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1998 In Review: Delays And Disappointment In The Caspian

Prague, 21 December 1998 (RFE/RL) - Optimistic predictions that uncertainty and obstacles to the export of Caspian oil to international markets would be resolved in 1998 have proven premature.

In November 1997, the Azerbaijan International Operating Company (AIOC) --the first international consortium to begin operations in the country-- began exporting oil through an existing pipeline that begins in Baku, passes through Chechnya's capital Grozny and ends in Russia's Black Sea port of Novorossiisk. At the time, most observers anticipated that within 12 months a decision would be made on the route for the so-called Main Export Pipeline. That line is intended to carry much larger quantities of oil not only from Azerbaijan's offshore Caspian oil fields, but also --thanks to a planned trans-Caspian pipeline-- from Kazakhstan and Turkmenistan.

As of early 1998, three options for the Main Export Pipeline were under discussion: north through Russia, west to Georgia's Black Sea ports of Supsa and Poti, and southwest through Georgia to the Turkish terminal at Ceyhan. (On geo-political grounds, the U.S. has blocked the shortest and most economical route, south through Iran.)

For the past three years, the U.S., Turkey, and Azerbaijan's President Heydar Aliyev have been lobbying energetically for the Baku-Ceyhan route. Meeting in Istanbul in March, the foreign ministers of Azerbaijan, Georgia, Turkey, Kazakhstan and Turkmenistan endorsed that option. Eight months later, the presidents of Azerbaijan, Georgia, Turkey, Kazakhstan and Uzbekistan, together with U.S. Energy Secretary Bill Richardson, signed a formal declaration of support for that route.

But some of the oil companies in the AIOC have serious reservations about the Baku-Ceyhan route, whose estimated cost is $3.5 billion. Their reservations have been exacerbated by the steep fall in oil prices on world markets. Consequently, despite pressure from the Azerbaijani leadership to make a firm commitment to Baku-Ceyhan, the AIOC repeatedly postponed a final decision on the route for the Main Export Pipeline.

Nor was disagreement over the merits of the Baku-Ceyhan route the sole point of contention between the AIOC and the Azerbaijani leadership this year. In the early Summer, the Azerbaijani leadership threatened legal proceedings against the consortium when it became clear that the cost of repairs to the existing Baku-Supsa pipeline would be almost double the AIOC's initial estimate. The first oil was pumped into that pipeline in early December.

But a second major pipeline project, that from Kazakhstan's vast Tengiz field west across Russia to Novorossiisk, has moved closer to becoming a reality. A feasibility study was approved by the Kazakh government in early November, and later that month the first contract on construction of a sector of the 1,500-kilometer, $2.2 billion pipeline was signed in Moscow.

A major obstacle to the exploitation of Kazakhstan's offshore oil was removed in early July, when President Nursultan Nazarbayev and Russian President Boris Yeltsin signed a formal agreement dividing their respective sectors of the Caspian Sea. But despite a mid-December meeting in Moscow of deputy foreign ministers of the five littoral states, dissent persists among them over the best approach to dividing the entire sea and all its resources.

Russia and Kazakhstan continue to advocate dividing the sea-bed into national sectors, leaving the Caspian waters for common use. Azerbaijan and Turkmenistan want to divide both the sea-bed and the waters into national sectors. Iran signaled at the December meeting that it might agree to that approach, which it had previously rejected, but only on condition that all national sectors of the sea are of equal size.

As a result of the lack of officially recognized divisions among the five states' sectors of the sea, Azerbaijan and Turkmenistan are currently engaged in a heated dispute over ownership of two oil fields. Four rounds of talks this year have failed to resolve the dispute. And in December, Baku formally protested an agreement signed between Iran and two Western oil companies on exploratory drilling in what Azerbaijan insists is part of its national sector.

Russia's insistence that the waters of the Caspian be jointly used could also prove a major obstacle to the planned Trans-Caspian pipeline that is to transport Kazakh and Turkmen oil to Baku for export. Russian officials argue that project is ecologically risky because the Caspian is in an earthquake zone.

Speaking in Washington earlier this month (Dec. 9) at one of at least a dozen major conferences on Caspian oil held in 1998, U.S. Department of Commerce advisor Jan Kalicki described 1998 as "the year in which the euphoric rush to the Caspian was tempered by rational expectations." Kalicki mentioned the failure of three trial wells drilled in 1998 to yield oil in commercially viable quantities --a failure that has seriously disquieted the international oil community. If more trial Caspian wells prove dry, or if the AIOC indefinitely delays a firm commitment to the Baku-Ceyhan pipeline, expectations may be revised further downwards in the new year.