replied that this system reduced paperwork, facilitated the transport of oil, and actually increased the overall amount of oil being shipped.

Professor Francis Bator of the Kennedy School asked what percentage of the Kazakh national budget is derived solely from oil. Kapparov estimated the current figure to be 40 percent of the budget, but also noted that by 2020 -- when oil production should be at full capacity -- this number could be as high as 80 to 90 percent if other industries are not developed more extensively. However, Kapparov underscored that Kazakhstan does not want to depend solely on the oil industry. In response to a question about Kazakhstan's plan for dealing with the excess funds derived from its vast petroleum resources, Kapparov said that the country had established a separate oil fund according to the "Norway model" -- whereby excess money would be placed in this fund so as not to interfere with the national economy.