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Caspian Sea: Predictions Of Wealth In Caspian Region Exaggerated

The second in a two-part series focusing on an address given in London this week by an expert on the oil and gas industries of the Caucasus and Central Asia. Today's feature looks at the prospects for the Caspian region's oil and gas sectors.

London, 9 July 1999 (RFE/RL) -- A leading Western oil executive says Central Asian and Caucasus countries need to be more realistic in their expectations of the amount of wealth that is likely to be created by Caspian oil and gas fields.

Willy Olsen, senior adviser to the Norwegian state oil company, Statoil, says predictions of a new "El Dorado" in the Caspian region are exaggerated. Olsen, involved in Caspian oil and gas developments since 1991, says it is understandable why the Central Asian and Caucasus countries "see the energy sector as the foundation of great wealth, influence and power." But he says some predictions are far too optimistic. He spoke this week before the Royal Institute of International Affairs (RIIA) in London.

"Some reports of the bright future go over the top, though, as the journalist from the San Francisco Chronicle who traveled to the region in 1998 and wrote, and I quote, 'the region's oil and gas wealth will shovel unimaginable wealth on people whose annual per capita GDP hovers between $400-600, building a new El Dorado.' I believe it is necessary to try to paint a realistic picture of what we can expect in years to come rather than dream of new El Dorados."

Olsen says the Caspian region has "exciting prospects of becoming a significant exporter of oil and gas in the next decades."

But he says there are many problems including the unknown size of Caspian reserves, the difficulty of exporting oil and gas to world markets, the time and cost needed to build the infrastructure for a modern energy industry, and shortage of drilling rigs and other equipment.

Olsen says it will take years to discover the size of the oil and gas reserves of Azerbaijan, Kazakhstan, Turkmenistan and the other countries. Geological knowledge is limited because in the Soviet era the region was behind a closed border. He says geologists have identified 250 undrilled sites across the region. But the chance of finding oil in commercial quantities at any one place are only 15-20 percent.

Olsen addressed the question: how fast can the Caspian oil and gas fields be developed? He says much will depend on the level of world oil prices. They have slumped in recent times, but have now recovered to a level of $18 a barrel. He says any return to lower oil prices will make the Caspian less attractive to foreign investors.

Much depends on whether the cost of developing Caspian oil makes it competitive. In the past 15 years, the cost of finding, developing and producing, for example, North Sea oil has fallen from $20 a barrel to $10. Costs will have to come down in the Caspian as well.

Olsen says the fact the Caspian nations lack access to an open sea means it will be difficult to transport their oil and gas to market.

"The huge distance between the region it serves and world markets imply a considerable financial burden, and it may add up to two to four dollars per barrel to the cost. As important, and it is very often forgotten, the Caspian countries do not have access to all the worldwide resources of the oil and gas industry, such as marine drilling and construction fleets, or world scale fabrication facilities."

Olsen says the shortage of oil drilling rigs is slowing down exploration. He says the three rigs in the region, two in Azerbaijan and one in Kazakhstan, will never meet the requirements of the many oil production sharing agreements already signed. He says the Caspian needs more drilling rigs, but the cost will be enormous.

In addition, there is only one crane barge in the region, needed for hoisting equipment onto the rigs. This depends on 30-year-old technology no longer in use in the oil industry elsewhere.

Olsen says the Caspian region is also handicapped by the lack of investment and maintenance of the old Soviet industrial infrastructure. Azerbaijan used to be the main supplier of oil equipment to oilfields in Siberia, but no longer has an industry for "tomorrow's requirements." The lack of export pipelines for oil and gas is yet another problem and one that gets considerable attention.

Olsen says energy companies are also facing environmental challenges which are already causing delays to energy projects in Kazakhstan. Olsen says drilling companies want to ensure they do not cause further harm to the Caspian sturgeon population and to wildlife in the north.

Regional instability is another element that could delay the exploitation of oil and gas fields. Olsen says without a solution to existing hot spots -- including Nagorno-Karabakh, Abkhazia, and South Ossetia -- political risks will remain high, and impede development.

In summary, he says the Caspian region is an exciting region for the international oil and gas industry. But governments and industry have under-estimated the time and cost of developing the modern infrastructure needed for export success. He also says the Caucasus and Central Asian nations must not depend on the energy sector alone, but must set out to build diversified economies.

"I do believe the energy sector can become a locomotive for growth and prosperity in the Caucasus and Central Asia, but to depend only on the success of the energy sector will be a very very dangerous strategy. Future petroleum revenues are exposed to the price of oil, and, as we have learned again in the last 15 months, the price of oil fluctuates. The Caspian energy states will have to diversify their economies if they are to succeed, and they will need western engagement to succeed."

The lecture coincided with the launch this week of a new RIIA study of Central Asian and Caucasian prospects. The study, "Western Engagement in the Caucasus and Central Asia", is by Neil MacFarlane, who is a professor of international relations at Oxford University.