Geopolitical consequences of the demise of the Soviet Union

One important geopolitical consequence of the demise of the Soviet Union was the rise of intense political and commercial competition for control of the vast energy resources of the newly independent and vulnerable states of the Caucasus and Central Asia. The fact that the three countries which share the majority of the region’s energy and resources, namely Kazakhstan, Azerbaijan and Turkmenistan, are landlocked makes them depend on their immediate neighbors for access to the World markets. Foreign policy concerns related to the regional balance of power, national security, and potential economic benefit have led four external powers to strive for export pipelines to be built across their territory: Russia, Iran, Turkey, and China. A fifth country, the United States has increased its own efforts to influence the pipeline derby. The alternatives to exporting oil and gas through the Russian pipeline system are exporting through war-torn Afghanistan, through Iran, or by building some of the world's longest pipelines to markets in China and Europe. The routing of new oil and gas pipelines from the Caspian basin will greatly influence the region's future geopolitical orientation.

The United States supports the construction of a longer pipeline, which would begin at Baku, transit Georgia and much of Turkey before exiting at the Mediterranean Sea port of Ceyhan. The United States supports the construction of a longer pipeline, which would begin at Baku, transit Georgia and much of Turkey before exiting at the Mediterranean Sea port of Ceyhan. However, oil companies have been lukewarm towards the Baku-Ceyhan route because due to its enormous cost. Crossing roughly 1040 miles through mountainous territory, construction of this pipeline would cost $4 billion, exceeding by cost substantially any likely alternatives.

The AIOC’s successive refusals to commit to the Baku-Ceyhan route, ending in a final, indefinite postponement of any decision until today, created a disappointment for the US, Turkey, Georgia and Azerbaijan.

If genuine American national interests are at stake, the US government needs to enhance its efforts throughout the region to support the Baku-Ceyhan pipeline route as well as to support American companies. It should offer greater incentives for the oil companies. Alternatively, it should persuade Turkey to provide significant reductions in transit fees and other concessions to reduce the overall costs of the Baku-Ceyhan pipeline. Finally, the US government should encourage greater communication and dialogue between AIOC representatives and Turkish, Georgian and Azerbaijani government officials.

Introduction

In the past a few years, foreign policy specialists, oil companies, Western World, and the countries surrounding the Caucasus and Central Asia have been paying an increasing amount of attention to this southern tier of the former Soviet Union and specifically to the geopolitical issues surrounding the development and transportation of Caspian gas and oil. Caspian gas and oil is indeed at the center of the region’s evolving international relations, and the future of energy developments in the area certainly cannot be understood without taking into account the role and interests of the United States at this stake.

General Background

One important geopolitical consequence of the demise of the Soviet Union was the rise of intense political and commercial competition for control of the vast energy resources of the newly independent and vulnerable states of the Caucasus and Central Asia. The ex-Soviet republics of Central Asia, especially Azerbaijan and Kazakhstan, have been trying to exploit their natural resources, since they consider oil to be the prime means of securing their economic and political independence. Most of the oil and gas reserves in the Caspian region 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 Kazakhstan and Turkmenistan are offshore as well. Proven oil reserves for the entire Caspian Sea region are estimated at 16 – 32 billion barrels, comparable to those in the United States (22 billion barrels) and the North Sea (17 billion barrels). Natural gas reserves are even larger, accounting for almost 2/3 of the hydrocarbon reserves (proved plus possible) in the Caspian Sea region. Based upon proven reserves, Kazakhstan, 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 (Tcf), comparable to North American reserves (300 Tcf).

The prospect of potentially enormous hydrocarbon reserves is part of the magnetism of the Caspian region. Besides the 16-32 billion barrels currently proven, the region's possible oil 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 Possible gas reserves are as large as the Caspian's proven gas reserves, and could yield another 328 Tcf if proven.

Although the stakes involved remain the same, i.e., power, influence, security, wealth, the new playing field is further complicated by an array of problems. These include intra-regional conflict, political instability, fierce competition among multinational corporations, and a shortfall in commercial expertise and legal infrastructures. Moreover, the fact that the three countries which share the majority of the region’s energy and resources, namely Kazakhstan, Azerbaijan and Turkmenistan, are landlocked makes them depend on their immediate neighbors for access to the World markets.

