THE MYSTERY OF THE CASPIAN OIL BOOM
PART ONE
Contemporary Review
September 2004
Vol. 285, No. 1664
By Alec Rasizade
It is hard to think of an industry that has a hype machine as
phenomenal as the potential Caspian energy industry. Ever since the
disintegration of the USSR in 1991, the Caspian Basin has been touted
as one of the world’s largest new energy sources. This was partly
because the region had been off-limits to the West for so long that
its potential was genuinely unknown. In addition, the political
instability in the Persian Gulf had underscored the need to find
dependable energy resources outside the Middle East. As a result, the
premise of an ‘enormous” Caspian energy wealth was invented as a
justification for geopolitical manoeuvres by Western powders to fill
the strategic void left in the region after the Russian withdrawal.
But it is now becoming increasingly clear that the hydrocarbon
deposits in the Caspian Basin are much lower than bas been believed in
the West, that the Caspian’s energy promise has been deliberately
exaggerated and that production from the area will never make a major
contribution to the world’s energy security. Whatever the final size
of reserves, it is now obvious that much of the talk of Caspian oil
was a spectacular bluff. When the late Azeri president Heydar Aliev
painted a majestic picture of the Caspian energy potential at the 2001
World Economic Forum in Davos (Switzerland), his Armenian counterpart,
Robert Kocharian, famously retorted: “Is there any water in the
Caspian, or is it only oil”.
As the Canadian researcher Robert Cutler once observed, the Caspian
oil rush was akin to a high-stakes game of cards. It was complicated
further by the fact that the cards were being played within another
strategic game of chess, with other rules, played by the great powers
at a large geopolitical chessboard. With a relative consolidation of
the chessboard into patterns, at least temporarily, the Caspian oil
game is now more or less settled. Although the myth survives from the
old days of the card game, strategy as opposed to tactics has become
the conditioning environment in the region, as in a chess game.
Instead of the politically bloated appraisal of 200 billion barrels in
ostensible Caspian oil deposits (compared with Saudi Arabia’s 262
billion) valued at 4 trillion US dollars, exuberantly calculated for
the past decade by the Department of State to justify its own strategy
there, we are talking today of only 18 billion to 30 billion barrels,
according to another US government agency, the Energy Information
Administration (EIA). Estimates by the international Energy Agency
(IEA) in Paris range between 17 to 32 billion barrels. As for natural
gas, there is an agreement that proven reserves are about 6.5 trillion
cubic metres, with Turkmenistan holding the largest deposits outside
Russia.
Five major projects are currently underway in the Caspian Basin – four
of which account for some 70 per cent of total reserves. These are the
offshore Azeri-Chirag-Gunashli oil fields block and the Shah Deniz
offshore gas field in Azerbaijan, Tengiz and Karachaganak onshore, and
Kashagan offshore fields in Kazakstan. While other prospects exist,
particularly in Kazakstan, they are not likely to make any major
impact regional production in the future. The famous old onshore oil
fields around Baku, which in the early twentieth century produced half
of the entire world oil production, are now exhausted, and new
deposits have not been found.
All post-Soviet geological explorations have as yet failed to find
sufficiently large new deposits, except for the Kashagan oil field in
Kazakstan’s sector of the sea discovered by the Italian state energy
concern ENI. After drilling many dry wells, the area that had been
pushed by the US Department of State as an alternative to the Persian
Gulf was dismissed latterly as a product of Washington propaganda.
Caspian Oil and Global Energy Needs
The industrial world is now looking for oil beyond the Middle
East. The resources found in new areas will be critical to ensuring
global energy stability. It is also understood that the petroleum
demand will increase sharply and that oil import dependence will rise
too. Indeed, according to the lEA, with a continued growth of the
world economy by 3 per cent, its energy demand will increase at the
rate of 2 per cent annually, meaning that the world will need 65 per
cent more energy in 2020 than in 1995. Ninety-five per cent of this
additional energy demand will be met by fossil fuels – coal, oil and
gas. In absolute terms, some 92 per cent of the total primary energy
demand in 2020 will be fossil-fuel-based.
In recent years the Middle East OPEC (Organization of Petroleum
Exporting Countries) countries have supplied 52-57 per cent of the
world consumption. The most optimistic reserve estimates for Caspian
oil pale in comparison with those for the Middle East, which holds
over 680 billion barrels or some 60 per cent of the world’s total
(1147 billion barrels). Caspian reserves, which have been depleted
over the past hundred years of intensive Soviet production, are
certainly not another Persian Gulf or Siberia, and not even a new
North Sea. The North Sea’s oil reserves were 60-70 billion barrels
(compared to Caspian’s 18-30 billion), of which about 17 billion
barrels still remain.
