CASPIAN SEA REGION

The Checkerboard of Oil & Minefields

University of Michigan - Dearborn

Summer 1998

"A Political Science Independent Study"

by: khalil el-saghir

Under the Supervision of

Professor R. Stockton

TABLE OF CONTENTS

INTRODUCTION

COLLISION OF HISTORY & GEOGRAPHY

ECONOMICAL ANALYSIS

PIPELINE ROUTES ANALYSIS

CONCLUSION

REFERENCES

INTRODUCTION

Since the breakup of the Soviet Union, much of the world's interests, nevertheless the United States’, has shifted to the huge oil and gas reserves on and off shore of the Caspian Sea region. Contracts worth billions of dollars had since been signed, with the newly independent countries, and many joint ventures had been formed, to develop the region’s oil and gas fields. Yet, there is still not one reliable export route to transport those products to the open water, and thus to the world markets.

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COLLISION OF HISTORY & GEOGRAPHY

Oil, as Daniel Yergin in his book, The Prize, so clearly demonstrates, carries with it as many hazards as windfalls (1). Ever since man became so fascinated with the magically-combustible greasy-mud, myths started sowing around what became known as the "Black Gold."

The Caucasus, the mountainous region east of the Caspian Sea, was among the first known producers of oil and petroleum products. The bible contains references to petroleum products in the Baku region, in Azerbaijan. Even Marco Polo alluded to a small 13th century export trade in oil soaked sand (2). The Turks, Persians and Russians jockeyed with each other for control of the region. Peter the Great actively sought to ship oil from the Caucasus north to Russia. Subsequently, however, Persia regained control and it was only after 1877 and the conclusion of the Russian-Turkish war that Russia was able to exert its hegemony over Persia and Turkey and the various mountain tribes, including the Chechans.(3)

In the early years of the twentieth century, Russian oil, then meant oil of the Caucasus, was regarded as an international prize. The competition between the British and the Russian empires for the upper hand, including the control over the region's vast energy reserves, became known as the "Great Game." The oil age had arrived, displacing coal and steel. Since WWI and the dramatic improvement of the combustible engines, which led to the invention of the real "Chariot of Fire", the tank, controlling the supply of oil became one of the most strategic objectives of the regional as well as the supper-powers. In 1941, during World War II, Hitler wanted to use Caspian oil to fuel his army. He staged a campaign to take over the region as well as its mineral reserves. He declared that if he failed to seize the Caucuses, he would be forced to end the war. Although it is not really known how much did it contribute to the end of the war, the Germans defeat in their quest for the Caucasus oil in the late 1942 was the 1st set back the Reich suffered since the beginning of the war.

On the eve of the 1973 oil embargo, during the Arab-Israeli war, the Middle East, the biggest petroleum reservoir in the world, became a loud and clear example of the importance of controlling the flow of oil. This control has since became the strategic focal point for the United States and the industrial world. The 1991 Gulf war represented the peak at which the struggle to control the flow of oil had reached. At the same time, the collapse and disuniting of the Soviet Union had not only increased the number of independent states in the United Nations, but also opened the door for the foreign oil companies, for the first time, to rush into the second biggest petroleum reservoir after the Middle East, the Caspian region.

Six independent states have emerged, in the Caspian Region, out of the breakup of the Soviet Union: Azerbaijan, Armenia and Georgia on the west side of the Caspian Sea, and Kazakstan, Terkmenistan and Uzbekistan on the east side. While Armenia and Georgia do not border the Caspian Sea and they do not possess significant oil reserves, they are, nevertheless, positioned on the routes through which transporting pipelines are planned and /or already exist. And while Uzbekistan, sandwiched between Kazaksan and Turkmenistan, also does not border the Caspian Sea, it possesses a significant amount of natural gas and is on the checkerboard of proposed pipelines running eastward toward China and southward toward Pakistan.

Iran, which connects the two sides of the region in the south, does not hold an economically-significant oil reserves on or offshore the Caspian Sea. Its tapped natural gas reserves, however, puts it second only to Russia, on a worldwide basis. With a population of 66.1 million, an experienced military power, and, most importantly, a strategic position on the Persian Gulf and the Arab Sea, Iran is definitely the second most important player, after Russia, in the evolving New Great Game in the Caspian Region. However, its enmity with the U.S. is significantly curtailing its ability to utilize its geopolitical advantages to gain more power in the region.