The distance from potential markets and the relative lack of infrastructure to export this oil and gas have tempered interest in the region's potential. The alternatives to exporting oil and gas through the Russian pipeline system are exporting through war-torn Afghanistan, through Iran, or by building some of the world's longest pipelines to markets in China and Europe.

Energy security is an important issue, and under any scenario the Caspian is going to contribute significantly to global energy supply. But energy security is not at the core of the region’s geopolitical significance, in obvious contrast to the Persian Gulf. The routing of new oil and gas pipelines from the Caspian basin will greatly influence the region's future geopolitical orientation. Trans-border pipeline infrastructure is a relatively long-term way to link countries together. Agreements, treaties, and alliances can, to varying degrees, be ignored or renounced while pipelines survive longer since they tie economic interests and often link political interests of countries. This political aspect of pipelines is well understood by the countries that border on the Caspian region.

Foreign policy concerns related to the regional balance of power, national security, and potential economic benefit have led four external powers to strive for export pipelines to be built across their territory: Russia, Iran, Turkey, and China. A fifth country, the United States has increased its own efforts to influence the pipeline derby. In the middle are the Caspian states, seeking to take advantage of their influence over pipeline choices to advance their own prosperity, security, and independence. Meanwhile the companies that will actually finance, build, and use the pipelines are studying the technical and commercial details of the various ...

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Key issues in this region include:

Legal issues concerning ownership and development rights in the Caspian Sea;
Regional instability;
Development of transnational export routes to take oil and gas from the landlocked Caspian Sea region to world markets;
The related issue of energy exports through the Bosphorus and into the Black Sea;
Iranian sanctions and the role of Iran.

American Goals and Objectives In the Caspian.

The USA leads the world in oil consumption, with 18.9 million barrels of oil in a day in 1998. Sharply lower U.S. crude oil production combined with a strong increase in oil demand led the United States to import 9.8 million barrels of oil in a day in 1998. As the numbers show, more than 50% of US oil consumption is imported, so that dependence on oil imports is expected to rise steadily in the next decade. Even though US government committees, examining the issue, have found that dependence on oil imports threatens US national security, American oil policy has not changed radically with regard to imports. These findings have not led to the formation of a new oil policy which would aim at the progressive reduction of oil imports. They have, however, led the American Government to seek diversification of supply, to avoid dependence on a single supplier or team of suppliers. The addition of new exporters, such as Kazakhstan and Azerbaijan, to the already existing oil-producing and exporting countries provides more freedom of choice for importing countries such as the US, while it also helps to keep oil prices down.

Within this framework, one can explain the American interest in the Caspian Sea basin for following economic reasons:

The oil of this region is considered to be of good quality.
The biggest part of this oil is intended for export, since the needs of the producing countries are relatively low and are expected to remain low. This implies that new sources of supply outside the OPEC countries will bring energy security for the Western countries.
The fact that the countries of the region lack the capital and the technology to proceed independently to the development of these oilfields offers American companies considerable investment opportunities.

At the economic level, the development of the oil industry of these countries means investment opportunities for the American construction and oil companies. Politically, the United States will be in a position to control these new important energy resources and diversify its own sources supply. American private companies have been supported by the US Government in at least two countries of Central Asia, namely, Kazakhstan and Azerbaijan.

But the issue of access to the oil and natural gas of the Caspian Sea is not isolated one; it is linked to other important US strategic interests in Eurasia. At the geopolitical level, the United States wants to help the countries of Central Asia to develop their oil and natural gas industries. According to the estimates of the American Government, this development will bring about economic growth and will help these countries move away from the Russian sphere of influence and prevent the possible re-emergence of a new Russian empire in the Eurasia.

Other American political objectives include the containment of Iran and the reinforcement of Turkey’s role in the region. The US government has generally viewed Turkey, as able to foster pro-western policies in the region. In addition, by playing host to pipelines, Turkey would earn significant revenues through the collection of transit fees and other payments. Moreover, Central Asia offers a safe alternative in regional integration for Turkey in the event that the European Union continually rebuffs Ankara’s bid for membership.

As far as Iran is concern, the US thinks extensive Turkish involvement in the region will discourage Iranian interference in the Caucasus states. The US has not only blocked any pipeline route passing through Iran, but has also cancelled Iran’s participation in the international consortium which has undertaken oil production in Azerbaijan.

