CASPIAN SEA ENERGY BASIN

 1. Introduction

After the disintegration of the former Soviet Union in 1990, the Russian Federation has politically lost its own influence over the Caspian Sea energy basin. In the meantime the international oil companies have found an incredible opportunity of preparing and implementing their commercial projects on the exploitation and then transportation of natural resources of the region to the world market. In fact they have made huge amount of investments. Total value of their investments in terms of US dollars is   nearly 37 or 42 billion dollars.

Due to newly emerged development, most of the states, who have urgently needed the natural resources, have turned their eyes on the resources and changed their foreign policies in favor of “energy” and “global cooperation”. For example, today Iran and the United States have made serious diplomatic attempts to put an end to bilateral conflicts. The United States have signed various agreements with the European Union and China on the subjects of energy, political cooperation, global economic affairs and global security. Meanwhile they have begun to establish close economic, diplomatic, political and commercial relations with the Central Asian and the Caucasus states in order to freely import the regional resources and to operate in these states’ markets.

Of course in order to understand real meaning of radical changes in the foreign policies of the states as well as bilateral and multilateral relations among them, we should briefly give information about the Caspian Sea reserves and the pipeline projects.

2.Brief Information about the Regional Resources

Before dealing with the details, in this study, total natural gas and oil reserves of Kazakhstan, Turkmenistan, Azerbaijan and Uzbekistan will be given because they are littoral states of the Caspian Sea.

During the former Soviet Union period, “Turkistan region”, including both Caspian Sea region and other Turkish areas, had contained nearly 32 percent of all former Soviet Union’s oil reserves and 50 percent of its natural gas reserves.

According to the report, named “Caspian Sea Region”, prepared by the US Energy Information Administration in December 1998, in the Caspian Sea region, Uzbekistan, Turkmenistan, Azerbaijan and Kazakhstan have nearly 161 or 178 billion barrels oil and 553 or 654 trillion cubic feet natural gas reserves. (See Table 1 and Table 2) Total amount of proven oil reserves is 15.6 or 32.1 billion barrels. Possible oil reserves are ten times more than that of the proven oil reserves, which is nearly 145 billion barrels.

If we look at Table 2, total amount of proven natural gas reserves is 236 or 337 trillion cubic feet.  In the meantime they have 317 trillion cubic feet possible natural gas reserves.

When we compare oil reserves of the Caspian Sea region with the North Sea and the United States, we can easily say these reserves are more than these two regions. A total oil reserve of the United States is 22 billion barrels and that of the North Sea is 17 billion barrels. Based upon proven natural gas reserves, Kazakhstan, Turkmenistan and Uzbekistan each rank among the world’s twenty largest natural gas producer countries.

In order to understand importance of the regional resources, we should indicate their values in terms of US dollars. If we assume that one-barrel oil price is 25 dollars. So total value of oil reserves, including both proven (390 or 811.5 billion dollars) and possible ones (3 trillion 625 billion dollars), in terms of US dollars is nearly 4 trillion or 4 trillion 436 billion dollars. (See Table 3)

When we accept that the price of one-thousand cubic meters natural gas is 40 dollars, total value of natural gas reserves, including proven gas reserves (539.42 or 770.28 billion dollars) and possible gas reserves (724.57 billion dollars), is 1 trillion 264 billion dollars or 1 trillion 494 billion dollars. Consequently the total value of oil and natural gas reserve is nearly 5 trillion 264 billion dollars or 5 trillion 930 billion dollars.

3. Rising Oil and Natural Gas Demand in the World

In 1991, gross energy consumption in the world amounted to 8,324 million tons of oil equivalent. But according to the studies, the world consumption will rise by nearly 1.8 percent on an annual basis in the industrialized countries. However energy growth in Asia is expected to reach an average of 4.3 percent per a year.

Within the framework of the scientific calculations, by 2015, total worldwide demand for oil is expected to reach approximately 103 million barrels per a day. It is estimated that nearly 25 or 28 million barrels per a day. On the other hand the Western Europe will need approximately 15 or 18 barrels per a day.