Russia, the heir of the Soviet Empire, sits on the northern part of the Caspian Region, occupying 30% of Caspian Sea shores. Although only holds 2.5% of the total Caspian oil reserves, Russia still considers the Caspian region as a sphere of influence and is trying to have as many pipelines as possible to cross its territory to enforce this influence. All existing oil pipelines run through Russia and terminate at Novorossisk on the Black Sea where the oil is shipped to the world markets. The Russian pipelines system also runs westward toward Ukraine, Hungary, and Poland and northward to Latvia, on the Baltic Sea. The Russian influence in the Caspian Region is much more complicated than the pipelines geographical paths. The following table clearly shows the depth of the Russian influence in the Caspian states.

Russian Influence In The Caspian States

Russia’s great influence over the Caspian Region’s States is not, however, going unchallenged. Azerbaijan, which holds 18.5% of the region’s total oil reserves and is the first to produce and export petroleum products from the Soviet Empire, had signed contracts, despite the Russian’s objections, to construct two pipelines, one to Georgia, on the Black Sea, and the other to Turkey, on the Mediterranean. To overcome the Russian objections, Azerbaijan agreed to refurbish the Baku-Novorossisk pipeline in the condition that a bypass be constructed around Chechnya.

Turkmenistan, the least economically developed state of the former Soviet union, and due to its proximity from Russia, seems to be enjoying its independent. The two pipelines negotiated to ship the Turkmen oil and natural gas are to Turkey via Iranian territory and to Pakistan via the war ravaged Afganistan, thus allowing no Russian control whatsoever.

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ECONOMICAL ANALYSIS

Total oil reserves of the Caspian Sea region, estimated at above 200 billion barrels, exceeds that of Western Europe and/or the United States (110 BBL) and puts it in second place after the Middle East (700 BBL). Total production, currently at 1 million b/d, could reach 3.4 million b/d by the year 2010, assuming that hydrocarbons can be transported to world markets.

The bulk of this production potential will come from Azerbaijan and Kazakstan, the two countries with more than 80% of the expected oil reserves and where 85% of the foreign investments in the region are concentrating.

Caspian Sea Region Oil Reserves, Production, & Exports (1996)

(Production & Export @ thousands barrels/day)

The expected increase in demand for oil is inducing the rush toward the Caspian region. Experts estimate world demand for crude oil could rise 30% by year 2010. And the world's largest customer, the United States, may be importing 70% of its oil by 2010, compared to 50% today. Furthermore, Asian demand for oil is forecasted to almost double, from 18.1 million b/d to 31.7 million b/d, between 1995 and 2010 (4). This latter increase, could be very beneficial for the Caspian oil and gas supplies.

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PIPELINE ROUTES ANALYSIS

The United States wants to see as many different pipeline routes as possible to prevent any one country from developing a stranglehold over the flow of oil from the region.

Russia, however, wants to ensure that most of the Caspian oil would go via its territories. To ease doubts about the safety of the Baku-Novorossisk pipeline in volatile Chechnya, Russia is considering a bypass around the secessionist region. However, the psychological damage, along with the United States insisting on mutiple routes, proved more influential. Oil companies as well as the financial institutions, that had rushed early to the region, had already prepared the alternative routes for pipelines abd had negotiated the construction of these pipelines with the region's governments .

Some of the proposed pipelines are still debatable on the basis of their economical feasability, such as the 2,000 miles long pipeline from Kazakstan to China, at a $9 billion cost. Others, such as the Turkmenistan-Iran-Turkey pipeline, which was initially seen as an impossible choice, due to the U.S. objection for the project. The pipeline runs 900 miles into the Iranian territory before connecting to the Turkish pipeline, which is already under construction. Last December, the first part of the pipeline which connects Turkmenistan to Iran, a 125 mile line at $195 million, was opened. It seems that the pipeline diplomacy has began to produce some fruitful results, at least on the U.S.-Iranian front.

