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1998 In Review: Slump In Prices Could Delay Caspian Oil Boom

Prague, 17 December 1998 (RFE/RL) -- This year's drop in world oil prices has cooled some oil companies' enthusiasm for Caspian fields as they weigh lower profits against the high cost of getting oil from the region to market.

The price of oil this year repeatedly slumped near $12 a barrel -- a ten-year low -- and at year's end was slipping still further. The drop followed the Asian financial crisis which sharply cut world oil demand.

This month, news reports said one international consortium -- the Caspian International Petroleum Company -- would stop exploring a major offshore Azeri site because it held less oil than expected and would be unprofitable to develop at current prices.

Experts say other companies in the Caspian are having doubts about investing in costly pipeline projects because prices are down. The Azerbaijan International Oil Consortium had planned to announce an overland pipeline for its oil in October but at year's end the decision has yet to be made.

Julian Lee, an oil expert at the Center for Global Energy Studies in London predicts: "The low price of oil is going to make the whole development of the Caspian more difficult. A part of the reason for that is obviously the high cost of transportation. We are now looking at oil prices in their current sort of range, (that is) from say $12 to $16 a barrel, probably for the next four or five years. Now that is going to make the Caspian a much less attractive oil province than it is at $18 a barrel ... If oil prices in the mid-70's had been at the sort of level that they are at now, then the development of the North Sea would have been a lot later and a lot slower. And I think that really is also what we might see happening in the Caspian."

Western oil firms rushed to the Caspian after the collapse of the Soviet Union in 1991, investing millions of dollars to explore what many company and regional leaders dubbed a new Persian Gulf.

But after almost a decade of exploratory drilling, many oil experts now believe the true size of the Caspian Basin reserves may be considerably smaller.

Lee says oil companies have so far confirmed Kazakhstan has some 8,000 million barrels of proven Caspian Basin oil reserves. Azerbaijan has some 7,000 million barrels. Uzbekistan has 600 million barrels and Turkmenistan some 500 million barrels. Many analysts think there may be that much again still lying undiscovered.

If so, such quantities would make the Caspian Basin more comparable to the North Sea than the Middle East. Julian Lee says:

"A more reasonable comparison is between the Caspian Sea and the North Sea. Whether the Caspian ultimately turns out to hold a similar amount of oil to the North Sea or as some suggest maybe twice as much as the North Sea, (and it) is probably not terribly significant which of those turns out to be the case ... I think it is more comparable to the North Sea than it is to the Middle East. That still (makes it) an important oil-producing region. I mean, the North Sea at the moment is producing something like six million barrels per day. If the Caspian gets to that sort of level of production, and if it does happen I think that is many years down the line, that would make it an important contributor to world oil supplies."

That day is impatiently awaited not only by the Caspian oil-producing countries themselves, but also by many of their neighbors.

Countries ranging from Russia, Iran and Turkey, to far more distant ones such as Ukraine, Romania and Bulgaria, hope the oil will move to market across their borders, enabling them to charge transit fees to boost their own economies.

Moscow took a major step in November toward securing the first major new pipeline pumping out Caspian oil when it agreed with Astana to connect northeastern Kazakhstan's Tengiz oil field with the Russian Black Sea port of Novorossiisk.

A study by the Russian Academy of Sciences has calculated that Russia would earn some $33 billion over the 40 year life of the pipeline project. Construction of the line is to be financed by the Caspian Pipeline Consortium, which includes Russia, Kazakhstan and several major international oil companies.

Iran also wants a share of moving oil from the Caspian. At a meeting in Tehran in November, officials sought to convince some international oil companies to deliver their Caspian oil to northern Iran, which badly needs fuel. Tehran offered to pay the companies back by exporting oil from southern Iranian fields on their behalf. But those overtures are strongly opposed by Washington, which restricts American companies from doing energy business with Iran. Georgia also hopes to secure substantial transit fees. The consortium developing Azeri offshore fields is reported to be leaning toward an early pipeline from Baku to the Georgian Black Sea port of Supsa. If used to capacity, analysts say, the early oil pipeline could earn Tbilisi up to $6 million a year. The consortium is also eyeing a later main pipeline from Baku to Supsa which could earn up to $365 million a year, though probably not before 2005. If Ankara has its way, oil reaching Georgia will continue on by pipeline to Turkey's southeastern port of Ceyhan, on the Mediterranean. To convince oil companies to pay for the construction of this longer route -- estimated to cost up to $4 billion -- Turkey initially is likely to waive most transit tariffs. But analysts say once the pipeline is completed, Ankara could raise tariffs to industry levels, earning as much as $357 million a year.

Four European states on the Black Sea also are separately pushing their own transit routes. They want to take oil delivered across the Black Sea by tanker from Russian or Georgian ports and forward it on to markets in Western Europe.

Romania hosted a conference in September to lobby oil companies to consider shipping Caspian oil to its port of Constanta, then up the Danube and Rhine into Germany.

Ukraine has proposed receiving oil in Odessa, then feeding it into the Druzhba pipeline network which for decades has carried Russian oil and gas westward. Bulgaria and Moldova have proposed similar feed-in projects.

Correspondents say that oil industry experts have not ruled out a transit role for any of the Eastern European countries. But they say all four would first have to upgrade their terminal infrastructures and build better connections to major east-west pipelines to be viable candidates.