As far as China’s energy demand is concerned, recent estimation of Asia-Pacific Economic Cooperation Organization suggests that China’s net external energy requirements will rise to over one million barrel per a day in 2000 and three millions barrels per a day by 2010.

In matter of the natural gas, the Western countries have needed approximately 456 billion cubic meters natural gas per a year by 2020. Nearly 251 billion cubic meters of natural gas will be imported from outside. On the other hand it is estimated that annual natural gas demand of Turkey is 80 billion cubic meters in 2020.

With its own oil reserves, including proven and possible reserves, from 2015, the Caspian Sea region can itself supply the Asian countries’ oil demands for period of 18 or 20 years; and those of the Western Europe for 30 or 33 years.

4. New Oil and Natural Gas Pipeline Projects

These scientific studies and estimations have overtly confirmed that not only the western but also the eastern states have clearly and urgently needed the natural gas and oil reserves of the Caspian Sea region for their own industrial infrastructure.

At the same time in order to transfer sufficient amount of the natural resources, new transportation routes have immediately been necessary. The existing pipelines in the Caspian Sea region were designed to link the Soviet Union internally and were rested through the Russian Federation. Now existing oil and natural gas pipelines do not have enough capacity to absorb or export the natural resources of the region to the world market.

4.1. Options for Pipelines

There are many seven different routes for the pipelines. China, Georgia, the Persian Gulf, Iran, Pakistan, the Russian Federation and Turkey.

4.1.1.  China

4.1.1.1. Natural Gas

The multinational oil companies have prepared two projects. American Exxon, Japan Mitsubishi and China National Petroleum have jointly submitted a preliminary feasibility study for the construction of the world’s largest natural gas pipeline from East Turkmenistan through Uzbekistan and Kazakhstan to the Chinese coast and South Korea and will end in Japan. Length of the pipeline from Turkmenistan to China is 5,730 kilometers; from China to South Korea, 650 kilometers; and from South Korea to Japan, 1,660 kilometers. Total capital investment is estimated at nearly 11 billion US dollars. Its annual capacity is one trillion cubic feet.

4.1.1.2. Oil

A feasibility study for an oil pipeline from Kazakhstan and Turkmenistan to China was prepared in 1999. Length of the pipeline is nearly 1,800 miles. Its cost is estimated at nearly 3.5 billion dollars and its daily capacity is 400 thousands or 800 thousands barrels. An agreement related to the pipeline project was signed in 1997.

4.1.2. Georgia

The pipeline will transfer early Azeri oil from Baku to the Georgian port of Supsa on the Black Sea. Total cost of the project is nearly 500 million dollars. The consortium has prepared some projects to increase its daily capacity from 100 thousand barrels per a day to 300 thousand barrels per a day. Its length is 550 miles.

4.1.3.  The Persian Gulf

4.1.3.1.   Oil

Kazakhstan signed an agreement in 1996 to transfer its oil to the Caspian Sea port of Iran with the Iranian government. After that Iran, through using existing pipelines, by rail, will transform the Kazakh oil to its Persian Gulf ports. Monument Oil and Gas Company has engaged in the process. Total volumes from Kazakhstan have been 30 thousands or 40 thousands barrels per a day.

Turkmenistan authorized Total in October 1998 to conduct a feasibility study for an oil pipeline that would transfer Kazakh and Turkmen oil from the Tengiz and Novy Uzen oil fields in Kazakhstan via the Balkan Velayat of Turkmenistan to the Iranian Persian Gulf ports. The proposed pipeline would carry 500 thousand or 1 million barrel Kazakh and Turkmen oil. With respect to the pipeline Turkmenistan, Iran and Kazakhstan have signed a Memorandum. They agreed on that they would transfer that amount of oil to European, Asian or South African markets depending on market situation. The cost was estimated at nearly 2 billion dollars for 500 thousand barrels day pipeline to Tehran. Kazakhstan Pipeline Company estimated at 1.6 billion dollars for 900 million barrels per a day pipeline to Persian Gulf. Length of the pipeline from Tengiz to Tehran is 1,060 miles; from Kazakhstan to Persian Gulf is 1,300 miles.

