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Central Asia/Caucasus: Multinationals Pushing Oil Projects Despite Instability, Corruption

  • Nikola Krastev

Multinational oil companies are pursuing production-sharing projects in Central Asia and the Caucasus despite the political instability and widespread corruption in the region, according to U.S. energy experts at a conference in New York this week. Kazakhstan and Azerbaijan are viewed in the U.S. as the most attractive places to invest, but also as the most corrupt countries in the region.

New York, 29 March 2002 (RFE/RL) -- A conference this week organized by the Asia Society, a nonprofit organization in New York, focused on Central Asia and the Caucasus as the most attractive regions for new energy projects despite widespread instability and corruption. While Saudi Arabia continues to be the world's largest oil producer at some 8.8 million barrels of oil per day, a Deutsche Bank survey presented at the conference shows that oil export growth in the years 2000 to 2005 will be led by Russia and Kazakhstan.

The survey, presented at the conference on 26 March, shows that Russia produces 8 million barrels of crude oil per day. Kazakhstan and Azerbaijan are not at present among the top 10 oil producers, it says, but they, along with Russia, are expected to see considerable growth over the next decade. Deutsche Bank estimates that by the end of this decade, Russian production will grow by over 2 million barrels a day. In Kazakhstan, oil production is projected to grow by about 1.5 million barrels, and in Azerbaijan by slightly less than 1 million barrels.

Both Kazakhstan and Azerbaijan already have drawn significant foreign interest in their oil industries. Exploration of the Kashagan West oil field in Kazakhstan was led by a consortium of multinational companies including BG, Eni, ExxonMobil, Shell, TOTAL, BP and Phillips.

The major multinational players in Azerbaijan are BP, TOTAL, Eni, and Chevron.

Despite its significant natural-gas reserves, Turkmenistan at present is considered of little interest to foreign energy firms because of political and logistical complications.

Ian Bremmer is the president of the Eurasia Group, a think tank in New York. He told the conference that many U.S. oil companies initially had high hopes for greater investment in Iran's energy resources. But Iran's inclusion in U.S. President George W. Bush's "axis of evil" has sidelined any such plans for the moment. Bremmer says: "A lot of these companies -- and I'm thinking particularly about the U.S. oil majors -- now that Iran is not really in the short-term plans, are starting to look at alternative places in the region where they can put some of their investment dollars. I've spoken to a number of oil majors here that are now looking much more closely at Russia and the Caspian [region] as places to put their money. And I think that's going to increase down the road."

Leonard Coburn, who directs the office of newly independent states at the U.S. Department of Energy, says that multinational corporations can prove beneficial to the Central Asian oil development landscape in a number of ways. He says such corporations provide capital, management and project-development expertise, technology, exposure to modern environmental protection methods, and social development.

Coburn says the development of the prospective fields requires huge investments, and adds it is clear that countries in the region are not capable of raising the funds without foreign investment. The Energy Department officials says Kazakhstan will require $50 billion to $70 billion in investment, while Azerbaijan will need around $60 billion. Coburn says: "Kazakhstan and Azerbaijan have production-sharing arrangements that are already in place and have been able to attract substantial amounts of investment to date. For instance, Kazakhstan already has brought in $10 billion of investment. In Azerbaijan they brought $3.5 billion. [This is in] contrast to Russia, which has not brought that level of Western investment into its oil and gas industry. The fundamental reason is that they do not have a stable production-sharing agreement regime in place."

Many participants noted that production-sharing contracts, as opposed to licensing agreements, are now the preferred legal framework for multinationals operating in Central Asia. Licensing agreements have proven to make a venture vulnerable to changes in taxation policies and other complications.

David Goldwyn is the founder of Goldwyn International Strategies, a Washington consulting firm. He told the conference that Kazakhstan and Azerbaijan are aggressively pushing for production-sharing agreements with multinationals. He also says Turkmenistan is the most problematic country in the Caspian oil and gas zone.

"For most of the [Caspian] area there's plenty of development; it's not a near-term issue. For Turkmenistan it's a problem, because as long as they maintain that fields that are under development by Azerbaijan belong to Turkmenistan, they're not going to get any pipeline going anywhere. This was the death of TCP -- the trans-Caspian Pipeline [from Turkmenistan to Turkey]. It wasn't clear where the Turkmen thought this thing was going to go, but it needed to go across Azerbaijan. As long as they left this issue unresolved they weren't going anywhere and their gas is going to be trapped. And I think they're doomed to long-term grief as long as they have that problem and as long as [President Saparmurat] Niyazov is there."

The Eurasia Group's Bremmer said growing political instability in Turkmenistan makes any major short-term investment there unlikely.

Azerbaijan, meanwhile, has routinely been cited as suffering from corruption. A 2001 economic freedom report by the Washington-based Heritage Foundation cites the U.S. State Department as saying, "Corruption is perhaps the greatest single problem foreign investors face in Azerbaijan." The problem, however, has not turned foreign investors away from the country.

Some of the panelists noted that the corruption issue in Kazakhstan -- which in most part applies to the investment and development of the giant Tengiz oil field -- could delay the development of the even bigger Kashagan field, which is expected to drive exports over the next 10 years.

But Bremmer says the corruption scandal -- involving alleged kickbacks of approximately $1.5 billion to Kazakh President Nursultan Nazarbaev and his family and cronies -- will most likely not seriously hamper future foreign investments.

"There are big dollar signs in everybody's eyes when it comes to Kashagan. So I don't think [corruption charges will hurt]. I think what you might find is that some American majors may find themselves a little bit more tentative if they find they're taking a little bit too much heat. And you also might find that the energy supply companies could end up also being in a position where they find themselves in some difficulty or they just want to reduce their presence. But in general I still think money's going to be talking in [Kazakhstan]."

All the same, Bremmer says he does not expect corruption cases to subside in Kazakhstan. At most, he says, the Tengiz scandal will act as a "speed bump" for the U.S. administration as it tries to promote more investment in Kazakhstan.