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Caspian Sea: Report Warns Against Exaggerated Expectations

London, 28 April 1998 (RFE/RL) -- A recent report says the oil and gas reserves of the Caspian Sea region may be much smaller than estimated, casting serious doubt on forecasts that the area could be a major long-term competitor for the Persian Gulf.

If the report's findings are right, it may be necessary to downgrade forecasts that the best-endowed countries, Azerbaijan, Kazakhstan and Turkmenistan, are about to enjoy a petrodollar bonanza. The report warns of the danger of over-inflated expectations.

An assessment of the Caspian region's potential is included in the latest edition of the Strategic Survey, the annual publication of the London-based International Institute for Strategic Studies.

The report says Caspian energy is "much less important than many political analyses have implied." There are three reasons for this: the scale of its oil and gas reserves, the high costs of extraction, and slowness in developing the new energy fields.

The report cites evidence to counter a famous claim by the US Energy Department which estimated that the potential recoverable oil reserves in the Caspian region are about 200 thousand million barrels -- or only a little smaller than the reserves of Saudi Arabia. The estimate, made a few years ago, caused a minor sensation.

But the figure of 200 thousand million barrels is widely derided within the oil industry where it is seen as over-inflated. Still, many analysts and journalists still cite the estimate and it has stoked up the general and political interest in Caspian energy exploitation.

The report says the U.S. estimates, publicized by the State Department, are seen to be of an order of magnitude that is divorced from reality despite their near universal quotation.

The report says the consensus of oil industry forecasts of the total recoverable reserves from the Caspian tend to lie in a range of between 25,000 million and 35,000 million barrels. This is between one-eighth and one-sixth of the U.S. Energy Department's estimates.

Accordingly, the report suggests it would be better to compare Caspian reserves not with those of Saudi Arabia but with the much smaller, albeit significant, oil and gas fields of Europe's North Sea.

If this is right, the possibility of the Caspian as a major long-term competitor and substitute for the Gulf "evaporates". Instead of the 16 percent of world reserves which the U.S. figures imply, "the true figure for the Caspian is likely to be closer to 3 percent."

Another sobering factor is that Caspian oil and gas is extremely costly. This is because of the difficulty of moving oil drilling equipment to the landlocked region; the expense of building pipelines to get the energy to western markets; and the transit fees payable to other countries to move fuel across their territory.

Oil prices are a key source of uncertainty. Since the Gulf crisis of 1990-91, oil prices have moved in a range between 12 and 25 dollars per barrel. At the high end, Caspian oil would provide good rates of return for investors. At the low end, returns would be very poor.

The report says a sustained period of low prices would cause interest in the region to wane, and development timetables to slow. The development of gas fields (Turkmenistan has the fourth largest reserves of natural gas in the world) would be completely unviable.

The report warns that in the first half of this year the potential profits for international oil companies in the Caspian were "derisory." It also says the potential for opening up the Iraqi oil industry is a major threat to the development of Caspian energy.

The report notes that Iraq has far more oil than the Caspian area, production can be increased far faster, and it would be at an extremely low cost. It gives one example of comparative costs: Iraqi oil goes through Turkey with transit fees of less than 1 dollar a barrel, while Kazakh oil going through Russia pays about 6 dollars a barrel.

The report underlines one of the big problems of Caspian oil and gas: it won't be available in large quantities any time soon. It cites one estimate that suggests that the entire Caspian region will produce a maximum 3.5 million barrels of oil a day (equivalent to Norway's daily production) but not until the year 2010.

The report concludes that the importance of the Caspian energy should not be dismissed, but it warns against what it calls the exaggerated expectations created by the U.S. official estimates.