Oil and gas deposits of the Caspian Sea are driving a major investment boom across the eastern and western shores.
The Caspian Sea has come into sharp focus for the international oil and gas indaustry. A number of factors have contributed to this, including the discovery of new offshore deposits; following the break-up of the Soviet Union, the emergence of new countries establishing their own energy and foreign investment policies; and because the Caspian Sea is landlocked, the need to develop new pipeline transport routes to get the oil and gas to market.
The Sea is the largest enclosed body of water in the world spanning a distance of around 371 000 km2, and has five countries surrounding it. To the northwest lies the Russian Federation, which has inherited the Soviet Union's network of pipelines and transport links that for many years were the only possible route to market. To the south lies Iran. The three newer coastal countries are Azerbaijan on the western shore, Kazakhstan in the north, and Turkmenistan on the eastern shore.
One of the biggest issues affecting the Caspian as a whole is the question of transport.
The main attractions of the area has been the willingness of the newer countries to bring in international oil companies to develop new deposits. The process has mobilised billions of dollars of resources over the last 15 years, but hasn't always been problem-free. A current example might be developments around the Kashagan oil deposits in the north of the Sea, owned by Kazakhstan. With reserves of around 38 billion barrels Kashagan is one of the largest and most complex oil field development projects in the world. Crude oil is located deep under the seabed, laced with toxic hydrogen sulphide and compressed under great pressure, posing the danger of potential explosions during extraction. The development consortium is led by Italy's Eni, which has an 18.5% share, as do Exxon Mobil, Royal Dutch Shell and Total. Smaller stakes are held by Conoco-Phillips (9.3%); Inpex and state-owned KazMunaiGaz (KMG) each hold 8.3%. Western governments see Kashagan as a key strategic source of new non-OPEC, non-Russian-controlled oil.
But there are technical problems and cost overruns. Eni recently gave the Kazakh authorities the unwelcome news that the first 300 000 barrels per day (bpd) stage of the project was going to come on-stream in 2010, two years behind schedule, and costing US $19 billion, double the original estimate. According to Kazakh sources, Eni also admitted that the cost of the entire 40-year project had now soared to US $136 billion from US $57 billion, making it the world's most expensive oil project. Although Eni has claimed that talks with the government, led by its CEO Paolo Scaroni, were ‘friendly', it is clear that Astana is furious.
Under the terms of the production-sharing contract, Kazakhstan only begins to receive Kashagan oil royalty payments after the consortium has recovered its investment costs, so delays and cost overruns have a direct negative impact on the country's aim to treble output. Kazakh Prime Minister Karim Masimov said that the delays would have serious socio-economic consequences for the country, and could cost it over US $10 billion in lost revenues. Energy minister Sauat Mynbayev threatened to ‘take all necessary measures under national legislation' if the consortium did not meet the government's demands. Citing environmental concerns, the government suspended Eni's operating licence for three months; the ministry of environmental protection had earlier said that the consortium's drilling work could destroy rare local flora and fauna.
The nature of the government's demands was not spelled out but there were indications that Astana wanted KazMunaiGaz to have a larger share and perhaps be made joint operator along with Eni. For a number of observers, there was a potential parallel with Sakhalin 2, the big development in the Russian Far East, where Moscow cited environmental, tax and other concerns to elbow out Royal Dutch Shell and seize control for state-owned Gazprom.
But Julian Lee from the London-based Centre for Global Energy Studies (CGES) disagreed. ‘This is not Sakhalin-2' he said, noting that Astana was not seeking majority control, and that its position was understandable given the effect of cost escalation. Consultant Richard Gordon of Gordon Energy Solutions spoke of the effect of what he called ‘the rolling thunder of cost inflation echoing high oil prices'. He argued that because of this Kashagan was not going to yield the massive returns that the international oil companies had initially projected.
One of the biggest issues affecting the Caspian is the question of transport. There are two routes that the international oil companies are not enthusiastic about. First, a network of oil and gas pipelines created by the former Soviet Union and now controlled by Russia is seen as unreliable for political and strategic reasons. The second obvious route would be to pump or ship oil to northern Iran, and from there onwards by tanker down through the Straits of Hormuz.
That leaves a third route - to move the oil and gas out westwards to the Mediterranean and from there, onwards to major European consumption centres. One crude oil pipeline that does that is the Baku-Tblisi-Ceyhan or BTC pipeline which, as the name suggests, runs from the Azerbaijani capital of Baku on the Caspian to Tblisi in Georgia and from there through Turkey to the Mediterranean port of Ceyhan. One advantage of this route is that it bypasses the congested Bosphorus Straits maritime route between the Black Sea and the Mediterranean. BTC, completed in 2005, was built by a consortium led by BP. BTC is designed to carry crude from the ACG (Azeri-Chirag-Gunashli) field in the Caspian, as well as liquids from the Shah-Deniz field.
Another important privately-owned pipeline that follows the Western route is run by the Caspian Pipeline Corporation (CPC), led by Chevron. CPC is anomalous in a variety of ways. For a start, it is also the only privately operated pipeline on Russian soil. The pipeline runs from the Tengiz field in the Caspian Sea for 1510km to reach the Novorossiysk-2 Marine Terminal on Russia's Black Sea coast. From there tankers carry the crude through the Bosphorus into the Mediterranean. The first stage of the CPC was built at a cost of US $700 million and opened in 2001. It is currently pumping 700000 bpd, and it is calculated that capacity could be increased to 1.3 million bpd in a second phase requiring US $2 billion. Apart from Chevron, CPC partners include the Kazakhstan government, Russia's state-owned Transneft, the government of Oman, Shell, Mobil, and AGIP.
The gas pipeline story is slightly more complex. The major non-Russia pipeline initiative is the Nabucco project led by Austria's OMV and favoured by the European Union. When the EU gave its support in mid-2006 Andris Piebalgs, the EU Energy Commissioner, said that ‘the issue of energy security is on the table of every energy minister, as well as foreign, finance, and industry ministers across Europe. Nabucco concretely contributes to our energy security.' Partners include MOL (Hungary), Transgaz (Romania), Bulgargaz (Bulgaria) and BOTAS (Turkey). This would initially follow a similar path to BTC but run overland through Turkey, across the Bosphorus and through Romania, Bulgaria, and Hungary to Austria, from where it would join European distribution pipelines. The 3300 km pipeline would cost an estimated US $5.8 billion and eventually carry 30 billion m3 per year. On current schedules construction work should start in 2009 and conclude by 2012.