 Since the end of the Cold War, oil companies have rediscovered the Caspian Sea's potential in oil and gas extraction. Could the region become a new petrol station for the world, asks Ben Paarmann (23, from Germany).
By Ben Paarmann
Edited and published by Thinking-East.Net
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Date published: 11/04/05
Section: Themes / Central Asia
1,025 words
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Baku: the city of black gold
The Caspian Sea, for a long time obscured behind the Iron Curtain, has left media's no-man's-land and returned prominence in international news. Well, this is not due to an ever-decreasing quantity of world-renowned Caspian sturgeon, but to another treasure to be found in these realms: Oil.
Azerbaijan, once holding the world monopoly on paraffin, has a long history of extraction industry. It was here where one of the Nobel brothers made a fortune exploiting the region's plentiful reserves and selling them in Europe, transported via train and ship. Baku's oil industry should also be famous for political reasons. It was there that Josef Stalin rallied together the 'Baku Bolsheviks' in 1907 and his ruthless understanding of Communist doctrine.
After the Communists took over, production declined as many Western investors turned their back in protest of the Soviet nationalisation. Yet, some companies remained in the region in the early days of the Soviet Union, among them Exxon's predecessor Standard Oil of New Jersey. In the Second World War, Azeri oil reserves decided the course of the war. The Wehrmacht never reached the refineries and thus ran out of fuel supplies on the Eastern front. Consequently, the Blitzkrieg ended, and German troops were forced to begin their long and costly retreat.
During Soviet times, the Azeri SSR continued to be a major oil-supplier, even though other facilities in the USSR, most notably in Siberia, were gradually developed.
Kazakh plunder
Meanwhile, Kazakhstan, known to sit on vast resources both oil and gas, never came to be a major producer. Deposits there were difficult to unearth, their depth caused Soviet technicians major headaches. On top of that, offshore drilling was prohibited due to a resolute official from Moscow. Her environmental concerns prohibited any major oil exploration.
During the Perestroika, efforts to exploit reserves in the Kazakh SSR were renewed, this time with the help of Western know-how. US-based oil giant Chevron acquired a 50% stake in a promising oil field named Tengiz. Thus, the Texan corporation became the first major Western investor on Soviet soil. After the collapse of the Soviet Union, Chevron could use its connections to establish the joint venture Tengizchevroil (TCO.)
After gaining independence, Kazakhstan and Azerbaijan steadily became alluring to the big players in the petrol industry. A 'contract of the century' was signed in Azerbaijan on September 1994, involving 12 major oil companies from eight different countries. Kazakhstan is now host to the majority of the world's biggest oil companies. Mobil was the second giant to enter the market by acquiring a 25% share of TCO in 1995, an event accompanied by allegations of massive corruption. Seymour Hersh famously uncovered what was to become known as 'Kazakhgate', which involved dubious businessmen from the United States and even President Nazarbaev.
Whereas the mid-1990s witnessed a spur on Caspian oil developments, the end of the decade was marked by investors' growing sense of frustration with the Soviet-inherited Kazakh bureaucracy that proved to be ill-equipped to handle multi-million-dollar deals and was prone to corruption. However, there are always two sides to a coin: Western oil companies nurtured these malfeasances by being involved in many inglorious deals as well. The gold-rush euphoria was notably cooling down, also due to the fact that estimated reserves for Azerbaijan did not match the results of actual explorations.
Kazakhstan, however, managed to incite a new boom in 2000, when a major oil discovery made big headlines in industry publications. Kashagan, the world's biggest find since Prudhoe Bay in Alaska, rejuvenated hope in the region's potential. When the oil price began to rise later that year, forecasts attested the Kazakh oil and gas industry a viable, even healthy future.
Still, is there enough oil to justify various geopolitical aspirations that were coined under the umbrella of terms like 'New Great Game'?
How much?
If one wants to assess the Caspian region's importance, one has to face the facts: How much oil and gas are we talking about? Well, there are different opinions. As explorations are still ongoing, there will always be a degree of speculation attached to forecasts. Also, not every barrel of oil proved in its existence can be recovered. Despite technological advance, some oilfields will only get exploited halfway.
It is also important to take into account a two-part wisdom when speaking about oil and gas reserves: while governments tend to inflate statistics to stimulate investment, oil companies tend to play down statistics in order not to raise their shareholders' expectations. Hence, one should be cautious with estimates, always check their origin, and compare them with alternative calculations.
A variety of estimates exist for the Caspian Sea. The most optimistic ones are whopping: the US Department of Energy estimated that more than 178 billion barrels of oil might exist. If this was true, the region would have the second-largest oil reserves in the world, beaten only by Saudi-Arabia's 261.7 billion barrels (as of 2003). However, the US body being responsible for making these calculations is known to be facing a dilemma. The US Energy Information Administration (EIA) provides forecasts for both future supply and demand. While the latter is soaring, the EIA is feeling an institutional pressure to overstate the likelihood of extensive oil explorations.
As for Kazakhstan, the diverging character of estimates is telling: Current proved oil reserves are estimated between 9 (BP Statistical Survey 2003) and 17.6 (Energy Information Administration, Oil and Gas Statistics, 2003) billion barrels. The latter even puts further potential oil reserves (reserves that are estimated to be 50 percent probable) as high as 92 billion barrels, which would consequently put Kazakhstan among the top five of the oil-richest countries. More moderate analysts suggest that we are dealing with a lot less than the staggering 178 billion barrels of probable reserves put forward by the EIA. A more sober number is presented to us via the Baker Institute: 50-60 billion barrels.
Is this enough to make the Caspian Sea a new major petrol station, including international powers' vie to control the region? More in part two of this article…
Recommended reading:
Lutz Kleveman: 'The New Great Game. Blood and Oil in Central Asia'
Shirin Akiner: 'The Caspian'
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