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Caspian Sea Region

The Caspian Sea region is important to world markets because it has large oil and gas reserves that are only now beginning to be fully developed. Developing these resources has resulted in competition both between companies to get the contracts to develop this potential, and between nations to determine the final export routes.

The Caspian Sea region's oil and gas potential has attracted much attention since the breakup of the Soviet Union. The nations in the Caspian Sea region - Azerbaijan, Iran, Kazakstan, Russia, Turkmenistan, and Uzbekistan - are already major energy producers (Table 1), and production will increase with additional investment, technology, and the development of new export outlets. The Caspian Sea itself is so large (700 miles north to south) that 6 different hydrocarbon basins are under its waters (the Caspian Sea countries also have additional onshore basins). Uzbekistan doesn't directly border the Caspian Sea, but is considered to be in the Caspian region not only because it shares several of the region's hydrocarbon basins, but also because it's proposed oil and gas export routes are also shared with the other Caspian countries.

Azerbaijan was the world's biggest oil-producing province in the early 1900s. However, the former Soviet Union did not have the technology to develop the Caspian's offshore oil and gas reserves, and once the onshore Azerbaijani oil was developed, the Soviet Union focused its resources elsewhere in onshore areas such as the Volga-Urals region and West Siberia. Most of the oil and gas reserves in the Caspian region (Table 2) have not been developed, and many areas of the Caspian region remain unexplored. Most of Azerbaijan's oil resources (proven as well as possible reserves) are located offshore, and perhaps 30%-40% of the total oil resources of Kazakstan and Turkmenistan are offshore as well. Proven oil reserves for the entire Caspian Sea region are estimated at 15 - 29 billion barrels, comparable those in the United States (22 billion barrels) or the North Sea (17 billion barrels).

Proven natural gas reserves are even larger, accounting for over 2/3 of the proved hydrocarbon reserves in the Caspian Sea region. Based upon proven reserves, Kazakstan, Turkmenistan, and Uzbekistan each rank among the world's 20 largest natural gas countries. Proven gas reserves in the Caspian region are estimated at 236 - 337 trillion cubic feet, comparable to North American reserves (300 trillion cubic feet).

The prospect of potential huge hydrocarbon reserves is part of the allure of the region. Most of the additional undiscovered hydrocarbons likely to be of commercial significance - the possible reserves - are oil, not gas. While this potential is not enough to create another Middle East, the region's possible reserves could yield another 163 billion barrels of oil if they become proven. This is roughly equivalent to a quarter of the Middle East's total proven reserves; however, the Middle East also has its own vast possible reserves.

Possible gas reserves are as large as the proven reserves, and could yield another 328 trillion cubic feet if proven. However, these reserves are located far from potential markets in relatively remote Turkmenistan, Kazakstan, and Uzbekistan. The distance from potential markets and the relative lack of infrastructure to export this gas have tempered interest in the region's gas potential. The alternatives to exporting gas through the Russian pipeline system are exporting through war-torn Afghanistan, through Iran (where investment is limited by sanctions), or by building some of the world's longest pipelines to markets in China and Europe.

Key issues in this region include: 1) legal issues concerning ownership and development rights in the Caspian Sea; 2) regional instability; 3) development of transnational export routes to take oil and gas from the landlocked Caspian Sea region to world markets; 4) the related issue of energy exports through the Bosporus and into the Black Sea; and 5) Iranian sanctions and the role of Iran.

Export Routes

New transportation routes will be necessary to carry Caspian oil and gas to world markets. The existing pipelines in the Caspian region were designed to link the Soviet Union internally, and were routed through Russia. While the Caspian Sea countries are linked by pipeline to each other, there is only one crude export pipeline - the 200,000 barrels/day Atrau-Samara pipeline from Kazakstan to Russia - that connects Caspian Sea oil production to the Russian crude oil export pipeline system and world markets. Russia has commercial and political interests in continuing to be a major transshipment point for the Caspian's energy resources. For this to happen, Russia must address commercial concerns regarding reliability, security, competitive tariffs, and access. While Russia has existing pipelines that are underutilized, these pipelines do not have the capacity to absorb all of the oil and gas the Caspian region could produce. An additional limitation is that most existing oil export pipelines terminate at the Russian Black Sea port of Novorosiisk, requiring tankers to transit the crowded and ecologically and politically sensitive Bosporus in order to gain access to the Mediterranean and world markets. Furthermore, there is some question as to whether the Mediterranean is the right place to send all of the forthcoming oil and gas from the Caspian, as oil demand over the next 10-15 years in Europe is expected to grow by little more than 1 million barrels per day. However, oil exports eastward could serve Asian markets, where demand for oil is expected to grow by 10 million barrels per day over the next 10-15 years. Finally, there are political and security questions as to whether the newly independent states of the former Soviet Union should rely on Russia or any other country as its sole export outlet. As a result, multiple routes for Caspian oil and gas exports have been proposed (Tables 3 and 4, Figures 1 and 2).

