December 1996

PERSPECTIVES ON CENTRAL ASIA
Volume 1, Number 9
December 1996

Published by the Eisenhower Institute's Center for Political and Strategic Studies

NEW DEVELOPMENTS RELATED TO CASPIAN OIL

(Reflecting on the Proceedings of the International Workshop "Caspian Oil: Transcaucasus, Central Asia and International Security")

By Andrei Shoumikhin, Moscow Public Science Foundation

Natural resources of the Caspian basin play an important, however at times contradictory, role in interstate relations inside and outside the Caspian zone and adjacent regions. As a most efficient energy resource, and leading commodity in international trade, oil creates needed revenue for sustained economic growth, social modernization and political stability. Increased cooperation for purposes of developing, refining and transporting oil resources may contribute to the avoidance, management and resolution of tensions and conflicts. At the same time, competition over oil resources is a well-known phenomenon, leading to serious aggravations and disruptions of international and regional relations. Furthermore, production, processing and transportation of hydrocarbons may inflict serious damage to the environment. All of the above positive and negative factors are certainly at play in the case of Caspian oil.

Evolving Positions of the Main Players

Recent months brought about considerable shifts to the situation inside and outside the Caspian zone. A particularly dynamic evolution was taking place in the Russian Federation - a major power aspiring for the role of a regional "hegemony." Boris Yeltsin's reelection and the conclusion of the "virulent" stage in the Chechen war have increased chances for accelerated solutions of political, legal, technical and other problems, connected to the development of Caspian hydrocarbon deposits and transportation of Caspian oil outside the region.

An important manifestation of Russia's readiness to compromise was reflected in the proposal they submitted at the recent meeting of CIS oil ministers in Ashgabad (Turkmenistan) which called for establishing a 45 mile "littoral zone," subdivided into national sectors, where all littoral states would enjoy special rights of exploration, exploitation, etc. At the same time Russia continued attempts aimed at preserving and expanding its control over the Caspian situation.

Azerbaijan intensified its attempts aimed at implementing international projects related to Azeri oil resources development. The declared Azeri position is to move ahead on existing projects even before all of the outstanding issues, including those related to legal matters, are resolved. In the Azeri view, "only real economic development may help achieve real independence." In order to expedite the fulfilment of multilateral projects, Azerbaijan agreed to the "dual pipeline" approach, that would send most Azeri oil through Russia and Georgia.

Still acting in a pragmatic and conciliatory way, Azerbaijan has been trying to involve Iran. Often blamed for the ideological "slant" of its foreign policy, in developing the Shah Denis oil field, Azerbaijan has sustained the belief that economic interests should supercede all others.

In compatible attempts to improve its economic situation, and therefore solidify its nascent independence, Georgia has been developing plans to participate in transporting oil from Caspian deposits to outside buyers. Georgians are taking pride in the fact that recently they are finally overcoming a bitter economic slump, associated with internal political instability and their losing struggle to stop Abkhazian secessionism.

The prospect of building a pipeline going through the Georgian territory to carry some of the expected Caspian oil flow is becoming a reality. The newly created joint-stock Georgian Oil Corporation is supposed to develop, in close cooperation with its Azeri counterpart, a transportation infrastructure capable of carrying 100,000- 180,000 barrels a day in the near future (a more ambitious goal of 700,000 barrels a day is foreseen for the next stage of the expanding Georgian transportation project.)

Georgia has received commitments from various international institutions (USAID, UNDP, EU, etc.) to facilitate the construction of the pipeline. The Georgian International Oil Company was set up to channel international assistance and investments for the project.

Kazakhstan's approach towards Caspian problems is predominantly based on compromise. Kazakh leadership strongly believes that "all Caspian littoral states should be allowed to take full advantage of the resources of the sea." Furthermore, in the Kazakh opinion, "national zones" in the Caspian should be covering all major oil fields, located in would- be sectors of the littoral states; zone delimitation should not infringe on existing cooperative agreements concluded with international oil companies, investing in the region; and the legal status of the Caspian Sea should be resolved in such a way as to provide for unimpeded flow of outside investments, without which the development of local resources may not be possible.

Turkmenistan continues to be relatively less involved in the regulatory activities around Caspian issues. It follows a rather general and unspecific formula that "all Caspian problems should be resolved between the littoral states." However, it appears that its interests in gaining greater independence from Russia in the area of transporting energy resources and generating hard currency revenues from gas exports have become more and more pronounced, creating a foundation for increased cooperation with other NIS countries who find themselves in a similar situation.

