Oil Export for a Unified Caspian Oil
Conglomerate
Adam Rodriguez
Monday 10:00 Section
E297 EDGE
Autumn 2002
Introduction
Oil resources are the focal point of almost all international disputes in the present century as every country needs oil to power its electrical grids, run its automobiles, and operate its machinery. The vast majority of accessible oil lies in the extremely unstable Middle East, whose countries form most of OPEC and have a viable monopoly on oil production and pricing. The troubles caused by this situation thus come to no surprise as high demand and monopolistic supply give omnipotent control to the supplier.
The Caspian Sea region is seen by some as a possible answer to the problems of OPEC control. The Caspian Sea and the surrounding states contain 10 billion barrels of proven oil reserves and 233 billion barrels of possible oil reserves (EIA), worth approximately $4 trillion. While this is severely dwarfed by Saudi Arabia’s 264 billion barrels of proven and 1 trillion barrels of ultimately recoverable oil (EIA), the Caspian Sea is expected to fill the worlds expanding needs for oil as OPEC production seems to have stagnated due to the difficulties in the Middle East.
Currently, the Caspian Sea states have been handicapped by internal legal struggles over control and division of the sea and its resources. Foreign investment has served to additionally fracture the region as foreign agendas keep the countries from cooperating. However, Caspian Sea states’ unification is crucial if Caspian Sea oil is to have an impact in the world energy economy rather than simply providing for individual foreign investors. If the Caspian Sea states were to cooperate, decisions regarding export would need to be made with the interests of all in mind rather than proceeding unilaterally.
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Figure 1: Caspian States (EIA) |
The
Region
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Figure 2: Caspian state oil
production (EIA) |
The Caspian Sea region is bounded by Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan. Russian and Kazakhstan occupy the northern half of the sea coastline and Turkmenistan, Azerbaijan and Iran take up the southern section. Azerbaijan, Kazakhstan and Turkmenistan all received independence from the Soviet Union in 1991 and have all recently begun to see the economic benefits of foreign investment and oil revenues. Russia and Iran are also looking to benefit from Caspian Sea reserves, but have other substantial sources of national revenue.
Of the five states, Kazakhstan and Turkmenistan together control nearly 75% of the Caspian Sea oil. However, Azerbaijan and Kazakhstan are best suited for oil production in the near future as can be seen on the following table (EIA).
Iran and Russia play a rather small role in the business of Caspian Sea oil, yet occupy a significant portion of the coastline, this discrepancy has lead to legal issues where Iran uses it control over the coastline to influence oil reserves not necessarily under Iranian jurisdiction.
Caspian Sea Unification
As foreign investment pours in to ramp up production of Caspian Sea oil, the surrounding states are looking to unify in a fashion similar to OPEC. As all the states have similar interests (efficient export and reasonable oil prices), unification into a joint conglomerate makes the most economic sense. However, before unification can begin, legal issues regarding division of the resources of the sea and environmental control must be settled.
Ideally, an agreement could eventually be reached between all five states regarding division of the sea resources; however, in the meantime, the majority of the states have reached bilateral agreements between one another regarding apportionment of the sea. In 1997-1998, Kazakhstan and Russia, Kazakhstan and Azerbaijan, Kazakhstan and Turkmenistan, and Azerbaijan and Russia all signed agreements deciding to divide the sea along the median line between the two countries. Notably missing from all agreements is Iran, who continues to insist upon equal division of sea resources. Iran prefers that all resources of the sea be jointly developed and thus split equally among the five states. If division of the sea is applied, then it should be divided into five sections of equal area. If Iran’s approach (called the “condominium approach”) were adopted, it would increase Iran’s share of the resources from 12% to 20%..
At the heart of the disagreement is the classification of the Caspian sea and the conventions that follow such classification. If the Caspian Sea is determined to be a sea (as its name would suggest), it is covered by the Law of the Sea Convention and thus divided up into national sectors. If the Caspian Sea is a lake (which is geographically true), then the Law of the Sea does not apply and the sea should be developed in cooperation. To complicate matters further, treaties signed by the former Soviet Union and Iran in 1921 and 1940 call for joint development of the Sea. Since these are the most recent decisions regarding the Caspian Sea, Iran’s stand that these treaties should be the basis of new legislation has significant weight.