However, from the perspective of some of the key actors in the Caspian region such as the oil companies, geopolitics is a sideshow. Their interest is rooted in their strong commercial interest in participating in the development of Caspian oil. The commercial realities of Caspian oil are often ignored or misunderstood in the face of more exciting geopolitical aspects, but they are no less important to a complete understanding of the region.

Transportation, meaning primarily pipelines but also including tanker transport issues, sits right at the intersection of politics and economics. Oil transportation is obviously very political. All of the proposed export routes from the Caspian region transit several countries, and the governments in the area have very strong interests as they should in where those pipelines run because their routes will give certain countries a great deal of leverage. All the same, the commercial realities of these pipelines are also very important because projects that are not commercially viable simply cannot happen.

To sum up, United State’s foreign policy in Central Asia is founded on the following rationale:

The US intends to help the former Soviet republics of Kazakhstan and Azerbaijan develop their oil and natural gas industries.
Through the development of their oil and gas industry, which will bring economic growth, the US hopes to extricate them from the Russian sphere of influence.
The US Government is actively supporting American companies in Central Asia involved in oil development as well as in the construction of pipelines which will channel the oil to the West.
The US will try to channel the oil coming from those countries into the international markets in order to diversify its own sources of supply and keep oil prices at low levels.
The US Government believes that economic growth will promote regional stability and the resolution of local disputes.
The US aims at reinforcing the role of Turkey in the region, while at the same time maintaining the policy of containment and isolation of Iran. For that reason it has actively lobbied for a pipeline which will transport oil from Baku to the Turkish port of Ceyhan.

Alternative Transport Options For Caspian Oil

Northern Route: The Caspian Pipeline Consortium has chosen the Tengiz-Novorosiisk route to transport Kazakh oil to world markets. The CPC will build a new pipeline from the Astrakhan region to the Black Sea port of Novorosiisk. The CPC received final approval from the Russian government in November 1998 to build the pipeline, allowing construction to begin. During its 35-40 year expected life, the pipeline could bring in about $33 billion in revenues for the Russian government, including $23 billion in taxes.

Novorosiisk also has been chosen as the last stop for the northern route for early oil export route for AIOC oil. An existing pipeline runs from the capital of Baku to Novorosiisk, a Russian port on the Black Sea. This 60-cm-diameter pipeline, while recently rehabilitated, only retains the capacity for 180,000 barrels per day, runs through the war-torn Chechnya region, and is considered a medium-term option only. The pipeline will not be able to handle the expected volume once the three major oil fields in Azerbaijan come fully on-line, expected in the early part of the next decade. In fact, Moscow has urged construction of a larger pipeline that would run alongside the existing line. However, both Azerbaijan and the U.S. government oppose this proposal, because they fear that it would provide Moscow with undue leverage over Azerbaijan.

Western Route: The United States supports the construction of a longer pipeline, which would begin at Baku, transit Georgia and much of Turkey before exiting at the Mediterranean Sea port of Ceyhan. In an effort to turn this into an alternative not only for Azerbaijan but for Central Asia as well, the US began in 1997 to push the idea of an oil pipeline that would pass under the Caspian Sea itself, winning the backing of both Kazakhstan and Turkmenistan. The US has supported trans-Caspian routes also as an alternative to pipelines passing through Iran.

However, the cost of Baku-Ceyhan has been a major issue. Despite Turkey's assertions that Baku-Ceyhan would be economically viable, members of the Azerbaijani International Operating Company, a consortium consisting of twelve shareholders in which American companies have %43.8 share, have delayed choosing a route, especially at a time of low world oil prices.

In addition, the proposals for trans-Caspian pipelines which will combine Kazakhstan oil to Baku-Ceyhan pipeline have raised a series of Caspian Sea legal and environmental issues amongst all of the Caspian littoral countries. Russia and Iran have raised concerns about the environmental impact of Caspian Sea development, and in the past have opposed the laying of trans-Caspian pipelines on ecological grounds. There is also territorial disputes need to be resolved regarding the Caspian Sea between littoral countries.

Apart from geopolitical reasons, the Baku-Ceyhan route offers several commercial advantages.

First of all, it would avoid expansion of tanker traffic through the overcrowded Bosphorus Straits. The Novorosiisk and Supsa routes require that tankers transport Azerbaijani oil exports through the Straits in order to access the Mediterranean and, hence, the Western European markets. But the Ceyhan option would avoid the Black Sea and the Bosphorus Straits altogether. Any shipping accident in the Bosphorus, which is always possible, would have no effect on the continued flow of oil to the West.

