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Energy Development and Sustainable Economic and Political Development in the Caspian Region
by Robert E. Ebel
Robert Ebel is the Director of the Energy and National Security Program at the Center for Strategic and International Studies.
Summary
Western media have tended to exaggerate the size of the oil and gas reserves in the Caspian region, which are unlikely to contribute more than 3 percent of the total world supply of oil by the year 2010. There are still many unresolved questions about the development of these fields - as illustrated by the recent discovery of large natural gas deposits in Shah Deniz. The development of the necessary export pipelines is stymied by the absence of peace in the region. And even when the oil wealth does begin to flow, there is a danger that this might empower corrupt and irresponsible elites and serve as a destabilizing factor in the region''s development.
* * *It is a daunting assignment to say something about the Caspian in 10 minutes that is both new and relevant. In approaching this task, I was inspired by the wisdom of George Bernard Shaw, who was once approached by an acquaintance troubled at the prospect of telling a scientific gathering everything he knew in only 3 minutes. Shaw''s advice to him was: Speak Slowly.
With that in mind, I shall speak slowly and will confine my remarks to three inter-related issues:
· Media hype and the reality of the day;· Pipeline politics; and· Living with prosperity.
Media Hype and Reality of the Day
The mixture of the politics of oil and the atmosphere of intrigue surrounding the Caucasus and Central Asia has proven to be fascinating to the general media. Unfortunately, in the search for attention-
grabbing headlines, the media has been careless in its assessment of the Caspian
contribution to world oil supply. Some have even concluded that at long last a rival to the Persian Gulf has been found. Not so.
This new oil is not going to be a substitute for Persian Gulf oil, not in terms of levels of production, not in terms of costs of production, not in terms of ease of access to world markets, and certainly not in terms of reduced political risk.
The opening up of the Caucasus and Central Asia following the dissolution of the Soviet Union in December 1991 presented an opportunity quickly grasped by foreign oil companies. What was the attraction?
There is nothing more attractive than something which has been denied but which is now available.
The world-class crude oil and natural gas potential of the region was generally known to the outside world. This potential could not be realized within an acceptable time frame without the presence of foreign investors. Most of the crude oil - and natural gas - to be developed would be available for export, as domestic requirements were comparatively small and were expected to stay that way.
A decision taken years ago in Moscow is very much responsible for the promising future Azerbaijan, Kazakhstan, and Turkmenistan can look forward to. That was a decision by Soviet leaders to allocate most of the available investment capital to the prolific oil and gas fields of Western Siberia, which were easier, quicker, and cheaper to develop. The outlying republics would be provided with Russian oil and natural gas, in whatever amounts were required, at heavily subsidized prices. The resource potential of Azerbaijan and Kazakhstan, and others, would thus remain largely undeveloped.
Had the reverse course been taken, that is, had Moscow decided to drain the Caucasus and Central Asia dry, holding back Russian oil and natural gas for later, then for the Caspian region the years ahead would be bleak indeed.
It is ironic perhaps to consider that pipelines, which in years past bound the Soviet Union together, have now become instruments of separation, helping solidify the political and financial independence of Azerbaijan, Kazakhstan, and Turkmenistan.
Just what might we expect from the Caspian region by the year 2010? To answer, we need two basic assumptions, other than no unforeseen political developments. First, that the exploration for oil in the Caspian will be reasonably successful. Not all wells drilled will be producers, some will be dry. That is to be expected. But there will be new oil developed by consortia other than the Azerbaijan International Operating Company (AIOC) and there will be limited success exploring the Turkmen sector of the Caspian. Tengiz and the oil fields being developed by the AIOC will both reach peak output during the latter half of the coming decade. And importantly Kazakhstan''s sector of the Caspian Sea will be providing considerable volumes.
Second, export pipeline availability will match oil and natural gas producing capacities. This is a key assumption, and one not to be taken lightly, for it is an assumption which has already been damaged.
If these two assumptions hold, then we might anticipate that by the year 2010 oil exports from the Caspian may be on the order of 2.5 million barrels per day (b/d), including some liquids from the Karachaganak gas condensate deposit in Kazakhstan. Yet this 2.5 million b/d level will represent less than 3 percent of anticipated world oil supply that year. Not pivotal by any means but important at the margin for importing countries around the world, who seek security of supply through diversity of supply. For some years now US companies have been encouraged to search for oil outside the United States but away from the Persian Gulf. US dependence on foreign oil has passed 50 percent, and is moving slowly towards 60 percent. Thus, any new oil coming into the market, like that from the Caspian, has both an economic and a political value.
