| ICE Case Studies
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I.
Case Background |
According to petroleum scientists, the Caspian Sea region contains the third largest reserve of oil and natural gas in the world, behind the Gulf region and Siberia. Drilling for oil in the region is not new. Oil derricks dotted the landscape during the latter decades of the nineteenth century. Oil was a major source of hard currency for the former Soviet Union, but drilling methods were technologically inferior compared with western firms when it came to large-scale oil exploration. This inhibited Soviet exploration in the Caspian region. Western firms for decades had longed to be given the opportunity to exploit the former Soviet empire's massive oil reserves, but the Cold War relationship did not allow this option. When the Soviet Union implemented perestroika and glasnost in the mid 1980s, its oil exploration sector was poised to reap benefits from the west. The breakup of the Soviet Union, however, put a hold on these plans, as several nations emerged in the former Soviet lands around the Caspian Sea. There are environmental concerns associated with drilling for oil in the Caspian region, in addition to the already well articulated effects from drilling itself. The major issue regarding oil exploration in the region is a question of how best to deliver the oil to world markets. The Caspian Sea area is landlocked, thus the only way to efficiently transport the oil to world markets is via pipeline. The exact route of such a pipeline is as of yet undecided, and may prove to be the single most important factor in determining the ultimate success of oil exploration in the region.
Oil exploration in the region predates the travels of Marco
Polo. Legend has it that the "eternal flame" of the Zoroastrian
religion was fueled by natural gas around Baku, the present capital
of Azerbaijan, before the eight century. Serious exploration and
exploitation began in earnest in the 1850s, and by the 1890s, this
exploration instigated rapid development in the Baku region. By
the outset of World War I, Azerbaijan commanded 10% of the world's
exports of oil and kerosene. This was down from the 30% figure
during the 1890s. It was only in the 1980s that modern technology
entertained the notion that the deeper fields (where the most of
oil reserves are) were more accessible.
The area around Azerbaijan, on the southwestern shores of the
Caspian Sea, is not the only portion of the region to have oil
reserves. One of the world's largest oil fields, the Tengiz in
western Kazakhstan, was discovered in 1979. The Soviets had been
drilling in the Tengiz region, in the northeastern section of the
Caspian Sea, for many years. The Tengiz discovery dramatically
altered oil exploration potential for the region as a whole.
By most accounts the reserves in the region are very large.
When the region was still part of the former Soviet Union, western
oil companies were aware of the vast potential, but were not able
to gain access to the deposits. The Soviets wanted to develop the
area on its own, however, and focused more on the Siberian region
instead. When the Soviet Union splintered into several nations,
western companies began negotiations with the new entities.
Contracts have since been signed, but there are still many
obstacles, notwithstanding the negotiating hurdles. First, the
region is basically desert terrain, with dramatic seasonal
variations.
Second, there are extreme mountains in the northeast into
Russia. According to the Oil and Gas Journal, there is deep
sediment covering most of the predicted deposits. There is also a
phenomenon called salt tectonics which could effect the quality of
the product. These factors may prove burdensome to most companies,
but they should not render exploration futile. Modern technology
can overcome some geologic impediments. If the oil can be
reached, petroleum engineers believe it to be of high quality.
Because of the aforementioned deep sediment cover (up to 24 km)
and the fact that the Tengiz field is the biggest of the super
giants, some journals believe the project marks a new stage in oil
exploration.
The intricate political climate in the region is the factor
which will ultimately determine how oil can be delivered to world
markets. Kazakhstan is in the best position to profit from the oil
reserves. When the Soviet Union collapsed, the Kazakh government,
recognizing the importance of foreign investment, implemented the
most protracted effort to elicit foreign investment as a
cornerstone for development.
Chevron, the largest and to date the most successful oil
company in the region, initiated negotiations with the Soviets over
the Tengiz oil field in the latter 1980s. After the Soviet Union
imploded--and after a brief lull in activity--Chevron continued
negotiations with the Kazakhs. The investment is worth roughly $40
billion over approximately 40 years.
As mentioned previously, the oil in the region still ranks
behind reserves in the Gulf and Siberia regions. But companies are
looking more favorably to the Caspian region because of the
difficulties in the Russian system and harsh climactic factors in
Siberia. Another important reason why firms favor the region over
Siberia is the greater ease of dealing with the government.
Kazakhstan coddled western companies and facilitated a fairly
standard and efficient contract review process. Additionally, the
president took a personal interest in negotiations.
The region, however, is not without its own political turmoil.
Developing oil fields in Kazakhstan and Azerbaijan present unique
difficulties and extricating the oil from the region will be even
more tenuous. According to Chevron and oil analysts, a pipeline is
imperative to justify an increase in production. In the short-
term, production capacity is approximately 200,000 barrels a day.
Existing production can be transshipped by rail or road. But an
increase in output would be economically irrational unless there is
a more efficient method of transport. The route that the proposed
pipeline would traverse is probably the most difficult aspect of
the whole issue because there are several political "hot spots" in
the region that make a pipeline a difficult proposition.