The combined Caspian output will never rival that of Saudi Arabia or
Russia, which produce respectively 8.8 million and 7.1 million barrels
of oil per day (mbd). The table below provides a
comparison. Production in 2003 from all four Caspian countries
amounted to 1.65 mbd, or about 2 per cent of the world’s total
production. Using the projected levels of production, the Caspian
Basin is expected to contribute no more than 3 per cent to global oil
supply by 2010, and even less thereafter.
———————————-
The world’s largest crude oil producers in 2003
(Source: IEA, Annual Review of World Energy, Paris:
OECD, 2003)
Country Reserves (billion barrels) Production
(mbd)
Saudi Arabia 262 8.8
Iran 131 3.7
Iraq 115 2.4
UAE 98 2.4
Kuwait 98 2.1
Venezuela 78 3.4
Russia 69 7.1
USA 30 7.7
Libya 29 1.4
Mexico 27 3.6
Nigeria 24 2.3
—————————————————-
Kazakstan, which holds 65 per cent of the Caspian Basin’s oil
reserves, is not even in this table. Thus, from an energy security
perspective, the Caspian is not a source for diversification of global
oil supplies, for it will remain only a small player on the world
market. It can compete neither with the Middle East, nor with other
marginal suppliers, such as Nigeria, which exports daily more crude
oil than all Caspian producers together.
Besides, in terms of profitability, most estimators have concluded
that a price of at least $20 per barrel is needed to justify the
Caspian investment projects and, if the price fell below $20 a barrel,
most Caspian oil consortia would no longer be profitable.
One of the differences that set the land-locked Caspian Basin apart
from the North Sea and other marginal suppliers is the difficulty of
getting the oil and gas production to world markets. The energy
transportation systems of the Caspian region were originally designed
and built to serve the strategic needs of the Soviet Union. Almost all
oil and gas export pipelines inherited from the USSR pass through
Russia. All other routing options are fraught with technical,
financial, legal and political difficulties.
The proposed alternative pipelines must pass through – or take
expensive detours to avoid – politically troubled mountainous areas
where they could become targets for terrorists.
Additional risks originate from the fact that the Caspian states,
still ran by totalitarian-era leaders whose principal goal is to
preserve their power, are all authoritarian, destitute and
corrupt. With virtually all opposition prohibited and oil export
revenues being siphoned off to the raling elite’s foreign bank
accounts, the population at large have seen a decline instead of an
improvement in their living standards during the professed ‘oil boom’
decade, and consequently the potential risks of political extremism
and terrorism in this predominantly Muslim region are appalling.
The Purpose of Caspian Megalomania
There is now emerging a question as to whether the Caspian Basin is of
major strategic importance, apart from all the oil-boom rhetoric of
public statements.
Is the Western interest in this peripheral region derivative of
broader security and energy concerns, those having to do with the
Middle East, Russia, Iran, China, and Islamic radicalism? Austere
insights that challenge the big-oil policy there are not encouraged,
and interlopers known for particular diligence in trying to ferret out
facts even endanger their personal safety. If the Caspian oil reserves
are not so extensive, why is it so essential for the West to be there?
The first reason is geopolitical. In the so-called Silk Road Strategy
Act of 1999, Transcaucasia represents an important geopolitical
isthmus, linking the Black and Caspian Seas and providing the West
with a ‘silk road’ to Central Asia. By reanimating the ‘silk road’,
which would avoid passing through Iran (historically its integral
part), Washington is trying to limit Russia’s influence in the region,
while at the same time restricting the number of potential allies for
Tehran.
However, the economic appeal of the Silk Road Strategy pertaining to
the presumed transportation significance of the region has become
absurd since the sixteenth century when it lost its value as the Great
Silk Route (transcontinental trade route that linked China to the
Mediterranean for 1500 years) due to the great maritime explorations
and the fact that the cheapest way to move goods between Europe and
Asia is by sea, not by land. Remaining since then on the periphery of
the ‘global economy’, the Caspian region does not constitute by itself
an area of vital strategic interest for the West.