Recently, Russia and Iran have expressed interest in settling the territorial dispute. Iran’s President Mohammad Khatami suggested the reactivation of the Caspian Cooperation Organization, founded in 1985 to promote regional economic cooperation. While Iran’s motives for this are clearly to support its preferred condominium approach, the meetings of the organization will nonetheless promote discussion and pave the way toward some sort of compromise.
Despite continued legal border battles, the Caspian Sea states have begun to discuss cooperation. The United Nations have increased pressure upon the states to find a compromise as unification in the area will lead to greater political stability and economic health. The deputy foreign ministers of the five states, the Caspian Working group, have been meeting regularly to decide the legal standards regarding the Sea, and while no final agreement was reached in the last meeting in Moscow in January 2002, a “joint communiqué on the legal status of the Caspian Sea” was reached which covered an group stand on various political issues in the area. Additionally, the Caspian Environment Programme was created in 1998 to coordinate joint protection and management of the Caspian environment and its resources. While the CEP does not specifically cover the legal issues regarding the sea, it is another forum under which cooperation regarding Caspian Sea resources can be encouraged.
Export Options
Assuming that the Caspian Sea states can be unified through either joint development or that the sea can be amiably divided into individual resources, group export is crucial for the newly unified conglomerate to have ultimate control of pricing and distribution. Foreign investment has served to open a vast array of export options, but it would be prudent for the Caspian states to follow an isolated few in order to keep division of oil to a minimum. Caspian oil must be jointly sold (if not jointly produced) if it is to compete with OPEC and demand appropriate prices.
In terms of export options, a few crucial points must be considered. Firstly, construction and maintenance cost of the pipeline must be kept as low as possible. Crucial to the cost of the pipeline are the length of the proposed line and its route. Many regions in the area are politically unstable, so protection of the pipeline will also add cost. It can be assumed that the UN will bear some of the protection burden, but with any outside help, it must always be supplemented by internal aid. Secondly, pipeline capacity is crucial to calculating the yearly profit made by running the pipeline. A large pipeline may be more expensive to build, but it also can pump a great deal more oil in a given day.
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Figure
3: Caspian export options (EIA)
Baku-Ceyhan Pipeline
The Baku-Ceyhan pipeline would travel through Azerbaijan, Georgia, and Turkey, beginning at the port of Baku in Azerbaijan and ending in Ceyhan on the Mediterranean Sea. This pipeline has received major funding from the United States, and is expected to be finished in 2004. It is the fastest, most direct link to the Mediterranean Sea and will have a capacity of 1 million bbl/d. Significant opposition was raised initially at the high cost of building and maintaining the 1000 mile pipeline but construction has continued nonetheless.
The pipeline is also strongly supported by Turkey as the Turkish would have the benefit of controlling export with the oil running through the country while not having to use the heavily congested Bosporus for transport. Turkey has raised concerns of possible environmental destruction due to overcrowding of tankers in the Bosporus, although such complaints are suspect as they play into Turkey’s hand of supporting the more profitable pipeline option.
A main area of concern for the pipeline is instability in Georgia, through which 135 miles of pipeline would run. A civil war fought between Abkhazia (northwest Georgia) and Georgia in 1992 as well as a coup attempt in 1998 has lead to the intervention of NATO peacekeeping forces. While NATO forces should help to keep the area stable, increased international involvement in oil export from the Caspian Sea is not encouraged as it would serve to dissipate the power of the 5 Caspian states.
Another problem region for the pipeline would be the civil wars in the mountainous region of Azerbaijan. Nearly 30,000 people have been killed in wars between ethnic Armenians and Azerbaijan in the Nagorno-Karabakh region. While peace talks have seen progress, the region must be stable if a pipeline is to be economically feasible in the area.
Through
Russia to Novorissiisk
Two routes through Russia are available, the northern route from Baku to Novorissiisk and the Caspian Pipeline Consortium (CPC) pipeline from Tengiz to Novorissiisk. Both routes are heavily supported by Russia for obvious reasons, but they are also one of the simplest options as they would connect to the already existing Russian pipeline system. Making use of the Tengiz-Novorissiisk link from Kazakhstan to Russia, the CPC pipeline then empties into the Black sea, from which tankers can transport the oil worldwide. This pipeline is planned to have a 1.34 million bbl/d capacity and will traverse 990 miles.