Additionally, there is the realization that the nation which
controls the pipeline will be able to exert a substantial amount of
control over most aspects of oil exploration as well. Thus
several nations are jockeying for the pipeline in their territory.
The conflict between Armenia and Azerbaijan threatens to
disrupt not only the oil production slated off Baku's shores, but
the proposed pipeline route through the region. Additionally, the
Azeri power struggle may end Turkey's influence in the region,
which the western nations have been counting on as the moderating
influence. Because it is questionable who will even rule
Azerbaijan, any negotiations are less than definitive. Russia has
been adamant regarding its desire to have the pipeline be routed
through its southern territory to its Black Sea port of
Novorossivsk.
Perhaps strategically, Russia has ties to some of the
competing factions in the Azeri power struggle. But there are two
problems with a pipeline through Russia. Russia has been embroiled
in a bloody conflict in Chechenya and the rest of the region is not
very stable. Secondly, Turkey is against such a route. Their
official reason is that the Dardanelles Straits (a thin waterway
connecting the Black Sea to the Mediterranean) cannot handle the
excess tanker traffic. Such a route would place extreme pressure
on ecological efforts to protect the region. More importantly,
however, is the Turk's desire to increased their sphere of
influence in the region by having the pipeline go to their ports on
the Mediterranean. The problem with this is that it would have to
go through the Azeri-Aremenian corridor or Iran. The latter route
is not popular with the west, especially the United States.
There have sporadic media reports of late that point to a pipeline
going through Russia and Turkey. It remains to be seen when a
definitive solution will concocted.
Heavy tanker traffic thorough the Mediterranean, Red Sea and
Persian Gulf have already alerted states to the polluting effects
of such activities. Increased production in the Caspian region
will increase the above effects, no matter which pipeline route is
eventually chosen. Unique to the Caspian region however, is the
fact that the Caspian Sea is rising. It could rise possibly three
meters in the next twenty-five years. Resultant environmental
damage would be immense. In the last decade, the sea has risen
one meter, inundating some parts of Baku already. Some of Iran's
most productive fields lie on the southern shores of the sea and
would be submerged if it were to rise.
More damaging to the environment, however, is the potential
flooding of refineries on the coastal plains of the region. These
regions are some of the most polluted areas in the former Soviet
Union, according to US Embassy reports. This trend might be
cyclical however. The Caspian sea was falling, much like the Aral
Sea to the east. Old photographs of Baku show the shoreline much
closer to the center of the city. But the sea is definitely rising
now. Russian archeologists claim to have found the ruins from the
1,000 year old Khazar empire at the bottom of the sea. Geologists
believe that the sea bed might actually be rising, giving way to
springs of water.
Existing oil drilling in the sea is a major cause of
pollution. The US Embassy in Baku reports that one can see oily
film on the sea's surface. Another problem is the flaring of
natural gas; about 4.5 million cubic meter a day. Natural gas
flares, however, can be contained with the appropriate western
technology. While the sea is less polluted than the Black Sea,
much needs to be done to lessen the harmful environmental effects
of oil drilling, and the potential disastrous effects of the rising
Caspian Sea.
Continent: Mideast
Region: Mideast-Asia
Country: Kazakhstan
IV. Environment and Conflict Overlap
V. Related Information and Sources
Business Week, "Fields of Dreams: The West Gets a Crack at Soviet Oil," Business Week, 11 June, 1990, pp. 36-37. Business Week, "The Scramble For Oil's Last Frontier," Business Week, 11 January 1993, pp. 42-44. Business Week, "Azerbaijan's Squabbles are Spooking Big Oil," Business Week, 5 July 1993, p. 67. Economist, "Tomorrow's Gusher," Economist, Vol. 324 No. 7769, p. 72. Economist, "The Bear Pauses," Economist, V. 329, No. 7841, 11 December, 1993, p. 62. Knott, David, "Lenin's policy works for Azerbaijan," Oil and Gas Journal, V. 92, p. 29. Hyman, Anthony, "Kuwait by the Caspian," Middle East, No.238, Oct 1992, p. 32. Middle East, "Lessons from Central Asia," Middle East, No. 236, July/August 1994 p. 30. Nijenhuis, Hans, "Azerbaijan: Kuwait of the Caucuses..." World Press Review, January 1995, v. 42, p.34. Oil and Gas Journal, "Kazakhstan aims to tap Caspian oil and gas," Oil and Gas Journal, V. 91, 10 May 1993, pp. 32-33. Lisovsky, Nickolie N., Gognenkov, G.N., Petzoukha, Yuri A., "Soviet Union's Tengiz Field: a Pre-Caspian depression giant oil, gas accumulation," Oil and Gas Journal, V. 88, 17 September, 1990, pp. 88-94. US Central Intelligence Agency, World Factbook, 1994. US Department of Commerce, Country Commercial Guide for Azerbaijan, 1994.