August 29 , 2008

Caspian Sea Oil and Gas

 

The current US-Russia conflict triggered on August 7 by the Russian invasion of Georgia, a republic on its southern periphery, has become the source of front-page news stories in almost all major newspapers of the world. This coupled with the  increasing world demand of crude oil and natural gas has brought into sharp focus the energy scenario in  Central Asia - the Caspian Sea region - the site of enormous oil and natural gas reserves some of which have been found in recent years. We shall touch here upon the salient features of this situation.
Before the disintegration of the Soviet Union in 1991, only the USSR and Iran bordered the Caspian Sea. Now five states – Azerbaijan, Iran, Kazakhstan, Russia, and Turkeminstan  - adjoin the sea whose bed and littoral areas are the repositories of an estimated 235 billion barrels of oil and comparable reserves of natural gas, some 330 trillion cubic feet (Tcf).  Afghanistan lies crucially in the south of the region sharing borders with Turkeminstan, Uzbekistan, and Iran.
The oil reserves in Kazakhstan are said to be the biggest among all new finds of the world over the past twenty years.
Most of the Central Asian states have Muslim majorities. They had been under Muslim rule for a thousand years before Russian occupation and imposition of its Socialist system, which lasted some seventy years. The people retained their ethnic identities and emotional attachment to their religion underneath the veneer of a seventy-year secular, socialist system.
They have, at the same time, been wary of the radical and harsh rule of the clerics of Iran and the much more strict and obscurantist Mullacracy of the Taliban of Afghanistan. Hence, they have all welcomed the US-led action against Taliban and Osama Bin Laden. No wonder, Uzbekistan readily offered bases to the US and allied forces.
Over the past few years, major Western oil companies have concluded a series of multi-billion dollar contracts with Azerbaijan, Kazakhstan, and Russia to explore and develop Caspian oil and gas deposits. But the implementation of these deals is dependent, to a great extent, upon the construction of a network of pipelines to export these hydrocarbon riches to foreign markets.
The uncertainty surrounding the extremist religious regime in Iran and the lingering sympathy in Afghanistan for Taliban, and the anti-West proclivities among ignorant and illiterate masses of both societies, had precluded the consideration of pipelines running through their territories to ports in the Gulf or on the Arabian Ocean. That would have been the cheapest and most viable arrangement.
However, Iran under a pragmatic and farsighted President Khatami, had been wooing the Western oil companies, holding regularly general elections in the country and denying vehemently its support to the terrorist Hizbullah setup, in order to have the sanctions on it removed. But its basic antagonism, that has acquired a sharper edge during the current Presidency of Ahmadenijad  towards the US – ‘the Great Satan’ - continues. So, the option of the pipelines traversing Iran is ruled out. 
Till the newly laid pipeline from Baku in Azerbaijan to Cehan port on the Mediterranean coast of Turkey started carrying oil some four years back, the  only functioning pipelines ran across Russia, from Baku to Novorossiysk, a Russian port  on the Black Sea, from where tankers carried  the oil to the Mediterranean  via Bosporus straits which is already choked with traffic. The narrow strait has been the main corridor for some 45,000 major vessels a year that make the route three times as busy as the Suez Canal.
The new pipeline, costing $3 billion, was therefore planned by Britain’s  BP oil company. The project was enthusiastically backed by the US and construction work on it was completed four years back. The pipeline has been transiting oil to Western oil-thirsty countries for over three years. The Russian occupation of Georgia poses a severe threat to this conduit that runs through that country.
The volatile situation in Afghanistan has put on hold several operations. In Pakistan, for instance, most oil and gas ventures have come to a standstill as most of the expatriates have left the country. Even fellow Muslim Malaysia’s ‘Petromas’ and friendly Chinese seismic firm BGP have pulled out. The Iran-Pakistan-India gas pipeline also remains on hold. Pakistan is likely to lose over a billion dollars because of the disruptions.
Reverting to the situation in the Caspian region, we find that the output of 1.3 million bbl/d in 2000 is likely to reach 4 million bbl/d by 2010. Production is thus no problem, nor is demand, transportation of the product had been presenting the biggest hurdle. The new pipeline has largely taken care of that in respect of the Azerbaijan crude.                    
All of the oil and gas pipelines had been designed in the past to link the Soviet Union internally and were thus routed through Russia.  The Caspian region’s relative isolation from world markets and the absence of export options, under the Soviet-dictated policy, had stifled the growth of the requisite infrastructure. In respect of natural gas too, the Russian state-owned Gazprom commanded all the pipelines and export routes of Caspian natural gas.
The oil and gas producers of the region are now seeking to diversify export options and reach new markets.
Europe does not offer an attractive market, as its oil demand over the next 10-15 years is not likely to grow more than one million bbl/d, as against ten times that quantity in Asia in the same period. A pipeline of over 5000 km over difficult terrain will have to be laid down to reach the markets of eastern China. The cost/benefit ratio does not recommend this. 
An alternative and much cheaper way for Caspian producers to meet the Asian demand  would be to build pipelines southward across Iran and Afghanistan. As for Iran, apart from the policy constraints, the US companies are prohibited from conducting business with Iran under a US law. Non-US companies investing in the Iranian oil and gas sectors attract the sanctions under the ‘Iran and Libya Sanctions Act’.
The Afghanistan option which Turkmenistan authorities and California-based Unocal oil company had been promoting, entailed the building of pipelines across Afghanistan.
The success of the US-led campaign in Afghanistan, apart from breaking the back of terrorism, would also benefit the Western oil companies by making the route through Afghanistan and Pakistan feasible and secure. The landlocked Central Asian states would not only gain secure export routes but a shot in the arm of their fragile economies that have sustained a drop of 15-20 percent in their national incomes after the demise of the USSR. Their centralized, bureaucratic business practices, inherited from the Soviet period, would yield to more efficient market mechanism.
The US military presence in Uzbekistan, Afghanistan and possibly some other areas of the region will make for stability, flow of western investment capital and technology. Growing general prosperity provides the best guarantee against the stone-throwing rage of the disgruntled youth who in some cases turn into suicide bombers.
The above shows the significance of the operations in Afghanistan and the US-Russia conflict in Georgia.  Oil holds the crucial position in both.
(arifhussaini@hotmail.com)