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Kazakhstan: Hopes Rekindled For Oil Find

Boston, 15 November 1999 (RFE/RL) -- It has been over a year since hopes for an oil boom faded in the Caspian Sea region. Plunging prices and poor returns have dampened much of the enthusiasm in the oil industry since 1998.

But a report this week suggests that a single new discovery off the shore of Kazakhstan could turn the outlook around. A consortium of nine companies may be on the verge of tapping into one of the world's biggest oilfields at the enormous deposit known as Kashagan.

After many false starts, the project is halfway to its goal of drilling 4,000 meters beneath the shallow waters of the northern Caspian, the Financial Times reported. Below the seabed lies a structure that contains an estimated 4 billion tons of hydrocarbons, according to seismic studies.

If those hydrocarbons turn out to be recoverable oil, the discovery could transform Kazakhstan, making it home to two of the world's biggest oil deposits, including the onshore field at Tengiz. The effects may be felt throughout the region, which needs an injection of good news to restore the hope that fortunes can still be made in the Caspian Sea.

To the south, recent discoveries off the shore of Azerbaijan have turned out to be gas rather than oil, leaving planners to search for sufficient oil volumes to fill a main export pipeline. A find at Kashagan could revive talk of a trans-Caspian oil line to join with the Baku-Ceyhan pipeline, even though the idea gives many environmentalists pause.

Concern for the environment has been a major factor in the delays and high costs that have plagued the Kashagan operation. The project is in a nature preserve, forcing the Offshore Kazakhstan International Operating Company to take unprecedented precautions. Drilling started in August, nearly a year later than originally planned. The Financial Times put the cost of the operation at $600 million, considerably more than previous estimates.

At the moment, it is unclear whether the first results from the drilling will be known before the northern Caspian freezes over this winter. But the answers could be a matter of weeks or months away.

Whether an oil discovery leads to a new trans-Caspian pipeline or not, the outcome could have a big effect on investment in the Caspian. A major strike is likely to convince oil companies and lenders that more pipeline capacity for the Caspian is really needed, rather than simply the goal of a geopolitical wish.

The new oilfield could also change the recent assessment of the Caspian as a resource that will make only a marginal difference to the world's supply of oil. The spotlight could fall on the Caspian and Kazakhstan once again if Kashagan lives up to its huge potential. Just as Tengiz was a focus of strategic attention at the start of the past decade, Kashagan could be the center of calculations for years to come.

The downside is that failure to find commercial quantities of oil would leave the consortium with huge losses on their investment, further depressing the outlook for the Caspian. Kazakhstan's offshore deposits are believed to be the most promising of all.

Although pipeline strategists believe they are on the verge of a victory with the expected signing of pacts for the Baku-Ceyhan line at the OSCE summit in Istanbul next week, Kazakhstan has been teetering for the past year between boom and bust. The country sold its interest in the Kashagan consortium for $500 million to raise cash last year, even though it is still entitled to 80 percent of potential profits from the project under a production sharing agreement. In August, Kazakhstan's plan to sell part of its stake in the giant Tengiz field prompted a government crisis. At the same time, BP Amoco also announced it would sell its share in the Kashagan consortium before it, too, changed its mind. Both moves may be signs of pressure for results to bring confidence back to the Caspian after years of investment and risk.

The findings at Kashagan could also open a new chapter in the legal dispute over the division of the Caspian. Kazakhstan's Caspian shelf, including Kashagan, was the subject of the first bilateral agreement between Russia and another littoral state in 1998.

Since then, Iran has become increasingly isolated in its insistence that the Caspian should be divided into equal shares instead of national sectors. The formula would work against countries like Kazakhstan with its rich offshore resources, while favoring Iran, which is believed to have few viable fields.

It is perhaps no coincidence that Kazakhstan's Foreign Minister Erlan Idrisov reportedly issued a rebuff last week to Iran's proposal for Caspian division, calling it "impractical." On the eve of the Kashagan findings, all of the Caspian states must face reality.