Secondly, the interest of international oil companies in sustaining
the Caspian energy phantom can easily be explained by their motivation
of profit. All of these ventures are joint-stock companies whose
shareholders derive their main profit not from increasing dividends
based on successful commercial activity but from the rising price of
their shares on the stock exchange and oil futures on the mercantile
exchange. This is the very essence of Western business activity in the
Caspian Basin. By participating in high-profile Caspian projects and
issuing rosy reports of great resources, oil companies improve their
stock image, generating an instant profit without pumping a single
barrel of oil. In fact, to begin seriously extracting oil would be
counter-productive given the danger that the true extent of oil
reserves would then be exposed. The recent disclosure at Royal Dutch
Shell, that it would reduce its ‘proven’ oil and gas reserves by a
remarkable one-fifth, has revealed that share prices are dictated not
by real economic indicators but by the aura of promise affirmed by
motivated Wall Street analysts. In the months since Shell’s
announcement, BP-Amoco, Chevron-Texaco, Exxon-Mobil and several other
oil corporations operating in the Caspian Basin have also announced
revisions of their reserves spurred by the investigation into the
discrepancy started by the US Securities and Exchange Commission
(SEC).
The investigation ensures that even the degraded appraisal of the
Caspian oil potential would further diminish as soon as the SEC
implements its new requirement that all energy firms whose shares are
traded in the USA have their reserves reviewed by independent
auditors.
Third motive: why do the local governments cheat on the contracts they
are only too willing to sign, and how do they benefit from that? All
Caspian governments are fully aware of the obvious truism in
international politics: the greater the oil reserves – the more
tolerant Western governments are in overlooking a poor human rights
record of a petroleum-based regime. A regime with less significant oil
production provokes more international scrutiny of the status of local
democracy. Aside from the tumid sense of self-importance that the
Caspian oil bestows upon them, their objective is entirely pragmatic:
the more foreign investment – the easier to perpetuate autocratic rule
and keep popular discontent at bay with tales of an oil-boom
prosperity lying ahead, not to mention the Western slush funds and
kickbacks for the ruling elite, which do not even enter the Caspian
countries and are directly deposited in leaders’ personal bank
accounts abroad. For instance, the Azeri government has grossly
underreported the huge ‘signature bonuses’ received after auctioning
the concession rights to a prime deep-water oil fields block in 1994,
and told the International Monetary Fund (IMF) that it received $285
million in bonus payments.
But the consortium of oil companies, called Azerbaijan International
Operating Company (AIOC), claimed that they paid Azeri leaders for the
same block $400 million in bonuses. A 2001 investigative report in New
Yorker magazine asserted that Western oil conglomerates paid tens of
millions of dollars in ‘commissions’ to top Kazak officials, including
President Nazarbaev. Swiss authorities have frozen bank accounts held
by Nazarbaev on which he has accumulated over one billion dollars
through shady deals with American oil firms, after his government sold
in 1996 its 20 per cent stake in the Tengiz oil field. Under the
Foreign Corrupt Practices Act of 1977, a federal court in New York is
now hearing this case, known as ‘Kazakgate’, involving James Giffen,
an American banker linked to Nazarbaev. The indictment alleges that
between 1995 and 1999, this former consultant to the Kazak government
laundered $78 million unlawfully paid by big oil companies to
Nazarbaev and other Kazak officials.
In 1999, the OECD adopted its own ‘Convention Against Bribery of
Foreign Public Officials in International Business Transactions’,
which has never been implemented in the most corrupt Caspian
states. The affair of Viktor Kozeny, rogue Czech businessman, has
brilliantly illuminated the Convention’s hypocritical ethos.
For $6.3 million, Mr. Kozeny obtained 25 per cent of the 7.5 million
vouchers issued by the Azeri government in 1997 for privatization of
state property amongst its citizens. Then he raised $450 million from
an American investment group with the intention of participating in
the anticipated privatization of Azerbaijan’s national oil
company. The Azeri leadership subsequently ruled that the company
should remain state-owned. American investors maintain that they took
part in the buying of vouchers after assurances from the Azeri
government, and are now suing in London and New York President Aliev
Junior and his privatization officials for $100 million. Kozeny swore
in the court that President Aliev Senior personally demanded hefty
kickbacks in 1998 in exchange for his favorable decision, and insisted
that he gave him $83 million.
Finally, as we live in the age and under the infiuence of mass media
cheerleaders, one should mention the articulate lobby that has emerged
in the West and cultivated since 1991 the mythology of the Caspian
bonanza in collaboration with a sensationalist press. It comprises a
welter of numerous think-tanks, law firms, investment bankers, trade
associations, construction companies, effusive journalists, television
talking heads, big oil-controlled politicians, aspiring academics,
retired diplomats who ‘consult’ for oil corporations, hungry local
officials, agile Western expatriates in the region and unemployed
Caspian emigres in the West: they all profess in unison that the
Caspian is an enormous sea of oil because they all are hoping for a
pecuniary piece of investment action in the form of research funding,
construction contracts, personal assignments, consulting fees or mere
employment.