The role of the Islamic Republic of Iran in various "scenarios" of the evolving Caspian situation is subject to different interpretations. According to one perspective, the Iranian regime is being driven exclusively by anti- Americanism, while Iranian policy in the Caspian region is aimed at inflicting as much harm to Western interests as possible. Supposedly, this is why Iranians support Russia on such key issues as the legal status of the Caspian Sea.

An opposite view tends to emphasize Iranian economic and other pragmatic interests, and not ideology, as the main driving force behind Iran's Caspian policy. In particular, Tehran appears to be consistently siding with Moscow on many issues related to the Caspian because, as Russia, it may only lose if a broad interpretation of jurisdictional matters, favored by Azerbaijan and some others, does prevail.

The United States has officially committed itself to supporting the political and economic independence of Transcaucasian NIS. However, it appears that US leadership, in resolving key issues related to Caspian oil, has been insufficient and/or lacking. One of the explanations may be that private US oil companies, pursuing their own policies in the region, do not require direct American government involvement. Lack of US initiative in the Caspian region, e.g. in mediating local conflicts, may also be explained by a prevailing desire not to overextend US global obligations as well as their interest in preventing direct confrontation with Russia in situations where the latter tries to assert its "special" interests and responsibilities.

On-Going Search for Optimal Routes of Transporting Caspian Oil

The International Caspian Oil Pipeline Consortium (CPC) has plans to develop capabilities for transporting up to 60-70 million tons of crude annually by the end of the century. Resolving the transportation problem grows in importance, as more and more sites of potential oil production are being identified in the Caspian.

The so-called "Northern route" for "early" and "big" Caspian oil, going through the territory of the Russian Federation, remains a preferred option for economic reasons. Existing Russian infrastructure may be significantly expanded, after needed improvements are made through CPC.

The termination of warfare in Chechnya has reopened the Baku-Groznyi-Novorossiisk route, while a recent agreement on assuring the safety of the route makes investments in pipeline restoration economically feasible. However, transporting Caspian oil through Russia creates certain political complications and difficulties for Caspian littoral states, trying to assure their independence from Russia. Several international agreements have already been signed to attract outside investments to build more pipelines, going in the Southern direction.

Black Sea states alone, including Ukraine, Moldavia. Bulgaria, Romania and Turkey may be able to consume most or all Caspian oil, without even requiring its transportation further into European markets (provided, naturally, they can pay for it.) Therefore any route that takes oil into the Black Sea, including a bypass through Bulgaria, continuing into Greece, may eventually provide an effective solution.

A country with a heavy stake in developing the Southern route is Turkey. Turkish experts insist that the Bosporus Straits are approaching their maximal capacity. Building a pipeline from Baku through Georgia into Turkey may be an attractive alternative; one that could also play an important political role for the three countries trying to create "counter-balances" to Russian transportation "monopoly."

Ecological Concerns

Awareness of potential negative effects of accelerated development of Caspian oil resources on the environment is growing. However the key to protecting the environment lies not in stopping or restricting the development of oil resources, but in introducing sensible and safe production methods and advanced technologies, constant ecological monitoring, as well as effective remedial measures in case of environmental damage.

Some needed changes have already begun to take effect, such as the attempts at modernizing the Novorossiisk port facilities on the Russian Black Sea coast. Evidently, serious environmental protection requires considerable material expenditures and investments. Additionally, development of Caspian oil resources has to take into account many other concerns, including adjustment of local populations to new lifestyles and opportunities and fairness in distribution of profits. Failure to address these problems and other problems may increase local instability, rather than help achieve material well- being and social equilibrium in producer nations.

The Impact of Regional Conflicts

Local conflicts in the Near and Transcaucasian zones make the uneasy task of developing and transporting Caspian oil even more complicated, and in some instances totally impossible. The war in Chechnya had seriously compromised the very idea of exclusive reliance of littoral oil producing states on Russian processing and transportation capabilities, and precipitated the search for alternatives. Likewise, the Nagorno-Karabakh conflict presents a serious handicap for regional, primarily Azeri, efforts to attract foreign investment.

Developing Caspian oil resources and generating substantial material resources, to be used for modernization and growth, may play a positive role in calming emotions and setting up preconditions for cooperation between former antagonists. Recent contacts between leaders of Armenia and Azerbaijan seem to have been based on exactly this kind of "logic." Furthermore, it may be assumed that the termination of open warfare in the Chechen republic could be achieved only when both sides had finally realized that they had a lot to lose if foreign investors abandon plans of ever using the Northern route for transporting "early" Azeri oil.

The views expressed in this article are the author's and do not necessarily reflect those of the Eisenhower Institute.

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