How Much Oil Will be Exported from the Caspian Region? In 1996, oil production in the Caspian region totaled 1 million barrels/day, of which about 300,000 barrels/day, mostly from Kazakstan, were exported. However, only about 140,000 barrels/day were exported outside the former Soviet Union. Most of this was exported via the Atrau-Samara pipeline from Kazakstan to Russia, but Kazkastan also exported some crude oil via oil swaps with Iran. Kazakstan currently ships 30,000 - 40,000 barrels of crude oil per day to the Iranian port of Aqtau on the Caspian Sea using coastal barges and small tankers. Iran uses the oil in its northern refineries and exports an equivalent amount of its own oil from the Persian Gulf on behalf of Kazakstan.

Oil exports will increase substantially as oil begins flowing from two major joint ventures currently underway in the Caspian region. The two projects - the Azerbaijan International Oil Consortium (AIOC) in Azerbaijan and the Tengizchevroil project in Kazakstan, as well as some smaller ones currently underway, will help boost production to about 4 million barrels/day, and oil exports to about 3 million barrels/day by the end of the next decade. With these increases, Caspian production would represent about 4 percent of total world production of about 95 million barrels/day projected for the end of the next decade. Rather than being another Middle East, the Caspian region would more closely approximate the North Sea, where production levels increased from 4 million barrels/day in the early 1990s to 6 million barrels/day by 1997.

In what was described as "the deal of the century," the AIOC signed an $8 billion, 30-year contract in September 1994 to develop three Caspian fields -- Azeri, Chirag, and Guneshli -- with total reserves estimated at 3-5 billion barrels. Oil production is expected to reach 800,000 barrels per day by the end of the next decade. The AIOC has not yet decided upon its main export route for a 1 million barrel/day pipeline, but has decided that "early oil" will begin flowing by end-1997 or early 1998 along two routes: 1) 100,000 barrels/day along the northern route from Baku, Azerbaijan to the Russian Black Sea port of Novorosiisk; and 2) 100,000 barrels/day along the western route from Baku to the Georgian Black Sea port of Supsa.

In April 1993, Chevron concluded a historic $20 billion, 50/50 joint venture deal with Kazakstan to create the Tengizchevroil joint venture to develop the Tengiz oil field, estimated to contain 6-9 billion barrels of oil. In April 1996, Mobil announced that it had purchased from the Kazak government a 25% share in the consortium developing Tengiz. Given adequate export outlets, Tengiz can reach peak production of 750,000 b/d by 2010. Tengiz oil will be exported by the Caspian Pipeline Consortium (CPC), which will export Tengiz oil to world markets via a 900-mile, $2.2 billion oil export pipeline connecting to the Russian Black Sea port of Novorosiisk. The pipeline is expected to be commissioned in 1999, but not reach full capacity of 1.34 million barrels/day until sometime in the next decade.

These CPC and AIOC pipelines will have a combined export capacity of 2.5 million barrels/day, which will be sufficient for projects currently underway. However, by 2020 additional production is expected to be brought on-line, and new export capacity will need to be built.

How Much Natural Gas Will be Exported from the Caspian Region? Natural gas production in 1996 totaled 3.3 trillion cubic feet, and gas exports totaled about 0.8 trillion cubic feet, mostly from Turkmenistan. By 2010, production could reach 5 trillion cubic feet of gas, with over 2 trillion cubic feet of exported (mostly from Turkmenistan) - roughly what the Caspian region had produced in 1990. While the Caspian's oil potential had been largely ignored until after the collapse of the Soviet Union, its gas resources had been extensively developed, and it was the collapse of the Soviet Union that led to downturns in both production and exports. The new republics that had been customers for Central Asian gas have been unable to pay for these supplies, and until new pipelines are built bypassing the old Soviet network exports will remain low.

There is currently only one new gas export pipeline under construction - a $190 million, 90-mile pipeline from Turkmenistan to Iran with an initial capacity of 0.3 trillion cubic feet/year. Turkmenistan has also signed a contract to export 100 billion cubic feet of gas a year initially to Turkey, but the volume could eventually grow to 1 trillion cubic feet annually. This pipeline is widely expected to be built across Iran. Construction of this pipeline would be problematic because of Executive Orders signed in 1995 that prohibit U.S. companies from conducting business with Iran, and the Iran and Libya Sanctions Act of 1996 that imposes sanctions on non-U.S. companies that make large investments in the Iranian oil and gas sectors.