It is disheartening for a veracious researcher to debunk this Caspian
megalomania. Big oil sponsors scores of political flunkies,
influential celebrities and lobbyists, ‘business councils’, academic
activities and publications confirming the region’s great oil
potential, and withdraws high-priced advertising from those polemical
periodicals which sow the seeds of doubt and rock their Caspian boat.
The Baku-Jeyhan and Alternative Oil Export Projects
After many years of deliberation, construction of the
Baku-Tbilisi-Jeyhan (Turkey’s Mediterranean coast) main export
pipeline was launched near Baku in 2002. The capacity of this 1730 km
line will be 50 million tons of oil per year. The cost is estimated at
around $4 billion, compared to $1 billion for a new export pipeline to
the Persian Gulf through Iran.
However, Baku-Jeyhan is not econoniically feasible. It needs a daily
throughput of one million barrels of oil to be financially
justified. Azerbaijan produces less than 15 million tons a year, while
Kazakstan produces more than 40 million tons. Even the existing
Baku-Supsa (Georgia’s Black Sea coast) pipeline is being currently
filled only to one-quarter of its 18 million-ton annual
capacity. Where will the oil needed to fill the 50 million-ton
Baku-Jeyhan line come from? Azerbaijan will be able to produce only
about 600,000 barrels per day (bpd) when all its consortia reach their
peak by 2010, and even less thereafter. For comparison, Kuwait is
producing 2.14mbd, its quota from the OPEC, and has enough oil to pump
2 million barrels daily for 132 years. According to all geological
appraisals, Azerbaijan has enough oil reserves for only 27 years at
its current level of production.
Such major companies operating in the Caspian Basin as Exxon-Mobil,
Chevron-Texaco, Royal Dutch Shell, ENI of Italy and Lukoil of Russia
have been asked but declined to join this project so insistently
promoted by the US, Turkish, Georgian and Azeri governments. The
failure of negotiations frustrated the project’s long bid to draw
additional oil from Kazakstan to fill the pipeline’s 1 mbd
capacity. British Petroleum (the chief operator of the Baku-Jeyhan
project) insists that there will be no such problem and that
Azerbaijan’s own oil alone will be enough. But studies by two
independent research groups in Washington, the Cato Institute and the
Carnegie Endowment for International Peace, have calculated that the
Baku-Jeyhan pipeline would need $200 million per year in subsidies
from the US government to remain viable.
Other oil companies favour cheaper alternatives that would use the
existing pipeline facilities. They would send an extra 100,000 bpd
west through Baku-Supsa, an extra 100,000 bpd north, through
Baku-Novorossiysk, and 100,000 bpd south to Iran, to be swapped for
export shipments from its Persian Gulf terminals.
This combination could handle all the extra oil Azerbaijan hopes to
export over the next ten years, and if additional pipelines are needed
later, there will be time and money then. Such diversification has
been fiercely resisted by the USA and Turkey for fear of damaging the
prospects for their Baku-Jeyhan geopolitical project.
Meanwhile, Russia has completed in 2002 its 1,580-kilometer
North-Caspian pipeline linking Kazakstan’s Tengiz oil field to
Russia’s Black Sea port of Novorossiysk. Tengiz is the world’s
sixth-largest land field with 9 billion barrels of oil in reserves and
is operated by Chevron-Texaco.
The announcement of the Kashagan discovery worth 7.8 billion barrels
of oil off the coast of Kazakstan has generated some excitement. Since
Azerbaijan’s reserves are insufficient, supporters of the Baku-Jeyhan
project are hoping that Kashagan could provide the needed volumes of
oil that Azerbaijan lacks through an additional underwater pipeline to
be built from Aktau (Kazakstan) to Baku.
However, when Kashagan does begin producing oil in earnest, its export
through the existing nearby pipeline from Tengiz to Novorossiysk will
make far more commercial sense for its operator ENI than a commitment
to the Baku-Jeyhan project. The North-Caspian line has ample excess
export capacity even when it accommodates the projected peak
production of 750,000 bpd anticipated from Tengiz by 2010.
In next month’s issue Alec Rasizade continues his investigation of
Alternative Oil Export Projects.