Turkey has raised serious issues with this export selection as the tanker traffic through the Bosporus could become extremely environmentally hazardous. Although concerns regarding the environmental dangers of increased shipping in the Bosporus seem tainted by Turkey’s vested interest in the Baku-Ceyhan pipeline, they are also well supported by an alarming rate of previous accidents, for example:
December
1960, the Greek tanker World Harmony hit the Yugoslav Peter Zoranic. Major
pollution, 20 killed.
March
1966, two Soviet vessels, the Cransky Oktiabr and the Lutsk, collide, burning
the Karakoy ferry station.
October
1988, the Panamanian tanker Blue Star spills huge quantities of ammonia,
polluting the environment. Not long after, the Iraqi Jambur and the Chinese
Datton Shang collide and spill thousands of tons of crude.
November
1991, the Philippine Madonna Lily sinks the Lebanese livestock carrier Rabunion
18; 21,000 sheep drowned, their corpses causing major pollution.
(Chelminsky, Smithsonian)
Over 150 serious accidents have occurred in the Bosporus in the past ten years and already the world’s most dangerous strait is crossed by 50,000 vessels annually, 14% of which carry oil. Much of the danger is in fact caused by the 1936 Montreux Treaty which states, “Navigation through Turkey's Bosporus and Dardanelles straits is unrestricted for commercial vessels, except in wartime” (Oil Daily). By giving Turkey no control over its own waterway, the interests of Istanbul and its 10 million residents carry little weight in the minds of those controlling the traffic, the oil companies.
In an answer to this problem, Ukraine has built the Odessa-Brody pipeline taking oil from the black sea to Ukraine and thus supplying mostly central European markets. In addition, Bulgaria has proposed a pipeline linking the black sea to the Mediterranean via Greece. While no construction has begun, the entire project is scheduled to be completed by 2005.
Two main regional problems face Russia concerning the two pipeline options. The original route for the northern pipeline passed through Chechnya, a location of constant uprising between local citizens and Russian troops. While the new route includes a bypass of Chechnya, its close proximity to the volatile region puts it in danger of sabotage. The other issue regards the fact that the major oil producing states around the Caspian Sea just received their independence from the Russia in 1991, for those states to rely solely on Russia as their exporter for oil assumes a great deal of confidence that Russia will not use that control to further other motives of regional control. Hence, while the northern route will most likely be used, it is doubtful that Russia will become the center for Caspian Export as it had hoped.
South to the Persian Gulf and Iran
A southern pipeline to the Persian Gulf would be the best pipeline to serve Asian markets, which have the largest growth potential of all possible oil markets. Despite the advantages of such a short, profitable pipeline, two main problems have stunted any growth toward that end. Firstly, Arab oil has distinct control of the region, so Caspian Sea oil would have to compete or join with already established Iraqi and Saudi oil, neither being a favorable option for a unified Caspian oil conglomerate. Secondly, US sanctions under the Iran and Libya sanctions act have completely cut off foreign investment into Iran. “Although the U.S. has failed to muster direct international support for its trade embargo on Iran, non-U.S. companies remain reluctant to make long term commitments in the country-in part for fear of alienating the U.S. government” (Oil and Gas Journal). Since any pipeline requires vast amount of capital, almost always provided by the country with demand, the severe lack of funds essentially prevents the Southern route option.
Through
Afghanistan
Prior to the war in Afghanistan, a 1 million bbl/d pipeline moving oil from Turkmenistan through Afghanistan to Pakistan and the Arabian Sea was suggested by the involved nations. This “Central Asian Oil Pipeline” was then put on hold during the war in Afghanistan and lost a major supporter in Unocal. Following the war, talks regarding the pipeline have resumed mostly due to increased US support and funding by Delta Oil out of Saudi Arabia. This pipeline option raises concerns for the Caspian states as its security relies almost solely on US peacekeeping efforts and would thus limit export control given to the Caspian states. Finally, even with international assistance, with the country in disarray, Afghanistan is still seen as a rather high risk option for export investment.
Chinese
Market
The Chinese market is expected to become a major factor in oil consumption as it will soon become the second largest oil consumer, expected to pass Japan in the next ten years. As Chinese oil consumption is expected to increase from 4.78 million bbl/d in 2000 to 10.5 million bbl/d in 2020, China has been looking to increase investment in foreign oil exporters. One of the most logical routes for oil is from Kazakhstan, and exports have already begun by rail since 1999. China has shown interest in building and funding a pipeline from Kazakhstan, but such a pipeline does not seem feasible as Kazakhstan would need to pipe 500,000 bbl/d per year, over 60% of Kazakhstan’s possible production (EIA).