Iran has also proposed that Azerbaijan might use an alternative route for the Baku – Ceyhan pipeline that would pass from Azerbaijan to Turkey via northwestern Iran. But the Azerbaijani Milli Majlis rejected the proposal in November 1998.

4.1.3.2.   Natural Gas

In December 1997, Turkmenistan and Iran jointly constructed an export pipeline for natural gas of Turkmenistan from Korpedge to Kord-Kui. Export volume of the pipeline is 70 billion cubic feet. Within ten years they will increase its capacity to 350 billion cubic feet annually.

In the same year, Turkey, Turkmenistan and Iran signed an agreement on the construction of natural gas pipeline from West Turkmenistan to Turkey via Iran. In May 1997, they signed a Memorandum. French Sofregas completed first feasibility study for the gas pipeline in 1997. Shell Company prepared another feasibility.  After the feasibility report, Iran and Turkey signed Memorandums of Mutual Understanding. They also signed related official documents for establishing the Consortium, Purchasing, Selling and Transiting the Turkmen gas. Length of the route to Turkish – Bulgarian border is 3,900 kilometers. Total cost is estimated at 7,6 billion dollars. Its capacity is 22,5 billion cubic meters in 2005 and 30 billion cubic meters in 2010.

4.1.4.  Pakistan

4.1.4.1. Natural Gas

In May 1996, the governments of Turkmenistan, Afghanistan, Pakistan and Uzbekistan signed a Memorandum of Mutual Understanding for the construction of Centgas (Central Gas Pipeline). In October 1997, an agreement was signed for the establishment of Consortium with the Unocal Corporation, Inpex, Krescent and Hyundai. Although Bridas discovered sufficient natural gas reserves in Yaslar area and Unocal / Delta leadership prepared positive feasibility report, Unocal announced that it was suspending its work on the pipelines. In December 1998 it withdrew from the Consortium and put an end to its own commercial activities in Turkmenistan. It was due to the ongoing civil war in Afghanistan and US bombings on Afghanistan.

The pipeline would transfer Turkmen natural gas from Dovletabad – Donmez field to town of Multan in Pakistan via Afghanistan. Its length is 1,464 kilometers. The Consortium estimated its cost at 2 billion dollars. Its annual capacity is 15 billion cubic meters.

4.1.4.2.Oil

The Central Asian Pipeline project envisions construction and operation of an export pipeline and marine shipping terminal. By early 1999, a Memorandum of Mutual Understanding among Turkmenistan, Afghanistan and Pakistan was signed. Its length is 1,667 kilometers. It will end the marine shipping terminal on Pakistan’s coast of the Arabian Sea passing through the territories of Afghanistan and Pakistan. Its annual capacity is 50 million tonnes. Its construction cost is estimated at 2.7 billion dollars.

4.1.5. Russia

4.1.5.1. Oil

The Caspian Pipeline Consortium will transport Kazakh oil from Tengiz – Novorossiik route to the world market. The CPC has refurbished an existing pipeline from Tengiz to the Astrakhan region. In the meantime it has constructed a new pipeline from the Astrakhan region to the Black Sea port of Novorossiik. Shareholders of the Consortium have expected to make the pipeline operational in 2001. Its capacity is 1,34 million barrels oil per a day. Its length is 930 miles. Its cost is estimated at 2.3 billion dollars. In November 1998, the Russian Parliament approved the CPC construction plan.

In the same period, the Russian Federation presented a proposal to the Turkmen officials for transporting its oil via Russian territory to the world market. According to the Russian Transport Ministry’s proposal, the Russian Federation will ship Turkmen oil via tanker from Turkmenbashi city in Turkmenistan to the Russian ports on the Caspian Sea. From there it will be shipped via rail to the Black Sea.