Other Options for Oil and Gas Export Routes

To China - Exxon, Mitsubishi, and China National Petroleum agreed to study the idea of building the world's largest natural gas pipeline from Turkmenistan and Kazakstan to the Chinese coast, and perhaps continuing onwards to Japan. Another proposal would build an oil pipeline to China from Central Asia as well. This pipeline faces numerous financial and technical difficulties, and is not likely to be built in the near-term.

Cross-Caspian Pipelines - Proposals have been made to bring oil and gas from Kazakstan and Turkmenistan across the Caspian in order to avoid crossing Iranian or Russian territory. These proposals would most likely be seriously considered after the first main export pipelines are completed, since the cross-Caspian pipelines would connect with those pipelines. However, Caspian Sea legal and environmental issues need to be settled first, which requires that all Caspian countries cooperate on these issues. Eventually, the cross-Caspian pipelines could be connected on the east with export routes flowing eastward as well.

To Europe via Russia - The existing Russian gas system could be expanded to allow Central Asian gas exports to enter the Russian pipeline system to bring gas to Europe. Turkey could be served by using an existing Russian gas pipeline to Georgia and building a new pipeline from Georgia to Turkey.

To Iran and the Persian Gulf - Several proposals have been made to export Caspian oil via pipelines through Iran en route to the Persian Gulf. These pipelines are not likely to be built as long as the United States has sanctions against aid to Iran's oil and gas industries.

To Pakistan via Afghanistan - Turkmenistan signed a memorandum of understanding with Afghanistan and Pakistan to build a pipeline to carry natural gas to Pakistan via Afghanistan. These three countries plus Uzbekistan also signed a memorandum of understanding to build an oil pipeline to Pakistan, with the two pipelines sharing a common right-of-way for a portion of the route. However, the ongoing civil war in Afghanistan has prevented the project from going forward. While all of the major Afghani factions have agreed in principle to the construction of the pipelines, without a peace settlement the pipelines are unlikely to attract the necessary financing. In October 1997, a tripartite commission comprising the Islamic State of Afghanistan, Turkmenistan, and Pakistan was formed to start work on building this pipeline.

To Turkey - The Turkish port of Ceyhan is one of several oil export destinations being considered for the main export route for the Caspian Pipeline Consortium. Turkey is also looking for gas supplies in addition to the earlier-referenced deal to import natural gas from Turkmenistan via a pipeline that will likely cross Iran. The proposed cross-Caspian pipelines originating in Kazakstan or Turkmenistan could be extended to pass through Armenia or Georgia en route to Turkey.

Caspian Sea Legal Issues

Legal questions have slowed but not stopped development in the Caspian region. Legal issues surrounding the Caspian Sea's resources revolve around whether development rights are governed by treaties signed between the former Soviet Union and Iran (which did not establish seabed boundaries or discuss oil and gas exploration), and whether the Caspian is a body of water affected by the Law of the Sea (inland lakes are not covered by this law). If the Law of the Sea convention were applied to the Caspian Sea, full maritime boundaries of the five littoral states bordering the Caspian would be established based upon the equidistant division of the sea and undersea resources into national sectors. If the Law were not applied, the Caspian and its resources could be developed jointly.

The Russians have argued that neither the Law of the Sea nor its precedents apply because the Caspian is an enclosed sea. In December 1996, Russia called for joint navigation rights, joint management of fisheries and environmental protection, and the establishment of an interstate committee of all boundary states to license exploration in a joint-use zone in the center of the Caspian beyond a 45 nautical mile exclusive national zone, and a joint corporation of these states to exploit these resources.

Iran has backed Russia's claim that regional treaties signed in 1921 and 1940 are valid, implying that all Caspian littoral states must approve any offshore oil developments. Iran's support of Russian proposals for joint development could pose a problem for U.S. firms under Presidential Executive Orders which impose an embargo on trade and investment with Iran.

Azerbaijan has rejected this view, believing that boundaries were formalized under the Soviet Union. Azerbaijan has called for the Law of the Sea to be applied, and has advocated the establishment of maritime boundaries into national sectors based on the equidistant division of the sea. Boundaries would follow those established and recognized under the Soviet Union to delineate republic sectors for oil exploration and development.

Kazakstan has supported Azerbaijan's view for the establishment of national sectors, but has stated that cooperation on the environment, fishing, and navigation would be beneficial.