Now, with the discovery of natural gas at Shah Deniz in the Caspian, and with the United States pressing for construction of a gas pipeline from Turkmenistan across the Caspian Sea, Azerbaijan, and Georgia to consumers in Turkey, how much gas might the Caspian be marketing by the year 2010? Small volumes of Turkmen natural gas are already being delivered to Iran, a forerunner of a natural gas pipeline across Iran to Turkey.
Far too many questions remain unanswered with regard to future exports of natural gas. Is the southern Caspian gas prone? Will Afghanistan open up as a transit country? Just how big is the market for natural gas in Turkey? If the Turkish market is satisfied, where might volumes be disposed of? Might the Russian gas pipeline network once again become available for delivery of natural gas from Turkmenistan and possibly Kazakhstan to markets in Europe?
Pipeline Politics
I recall reading someplace that almost 100 years ago the British Institute of Petroleum sent a mission to Baku which stated in its report to the Institute that there was indeed a substantial oil resource base to be found at Baku, but that to exploit this resource base two issues had to be resolved. First, there had to be peace among the Tatars and, second, there had to be a pipeline to the Black Sea.
Here we are, 100 years later, still searching for peace in the region and still concerned about pipelines to the Black Sea.
Peace and pipelines seem to go together. Indeed, some observers are led to believe, for example, that if a pipeline were to be built from Baku westward through Armenia, such could well contribute to resolving the dispute over Nagorno-Karabakh. Not so, in my judgement. A pipeline can follow peace, but peace cannot follow a pipeline.
Whether consciously or not, the US policy of advocating multiple pipelines out of the Caspian region has given the issue of pipeline availability a strong political tinge. Indeed, US policy towards the Caucasus and Central Asia on the whole may be regarded as political. It is a strategy of assisting and denying. The US seeks to assist Azerbaijan, Kazakhstan, and Turkmenistan and transit country Georgia in solidifying their political and financial independence and their ties with the west. Also the US wants to aid Turkey, who has been a valued NATO partner. But Russia and Iran, to the extent possible, are to be denied any strategic role in the movement of oil and natural gas out of the Caspian region to foreign markets.
Although it is understood that US policy above all must serve our national interests, portions of this policy place our government in a position where political decisions have taken precedence over what normally would be purely commercial decisions. I have in mind of course the much-debated proposed oil pipeline from Baku to the Mediterranean port of Ceyhan.
There seems to be a change afoot with respect to Baku-Ceyhan. The Azerbaijan International Operating Company, developing three fields in the Azeri sector of the Caspian Sea, argues that presently known reserves of crude oil do not justify construction of Baku-Ceyhan at this time, that it would not be commercially viable to do so. The US government takes a different point of view, stating that the line would be commercially viable, that there is sufficient oil available.
But beyond all this stands the geopolitical value of the pipeline, which the AIOC may be coming to accept. That may lead to construction of a large-diameter export pipeline from Baku to a point in Georgia, beyond which a smaller diameter line would be extended to the Black Sea. This large-diameter pipeline could be presented as the first leg of Baku-Ceyhan, and would be extended to Ceyhan when oil volumes warranted. Might this approach be acceptable to all parties, including the AIOC, Azerbaijan, Turkey, and the United States?
A key element of US policy towards the Caspian has been the importance of multiple pipelines, again, security through diversity. Although the AIOC would have been content with just the Baku-Novorossiisk pipeline, the United States pressed for a western route, from Azerbaijan across Georgia to the Black Sea. Because of the conflict over Nagorno-Karabakh between Azerbaijan and Armenia, the latter was circumvented as a transit country. This export pipeline fortuitously came into operation in April of 1999, just at the time when the Chechen section of Baku-Novorossiisk was encountering operating problems. Baku-Novorossiisk shut down completely in June 1999 and has been closed since then.