The Russian Federation had also wanted to carry on the transportation of the Azeri oil from Baku to the Black Sea through using the existing pipeline via Grozny, Chechnya. Due to the internal conflicts between Chechnya and the Russian Federation, the Russian officials prepared new projects that bypass Chechnya. Daily capacity of the pipeline is 0.6 million barrels. Total cost of the pipeline is estimated at 1.2 or 1.5 billion dollars. In order to bypass Chechnya, the Russian Federation has planned to build 176 mile-long new pipelines from Baku to the Russian Federation.

4.1.5.2. Natural Gas

The existing Russian pipeline system could be repaired and expanded to allow the Central Asian states to export further natural gas resources to the Western Europe through the Russian territory. Due to the debts of the former Soviet Union Republics, especially Ukraine, Georgia and Armenia, the Northern route was not efficiently operational after 1990. Turkmenistan and the Russian Federation lived some conflicts on the matters of price of the natural gas and its payments. Therefore in 1997 Turkmenistan cut off the Northern pipeline. Thus it was deprived from huge amount of the natural gas revenues, amounted to nearly one billion dollar. After that they signed an agreement on selling the natural gas. Nowadays the Russian Federation has negotiated with Turkmenistan on a natural gas deal. The Russian Federation has expressed its intention to buy annually fifty billion cubic meters natural gas from Turkmenistan.

On the other hand the Russian Federation has intended to construct a new natural gas pipeline to Turkey via Georgia.  They have planned to build a new gas pipeline from Georgia to Turkey.

Lastly Turkey and the Russian Federation have made great attempts to finalize the Blue Stream project. The project will transfer the natural gas under the Black Sea from Dzhubga to Samsun. Russian Gazprom and Italian ENI have jointly constructed the Russian side. Its capacity is annually 16 billion cubic meters. Its cost is estimated at 2 billion dollars. Although it lived a financial difficulty for a long time, Italian and German financial institutions finance mostly the project.

In December 1997, Turkey signed an agreement with the Russian Federation to buy annually all amount of the natural gas transferred by the Blue Stream project. When Prime Minister Bulent Ecevit visited Moscow, the parties signed an additional protocol to complete the project.

4.1.6.  Turkey

4.1.6.1.Oil

International oil companies have planned to transfer Azeri, Turkmen and Kazakhs oil reserves from Baku to Ceyhan via Georgia. Kazakh and Turkmen oil will be shipped from their Caspian coasts to Baku. In October 1998, related parties signed the Ankara Declaration, which affirmed their political support for Baku – Ceyhan oil pipeline. The governments of Azerbaijan, Georgia, Kazkahstan, Turkey and Uzbekistan signed the Declaration. Firstly Azerbaijan International Oil Consortium (AIOC) put forward its own objections against the project. According to the AIOC, the pipeline was not economically viable. Upon the US support in 1999, they selected the Baku – Ceyhan route as a main route that will transfer the Caspian oil to the world market.

4.1.6.2. Natural Gas

In 1998, the US Administration put forward the Trans-Caspian natural gas pipeline project as an alternative route to the northern route. The pipeline route originates in Western Turkmenistan, runs on the bed of the Caspian Sea and then via Azerbaijan and Georgia and continues in Turkey. Its overall length is nearly 2,000 kilometers. The project’s cost is estimated at 2 billion dollars. Annual capacity of the gas pipeline will reach to 30 billion cubic meters. Turkey will annually buy 16 million cubic meters.

In January 1999, Enron (USA) submitted results of its marketing study for Turkmen gas and the feasibility study. In October 1998, Turkey and Turkmenistan signed an agreement on the sale of Turkmen gas. In March 1999, PSG, based in London, became the leader of the Consortium. The Consortium partners have spent great efforts to complete the Transit Agreements with Azerbaijan and Georgia. In the same year, a new natural gas reserve in the Caspian Sea Azerbaijani part was discovered. Thus Azerbaijan has wanted to transfer its own natural gas through the Trans-Caspian pipeline. Still they have carried on the negotiations to find a final understanding among themselves.