Turkmenistan's position is still evolving. It initially supported Russia's proposal for a 45- mile nautical zone at a November 1996 meeting in Ashgabat of the foreign ministers from the five littoral states. At that meeting, Turkmenistan signed a protocol with Iran and Russia to develop a joint-stock company to develop the energy resources in the national zones of the three countries. However, it has changed its position since then . In February 1997, the presidents of Turkmenistan and Kazakstan signed a statement calling for a division of the Caspian Sea based upon Soviet-era divisions until the littoral states agreed upon a new status for the Caspian. Turkmenistan's position changed again after a dispute with Azerbaijan over a field called Kyapaz by Azerbaijan and Serdar by Turkmenistan. Azerbaijan reached a preliminary agreement to develop this field in July, and Turkmenistan laid claim to it by including it as part of its Block 30 licensing in September. Oil Minister Batyr Sardjaev stated Turkmenistan's position: "We have decided we have to divide the Caspian on the principle of the median line". However, a final resolution of the Caspian issues has not yet been made.

The United States supports the principle that the resolution of the legal status of the Caspian Sea must be decided by the five littoral states. However, the United States would not favor any resolution that precludes American company involvement because of Iranian involvement.

Regional Conflict

Development of the oil and gas resources and export routes has been slowed by regional conflict, political instability, and lack of regional cooperation. Many of the proposed export routes pass through areas where conflicts remain unresolved. Most of these are in the Transcaucasus part of the Caspian region, where conflicts in Georgia, the Chechnya portion of Russia, and between Armenia and Azerbaijan, hinder the development of export routes westward from the Caspian. In addition, a civil war outside the Caspian region in Afghanistan has hindered exports eastward.

Armenia-Azerbaijan The western route for early oil from Azerbaijan passes just north of the breakaway Azeri region of Nagorno-Karabakh. Populated by ethnic Armenians, Nagorno-Karabakh had been an autonomous region under Soviet rule. Soon after Azerbaijan's independence in 1991, Armenian separatists declared control of an area equal to about 20 percent of Azerbaijan's territory. A Russian-mediated ceasefire has been in place since May 1994, and Russia, the United States, and France have tried to bring the sides closer together. Azeri President Aliyev has offered to route an oil pipeline through Armenia en route to Turkey, which would give Armenia transit revenues from the pipeline, in exchange for Armenian withdrawal from the occupied territories. Armenia has refused, and serious consideration of pipelines running from Azerbaijan through Armenia to the west remains unlikely as long as the conflict remains unresolved; skirmishes still flare along the Armenian border with Azerbaijan.

Relationships between Russia and Azerbaijan were strained when it became known that Russia shipped over $1 billion of arms to Armenia from 1993 to 1995. In the meantime, Armenia and Russia signed an updated friendship treaty at the end of the summer, as well as a deal to create a joint venture with Gazprom of Russia to supply Armenia with natural gas. Armenia's fuel supplies had been constrained by the Azeri blockade that followed the Nagorno-Karabakh conflict. Following the imposition of that blockade, the United States passed section 907 of the Freedom Support Act in October 1992, which restricts U.S. government assistance to Azerbaijan until Azerbaijan has taken "demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Nagorno-Karabakh".

Georgia The western route for early oil from Azerbaijan goes to the Georgian port of Baku on the Black Sea, and other proposed pipeline routes also pass through Georgia. Georgian President Shevardnaze narrowly escaped an assassination attempt on August 29, 1995, and President Shevardnaze expressed his belief that it may have been related to disputes over construction of an oil pipeline through Georgian territory. The proposed pipeline routes pass near several regions of Georgia that had been the site of separatist struggles, such as Abkhazia (northwest Georgia) and Ossetia (north central Georgia). Abkhazia won a civil war with Georgia in 1992-1993 with military backing from Russia, and has demanded to be a sovereign republic with minimal ties to Georgia. Georgia has expressed a willingness to grant Abkhazia some autonomy. Talks have continued to resolve the standoff, including proposals to route future oil pipelines across the rebel region, on the premise that economic cooperation could help bring peace to the region.

Russia/Chechnya The northern route for early oil from Azerbaijan passes for 80 miles through the breakaway Russian republic of Chechnya en route to the Black Sea port of Novorosiisk. Russian troops entered Chechnya in December 1994, and after almost 2 years of fighting, a peace agreement was reached. As part of that agreement, resolution of Chechnya's call for independence was postponed for up to 5 years. The peace agreement cleared the way for the July 1997 tripartite agreement between Azerbaijan, Chechnya, and Russia on early oil exports from Azerbaijan. While the deal allowed necessary repairs to begin on the existing oil pipeline, it did not settle the issues of regional security and pipeline tariffs. Chechnya and Russian transport company, Transneft, have been deadlocked over the issue of tariffs, with Chechnya demanding much higher rates - as much as $6 out of the $15.67 per ton tariff that Transneft will charge for pumping Azeri crude to the Black Sea. Chechen officials have also demanded war reparations from Russia totaling $1,500 trillion roubles (roughly $250 billion). Deadlocks over negotiations have prompted Russia to announce that it will simultaneously build another pipeline from Azerbaijan to Novorosissk that will bypass Chechnya. The proposed alternative pipeline would pass along the Chechen border in the southern Russian republic of Dagestan, and then go on towards the Stavropol region, ending at Terskoye in North Ossetia.

