Exploiting the Caspian28 May 2008
Dr Gareth Evans explores the Caspian sea and asks what this could mean for future balance of hydrocarbon wealth.
Boasting oil reserves at least comparable to the North Sea and a gas resource to rival that of Nigeria's the growing international interest in the Caspian Basin region is hardly surprising.
However, having a coastline bordered by Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan – and with no agreed formula between these littoral states for the division of the sea's riches – the inevitable political dimension is destined to be as important as the geo-physical.
As these large hydrocarbon reserves finally begin to be fully developed there are significant challenges to be met, principally in terms of accessing them in the first place and then subsequently transporting them through neighbouring countries.
With so much at stake, the prize is clearly worth it; ten years ago, Dick Cheney, then CEO of Halliburton, commented that he could not 'think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian'.
The recent announcement in April 2008 of Kazakhstan's support for Chinese moves to develop oil and gas resources on the Kazakh portion of the continental shelf of the Caspian Sea has given his words a new resonance for the region.
ESTIMATES AND EXPLORATION
At the time of Cheney's observation, however, the oil and gas reserves believed to be on offer in the Caspian Basin were considerably higher than today's consensus figure – the American Petroleum Institute suggesting an oil reserve of more than 659 billion barrels in 1995. Although there is some variance between current estimates, depending on their source, there seems to be a broad agreement on a figure of between 18 and 40 billion barrels of oil and a natural gas potential of around 232 trillion cubic feet.
To date, most of the oil production has come principally from the north of the region – Kazakhstan and Azerbaijan – with three major developments yielding around a third of the region's total.
The other newly independent Caspian states have made less headway in exploiting their share of the region's hydrocarbon wealth, multi-national oil companies tending to favour Kazakhstan and Azerbaijan, with neighbouring countries only attracting smaller deals. Never-the-less, the upstream sector in Turkmenistan has benefitted from a number of Production Sharing Agreements (PSAs) with the likes of Petronas, Dragon Oil and Burren Energy.
Russian exploration of the area has been ongoing since 1995, when Lukoil began work in the north Caspian – aiming to achieve gas production by the end of 2008. On the oil side, the company has announced that it expects its six fields – a hydrocarbon resource of around 6.5 million barrels – to hit maximum output of 140,000bpd by 2016.
Significantly, a measure of regional cooperation is also emerging.
One of these fields – Khvalinskoye – is an equal share JV between Lukoil and Kazakhstan, while Lukoil and Gazprom established a joint venture with KazMunaiGaz – the Kazakhstan state oil company – to develop the Tsentralnoye structure, on the border of their offshore sectors.
The Caspian promise has not always been entirely forthcoming. The exploratory wells drilled in the Iranian sector during the mid-90s failed to yield commercially viable discoveries and Total's desire for a 25% share of the Kurmangazy project – supposedly to develop a seven-billion-barrel field – evaporated when the first well drilled came up dry.
Despite these set-backs, the region retains its allure; in January 2006, the Iranian Northern Drilling Company (NDC) signed an agreement with China's Oilfield Services to explore waters over 2,000ft deep and Lukoil announced a major discovery on the Anaran block in western Iran's Azar field. The Anaran project is 75% owned by Norsk Hydro, which expects it to produce a potential 100,000bpd by 2010.
By this same year, the US Energy Information Administration (EIA) predicts that the region will be producing between 2.9 and 3.8 million barrels a day – exceeding the annual output of Venezuela, South America's largest oil producer.
While the resource estimates may have had to be revised downwards, there is no minimising the challenges which lay ahead – not least the political and infrastructural ones. With a promise of around 230 trillion cubic feet of natural gas effectively on its doorstep, Europe understandably views the Caspian assets as a route towards diversifying its imports and achieving a greater measure of energy security.
More than a quarter of Europe's gas demand is supplied by Russia – and as a stake-holder in the Caspian game itself, any plans to circumvent the so-called 'bear-hug' are hardly likely to be well received.
In his last presidential address to the state before stepping down, Vladimir Putin warned that it would be 'a stupid and wrong policy' for European nations to seek supplies in former Soviet satellites in an attempt to circumvent dependence on Russian gas. In any case, two months earlier, in December 2007, Russia signed a deal with Kazakhstan and Turkmenistan to build a new natural gas pipeline along the Caspian Sea – a move which many analysts viewed as strengthening the Russian monopoly on regional exports.
Looking to the export of oil, it is by no means certain that Europe offers the most logical market for Caspian resources. According to EIA analysis, OECD European oil demand is only expected to rise by around 200,000bpd over the next 15 years, compared with a predicted Asian growth of some eight million barrels a day over the same period.
China's hunger for oil alone is forecast to have increased by over four million barrels a day by 2020. Kazakhstan's support for Chinese developments offshore, the 600-mile long pipeline from Atasu to Alataw Pass in China's Xinjiang region and the construction of a new 200,000bpd Atyrau to Alashankou pipeline – nearly three times as long – may well be signs of things to come.
INVESTING IN INFRASTRUCTURE
Infrastructure is widely seen as the key to progressing optimal exploitation of the region's resources and export pipelines come high amongst the priorities, though they have also been the source of much controversy – chiefly through differing perceived national interests.
Although existing pipelines in the region – such as the Baku-T'bilisi-Ceyhan (BTC), completed in May 2005 and operated by a BP-led consortium – provide a much-needed export route and offer some scope for extended capacity, it is clear more are needed.
The US has long championed a route under the Caspian Sea – the Trans-Caspian oil and gas pipelines – by-passing Russia and Iran. As well as denying Russia valuable transit fees, they would threaten the country's effective stranglehold on hydrocarbon exports to the west.
The EU's Nabucco gas pipeline – a hugely ambitious project – would stretch 2,000 miles from Turkey through the Balkans to deliver Turkmenistan, Azerbaijan and Iranian gas to Austria. Geo-political sensitivities extend here too and unsurprisingly, as Peter Kaderjak, director of the Regional Centre for Energy Policy Research in Budapest points out, "Russia has always been trying to block Nabucco." Putin's personal intervention to bring off the recent pipeline deal with Kazakhstan and Turkmenistan would certainly appear to support that interpretation.
The Caspian Basin has a long association with hydrocarbon exploitation – the oil was reportedly used in local houses as early as the 16th century and Bibi-Heybat Bay, near Baku, Azerbaijan saw the first offshore and machine drilled wells in the world. By the turn of the 20th century, Baku was firmly established as the centre of the international oil industry; it seems clear that a hundred years on, the focus has once again returned to the region – and with good reason.