5. Expectations of the Regional Countries from the Pipeline Projects

5.1.Strengthening Their Economic Prosperity and Political Independence

During the Soviet Union period, there was a strict interconnected economic system among the former Soviet Republics. Therefore each Republic was absolutely dependent upon other Republic’s industrial infrastructure and it should adapt its economic development plans to the Moscow’s five-year economic programs. For example, Turkmenistan exported its oil and natural gas resources to other former Soviet Republics through Central Asia – Center Pipeline. Thus from thus operation it took money from Moscow.

However when the Central Asian countries gained their independence, only the northern route was operational. Therefore they should carry on to transfer their resources to the Russian Federation in order to gain revenues. Otherwise they would not earn money that was vitally necessary for the survival of their economies. Thus as of economic vulnerability of them, they could not make independently their economic development programs. In the meantime the Russian Federation has used the existing pipeline network as an instrument to manipulate their political behaviors. Thus they did not have full political independence, which was under the control of the Russian Federation.

When they have constructed various pipelines with the help of the Western companies, they will transfer their own natural resources to the world market without direct Russian control. Thus they will become less dependent upon the Russian industrial infrastructure as well as its economy. They can find a suitable ground for preparing their economic development programs independently. They will also catch an opportunity for pursuing independent foreign policies in favor of their national interests. This situation will automatically weaken and maybe abandon the Russian hegemony over the region. Thus they will gain their full political independence and provide their economic prosperity.

5.2. Putting an End to the Local Social Difficulties

In 1991, as a result of the disintegration of the former Soviet Union and as of the interconnected economic system, the Central Asian states faced with terrible economic difficulties. They did not have any manufactures goods, which would be exported to the world markets, except their natural resources. Although they continued to transfer their gas and oil reserves to other former Soviet Union Republics through northern route, the Consumer Republics could not pay their debts on the time. This is the handicap for their economies.

On the other hand they should make huge amount of investments in order to reorganize their internal economic infrastructure and to provide new job opportunities to local people. Meanwhile in 1991s nobody could find any kind of consumption goods, except basic consumption things. Therefore they should produce the goods for local people and the manufactured goods such as textiles to export and then to earn the money. Non-functional economic infrastructure, lack of basic consumption goods and also high unemployment might lead to the social difficulties.

Therefore they should immediately transfer oil and gas reserves to the world market to earn money. Thus they could make their economic infrastructure functional, to provide new job opportunities for the local people and to pay higher salaries to them. In their economies, oil and natural gas sectors are the leading sectors and therefore have a very important place. For example, total amount of 1999 Turkmenistan’s budget was 22 trillion manats. 16 trillion manats of total revenues came from these two leading sectors.

When they earn huge amount of money from these sectors, they will spend them for sustainable economic developments. Thus internal social conditions will become much better and provide very comfortable life for the local people. Thus the governments will prevent the emergence of social radical movements.

5.3. Integrating with the World Economic System

The Central Asian and the Caucasian states have pursued more liberal and democratic policies. They have encouraged the foreign companies to make investments in their own territories. Thus they have made incredible attempts to transform their state-controlled economic system to the liberal one. Even they have adopted suitable laws that have given some guarantees to the foreign investors. As a result of their attempts, firstly international oil companies will begin to operate in their economies and make huge amount of investments. Other foreign companies will follow their commercial activities. With the help of foreign companies, they will automatically integrate with regional and world economic systems. Finally they will become members of regional and international economic organizations.

TABLES

Table 1: Oil Reserves (billion barrels)

Source: US Energy Information Administration, Caspian Sea Region, December 1998

 Table 2: Natural Gas Reserves (trillion cubic feet)

Source: US Energy Information Administration, Caspian Sea Region, December 1998

Table 3: The Values of Oil Reserves in Terms of US Dollars (billion dollars)

Table 4: Value of Natural Gas Reserves in terms of US dollars (1.000 m3 = $ 40) (billion dollars)