Afghanistan A memorandum of understanding has been signed to build a 900-mile natural gas pipeline stretching from Turkmenistan to Pakistan via Afghanistan. This eastward route, along with one to China, is one of the few alternatives to exporting Turkmeni gas through Iran. However, war-torn Afghanistan continues to experience new upheavals, and in the absence of a stable government in Afghanistan, it may be years before the project is feasible.

The Bosporus/Black Sea

Many of the proposed export routes from the Caspian region pass westwards through the Black Sea and the Bosporus en route to the Mediterrean Sea and world markets. The ports of the Black Sea, along with those in the Baltic Sea, were the primary oil export routes of the former Soviet Union, and the Black Sea remains the largest outlet for Russian oil exports. Exports through the Bosporus have grown since the breakup of the Soviet Union in 1991, and there is growing concern that projected Caspian Sea export volumes exceed the ability of the Bosporus to accommodate the tanker traffic. Turkey is concerned that that the projected increase in large oil tankers would pose a serious navigational safety and environmental threats to the Bosporus. These concerns are recognized in customary international law and reflected in the Law of the Sea Convention.

The introduction of a modern navigation system could improve the safety and operation of the Bosporus. However, export routes which bypass the Bosporus will eventually have to carry most of the Caspian oil exports. To resolve the anticipated problems in the Bosporus, Turkey has proposed the construction of a pipeline from the Caspian region to the port of Ceyhan on Turkey's Mediterranean coast.

Alternate plans have included exporting oil via the Black Sea but bypassing the Bosporus. In January 1997, Greece agreed with Bulgaria and Russia on a plan to build a 200-mile-long oil pipeline linking the Bulgarian port of Burgas on the Black Sea with Alexandroupolis on the Mediterranean coast of Greece. Other proposed export routes bypass the Bosporus and Mediterranean region altogether.

Iranian Issues

President Clinton signed Executive Orders in 1995 that prohibit U.S. companies and their foreign subsidiaries from conducting business with Iran and Libya. In August 1996, President Clinton signed the Iran and Libya Sanctions Act of 1996. This legislation imposes sanctions on non-U.S. companies which invest more than $40 million annually in the Iranian and Libyan oil and gas sectors. The maximum investment allowable dropped to $20 million one year after enactment for countries not undertaking measures to inhibit Iran's actions in supporting international terrorism and pursuit of weapons of mass destruction. The Act requires that sanctions be imposed for a minimum of 2 years. These prohibitions in the Act and Executive Orders would likely apply to any joint-use arrangements in the Caspian Sea, including the Iranian sector of the Caspian Sea.

The U.S. State Department decided in July 1997 that proposed exports of natural gas from Turkmenistan to Turkey via Iran do not technically violate the law. However, the U.S. position could change if a memorandum of understanding to build an export pipeline across Iran results in a construction contract with more than $20 million of outside investment.

*only the regions near the Caspian are included
BBL = billion barrels, Tcf = trillion cubic feet

*only the regions near the Caspian are included
** includes these regions bordering the Caspian Sea: Astrakhan, Kalmyk Republic, Dagestan, and Stavropol Kray

*only the regions near the Caspian are included

Figure 2. Existing and Potential Oil and Gas Export Routes from the Caspian Basin

For more information on the Caspian Sea Countries, see these other sources on the EIA web site:
Links to specific Country Analysis Briefs for Caspian Sea countries:
Azerbaijan
Iran
Kazakstan
Russia
Turkmenistan
Uzbekistan

Links to other Sites:
United States Information Agency - U.S. Policy towards Iran
BISNIS - the Department of Commerce's Business Information Service for the Newly Independent States

The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.

United Nations - Oceans and Law of the Sea
Christian Science Monitor - Caspian Journey

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File last modified: October 29, 1997

Contact:

Erik Kreil
ekreil@eia.doe.gov
Phone: (202)586-6573
Fax: (202)586-9753

URL: http://www.eia.doe.gov/emeu/cabs/caspian.htm