The AIOC then shifted all of its oil to Baku-Supsa and that pipeline is now operating at its full capacity of 115,000 b/d. SOCAR, the state oil company of Azerbaijan, has been moving some small volumes to Novorossiisk by a combination of pipeline and rail. Russia, eager to demonstrate that it is a reliable player in the Caspian oil market, has now decided to construct a pipeline link through Dagestan, bypassing Chechnya. How that pipeline will be financed has yet to be determined. If and when completed however, a pipeline laid through Dagestan, along a route close to the border with Chechnya, will not be viewed as a necessarily reliable carrier.
Thus, the US policy of multiple pipelines has already paid a dividend, which has of course encouraged the government to stay course, to continue to press for Baku-Ceyhan and the recently added TransCaspian Gas Pipeline, known as TCP.
The TCP came about as the United States wished to be helpful to Turkmenistan, with world-class natural gas reserves at its disposal but with no means to move this gas to western markets. The Russian gas pipeline network is not available; why should Russia want to accommodate a competitor? There are markets in Pakistan and India, but to deliver gas would require transiting Afghanistan and that option is out because of the civil war. Turkey anticipates growing natural gas requirements and it would be logical to build a pipeline from Turkmenistan across Iran to tap into that market. But Iran is out as an option because of US unilateral sanctions against that country, although as noted there is the beginnings of a pipeline from Turkmenistan across Iran to Turkey.
Finally, there are very attractive markets in the Far East and Southeast Asia, in China, in Japan, in Korea, but the geographic separation between these markets and the gas fields of Turkmenistan is far too great for the natural gas to be able to compete with other fuels.
The prospect of a TransCaspian gas pipeline was rudely interrupted when a huge discovery of natural gas was made at Shah Deniz, in the Azeri sector of the Caspian Sea. Natural gas from Shah Deniz would have an advantage over Turkmen gas in the Turkish market, simply because of lower transport costs. But it normally takes 5 to 7 years to develop an oil or natural gas find, which implies that Shah Deniz gas might not be ready for export in acceptable volumes until the year 2005 or so. Might Azerbaijan seek to delay the TCP pipeline until Shah Deniz natural gas is ready? Or might some form of accommodation be worked out so that the TCP can proceed now, and Shah Deniz gas could be placed into the pipeline as it became available?
The discovery of natural gas at Shah Deniz holds another, perhaps more important consideration. What if the southern, deep water Caspian is gas-prone, that is, when and if future discoveries are made, the underground formations are found to hold primarily natural gas, and not crude oil? What then? The implications would be enormous. Where are the markets for large volumes of gas originating in the Caspian? For natural gas to be produced, there must be firm long-term contracts with buyers and dedicated pipelines must be available. Reduced oil prospects means a reduced need for export pipelines. Would there ever be crude oil in volumes sufficient to justify Baku-Ceyhan?
Living with Prosperity
Terry Lynn Karl, in her book The Paradox of Plenty: Oil Booms and Petro-States, observes that oil exporters find themselves especially vulnerable to internal strife if the oil exploitation and the process of modern political and economic development are concurrent events. Azerbaijan and Kazakhstan clearly fit this pattern, and so will Turkmenistan if and when natural gas exports to foreign markets and development of its sector of the Caspian Sea get under way.
The question arises, how will the income derived from the export of oil and natural gas be spent? Will these countries be able to avoid the temptations which surely will come their way? History unfortunately works against them.
Just what kind of temptations can we anticipate? The temptations are to use this income to heavily subsidize consumer goods and services; to build mega-projects for public show; to use these funds in a way to keep incumbents in power; and to placate the military by acquiring for them the latest in weaponry which unfortunately could lead to an arms race in the region. Additionally, oil-derived income can and does give rise to bloated bureaucracies, to graft, and to corruption. There is no institutional framework in place today in any of the Caspian resource exporting countries which would provide the checks and balances needed to ensure that the newly found prosperity was not wasted but rather benefited the whole, and not the few.
Other challenges lie ahead, beyond the question of how to handle export revenues. US national interests may not always coincide with the interests of US companies present in the region. For example, the US Congress readily imposes sanctions as a measure of punishment for human rights abuses and the absence of political freedom. It is not inconceivable that a Caspian exporting country may one day find themselves on the receiving end of US sanctions.
Similarly, confrontations may arise between the host governments and the foreign companies over the tempo and scale of investments, especially in times when market prices are down.
It is not difficult then to consider that for the Caspian region, resource development, rather than a guarantee of a stable and prosperous future, can just as easily turn into a destabilizing factor.