The Existing Oil Exporting Routes in The Caspian Region:

• Kazakstan - Russia Pipeline which extends from Atrau to Samara (200,000 b/d). From Samara oil will be shipped via the Russian pipelines system.
• The Russian pipeline system which, though underutilized, do not have the capacity to transport the vast amount of oil and gas the Caspian region is expected to produce. This system extends from Samara to:
  • - Latvia and Lithwania(Baltic Sea)
  • - Ukrain, Poland
  • - Bulgaria, Slovenia, and Greece
  • - Novorossisk (Black Sea)
• Kazakstan-Iran oil swaps: Kazakstan currently ships 30,000-40,000 b/d of crude oil from Aktau, its Caspian port, to the Iranian port of Neka, on the Caspian Sea, using coastal barges and small tankers. While Iran uses the Kazak oil, after blending it to produce a comparable Iranian crude feedstock, in its Tehran and Tabriz refineries, in the north, Kazakstan would have the option of lifting either Iranian Light or Iranian Heavy blend crude at Kharg Island in the Persian Gulf. The volume of this swap deal will peak at 120,000 b/d in mid 1998.
• Baku-Novorossisk Pipeline: It is also called The North-South Route. This is the oldest exporting pipeline from the region and it is still the only pipeline that Azerbaijan uses to export its oil to the Black Sea. The capacity of the pipeline is very limited, thus a new 42 inch pipeline is under construction that will run along the old one with a planned Chechnya bypass.

The Proposed, Agreed Upon & Under-Construction Oil Exporting Routes in The Caspian Region:

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CONCLUSION

The economic and military strength of a nation would reflect its access to and/or control of oil.

A blunt example, of the imminent role the pipelines issue is playing in the Caspian geopolitics, is the Armenia - Azarbaijan struggle. Had Russia and Turkey been geographically in the place of one another, the Russians would have sent the $1-5 billion worth of weapons to Azerbaijan instead of Armenia. It would've done so to clear away the obstacle the separatists of Nagorno-Karabakh had created in front of the Azeri pipeline westward toward the Mediterranean, bypassing the other foe, Iran. Because this hypothesis is, at least geographically (!), not feasible, Iran is realistically blocking the bypassing pipeline by supporting both the Armenians of Nagorno-Karabakh against the Azeris (the western path toward Ceyhan) and the Chechnians against Russia (the northern path toward Novorossisk.) Recently, when the Armenian former President, under heavy pressure from the US, showed some willingness to soften Armenia’s stand to clear the way for the proposed pipeline, which will provide the country with very much needed hard currency from oil transit, he was thrown away. He was replaced by a radical Armenian from the Nagorno-Karabakh region!

Another example of the importance of the pipeline checkerboard in the daily life of the region is the latest assassination attempt, two months ago, against the Georgian President Eduard Shevardnadze. When asked about the motives for the attempt, which was the third in two years, Shevardnadze suggested that the attack could have been related to his country's attempt to be part of a pipeline route transporting Caspian Sea oil to the Black Sea. The proposed pipeline routes pass near several regions of Georgia that had been the site of the separatists of Abkhazia (northwest) and Ossetia (north central). Abkhazia won a civil war against the central government in Tiblisi in 1993, with a blunt military backing from Russia.

While Russia was supporting the separatists Abkhaz in Georgia, to stop the planned Baku-Supsa Western pipeline, which was supposed to replace the Northern pipeline through Russia, it was fighting its own war with the separatists of Chechnya. The Chechens proved even harder to defeat than Abkhaz even by the second biggest military power in the world. Turkey and Iran, despite their rivalry in the region, both supported the Chechen rebels, publicly for a religious reason, reasonably for the sake of curtailing the Russian influence and control of the region’s energy resources, most notably the pipelines. When peace agreement signed, in 1985, the Chechen war had already wreaked Moscow’s territorial monopoly on oil, and gas, transportation from Kazakstan and Azerbaijan. The fear of unsecure passage through Chechnya had shifted the accents in the transportation of oil towards the alternative variants, most importantly Turkey and Iran!

Whether the new Caspian petro-dollars would pacify this geopolitically volcanic region or not, pipelines are being laid out from the shores of the Caspian Sea to the Shores of the Black Sea, the Mediterranean, China, and Baltic Sea. Thousands of miles of the aluminum 20,40, and up to 80 inch oil vessels, are running through mountains, deserts, swamps and valleys, crossing borders, raising hopes and igniting conflicts, bound to change the Caspian Sea Region forever. The vast and magnitude of centuries-old unsettled conflicts and struggles, however, being shoved beneath the surface, above which the pipelines are being constructed, for the sake of the immediate benefits, does not support a smooth transformation of the region into a prosperous and peaceful future.

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