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Baku-Ceyhan ("Main |
Baku (Azerbaijan) via Tbilisi
(Georgia) to Ceyhan (Turkey), terminating at the Ceyhan Mediterranean Sea
port |
Planned: 1 million bbl/d |
Approximately 1,038 miles |
$2.9 billion |
Detailed engineering study began
June 2001. Construction scheduled to begin in 2002, with completion targeted
for 2004. |
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Baku-Novorossiisk Pipeline
(Northern Route) |
Baku via Chechnya (Russia) to
Novorossiisk (Russia), terminating at Novorossiisk Black Sea oil terminal |
100,000 bbl/d capacity; possible
upgrade to 300,000 bbl/d |
868 miles; 90 miles are in
Chechnya |
$600 million to upgrade to
300,000 bbl/d |
Exports began late 1997; exports
in 2000 averaged only 10,000 bbl/d. |
|
Caspian Pipeline |
Tengiz oil field (Kazakhstan) to
Novorossiisk Black Sea oil terminal |
Currently: 565,000-bbl/d;
Planned: 1.34-million bbl/d (by 2015) |
990 miles |
$2.5 billion for Phase 1
capacity; $4.2 billion total when completed |
First tanker loaded in
Novorossiisk (10/01); exports rising to 400,000 bbl/d by end-2002 |
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Central Asia Oil Pipeline |
Turkmenistan and Afghanistan to
Gwadar (Pakistan) |
Proposed 1 million bbl/d |
1,040 miles |
$2.5 billion |
Memorandum of Understanding
signed by the countries; project stalled by regional instability and lack of
financing. |
Figure 4: Summary of
Export Options (EIA)
Conclusions
Of the four main export options presented, the Baku-Ceyhan pipeline seems most feasible mainly because it is already well under construction and manages to avoid the problem of congestion in the Bosporus. The Northern pipelines that inevitably require transport through the Bosporus strait could encounter difficulty as shipping through the strait will likely become very congested when a major accident does occur. Thus, the bypass options should be carefully examined. However, the bypass options are limited by the markets that they serve as Central Europe is not positioned as a major growth market for petroleum demand. China and the rest of Southern Asia are promising rapid growth in demand, but exports to those markets are mainly hampered by political problems. Caspian sea states would be well served to re-examine exports to China as the growing oil production and the growing demand could be ideal for the new conglomerate.
As existing pipelines reach capacity and new pipelines are built to meet supply, it is crucial that the Caspian sea states not form a single alliance with an investing nation. The United States or Russia would very much like to have unilateral control over Caspian oil production, but such stable control would remove the option of expanding to markets in China and Asia.
Bibliography
- Energy Information Administration. Caspian Sea Country Analysis Brief.
July 2002. http://www.eia.doe.gov/cabs/caspian.html
(Nov 2002).
- Energy Information Administration. Caspian Sea Region: Reserves and
Pipelines. July 2002. http://www.eia.doe.gov/cabs/caspgrph.html#TAB1
(Nov 2002).
- Energy Information Administration. Caspian Sea Region: Regional Conflicts.
July 2002. http://www.eia.doe.gov/cabs/caspconf.html
(Nov 2002).
- Energy Information Administration. Caspian Sea Region: Oil Export Options.
July 2002. http://www.eia.doe.gov/cabs/caspoile.html (Nov 2002).
- Caspian Environment Programme. CEP: the CEP. May 2002. http://www.caspianenvironment.org/cep.htm
(Nov 2002).
- Iran seeks to be outlet for Caspian Sea oil.(conference on new export route held in Iran) Oil and Gas Journal v94, n1 (Jan 1, 1996):29 (2 pages).
- Turkey to Require Tugboat Use.(large oil tankers passing through Bosporus straits)(Brief Article) Oil Daily v50, n211 (Nov 2, 2000):ITEM00307012.
- Kazaks Discount Bosporus Fears.(Kazakstan)(Brief Article) Oil Daily v51, n69 (April 10, 2001):ITEM01100016.
- Caspian Sea nations closer to territorial accord. Oil and Gas Journal v98, n26 (June 26, 2000):30.
- Chelminski, Rudolph The Bosporus: A disaster waiting to happen. Smithsonian (Nov, 1998):110 (1 pages).