Secondly, the Baku-Ceyhan route would offer greater political stability, although the ever-present threat of Kurdish terrorism does not make Turkey an automatic safe-haven.

Thirdly, Ceyhan already has a modern tanker loading and storage facility (previously linked to the Iraqi oil pipeline which Turkey shut down in 1990) and needs no additional construction. Ceyhan can handle the largest tankers in service, far larger than the size that can navigate the Bosphorus, and has four times the capacity of Novorosiisk. Ceyhan can also operate 365 days annually, compared to more difficult meteorological conditions in the northern Black Sea at Novorosiisk.

Fourthly, since Ceyhan is located in a NATO nation on the Mediterranean, it would provide maximum security for the Western consuming nations.

Nevertheless, oil companies have been lukewarm towards the Baku-Ceyhan route because due to its enormous cost. Crossing roughly 1040 miles through mountainous territory, construction of this pipeline would cost $4 billion, exceeding by cost substantially any likely alternatives.

Southern Route: The most direct and convenient route would flow southward through Iran to the Persian Gulf, offering more convenient access to the growing economies of South and East Asia. Iran has suggested that the best export route for oil from Kazakhstan and Turkmenistan is directly south through Iran via a proposed new pipeline to Tehran and Iran's network of pipelines and refineries. Iran also has suggested that Azerbaijan could transport its oil through Iran, either by shipping oil eastwards from Baku across the Caspian to the port of Turkmenbashi, Turkmenistan, where it could connect with the proposed new pipeline; or by transporting oil from Baku via a proposed 190-mile pipeline to Tabriz in northwest Iran, where it would also connect with the existing Iranian pipeline network and refineries.

Iran has also proposed that AIOC use an alternative route for the Baku-Ceyhan pipeline that passes from Azerbaijan through northwestern Iran en route to Turkey. The Iranian proposal suggests that this route would be cheaper than the current proposal that passes through Georgia and northeastern Turkey, and would allow for easier access to the Persian Gulf as well. The Iranian offer was formally rejected by the Azerbaijani Parliament, in November 1998. Ironically, Iran represents a haven of political stability for any pipeline in the context of the threats of Kurdish terrorism and Georgian separatism shadowing the Baku-Ceyhan route. However, a proposed Iranian route would conflict with the strict U.S. embargo against Iran and would require either the complete exclusion of American oil companies or an easing of U.S. policy towards Tehran. Moreover, the construction of the pipelines through Iran would increase Iranian leverage over world oil supplies, because Iran could shut the pipelines off at any time or obstruct tanker traffic out of the Persian Gulf through its control of the Straits of Hormuz.

Eastern Route: The most ambitious export route plan travel east, where China National Petroleum (CNP) have promised to finance pipelines traversing thousands of thousands of miles to the western China, and perhaps continuing onwards to Japan. According to a $3.5 billion project concluded in September 1997, the CNP will develop Kazakhstan’s Uzen and Aktyubinsk oil field and construct a 3,000 km pipeline to western China as well as 250 km pipeline to Turkmenistan, all to be operational by the 2002. Both pipelines face numerous financial and technical difficulties because of the distances and terrain along the route. Chinese pipeline proposal has a very large problem from a commercial perspective. On the face of it, it doesn’t make any sense commercially. But economics is not driving the project; it is quite clearly something that’s being driven 100 percent by strategic concerns, by Chinese geopolitical strategies rather than by any commercially driven concerns. This project is important to Beijing because of China’s need for new oil supplies and a concern with energy security.

Southeastern Route: The most risky of the planned alternative export routes is Turkmenistan’s notion for a 1,464-kilometer gas pipeline through Afghanistan to the Pakistani city of Multan. These three countries plus Uzbekistan also have 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. This eastward route, along with one to China, is one of the few alternatives to the Iranian route for exporting Turkmen oil and gas to Asian markets. In October 1997, a tripartite commission comprising the Islamic State of Afghanistan, Turkmenistan, and Pakistan was formed to start work on building this pipeline.

Unocal of the United States, offered to build the pipelines, however, no progress has been made on these pipelines due to the ongoing civil war in Afghanistan. Following the August 20, 1998 U.S. bombing raids on Osama bin Laden’s strongholds in Afghanistan, Unocal announced that it withdrew from the consortium.

Constraints to Caspian Pipeline Development

Regional Instability

Regional conflicts have caused instability in the South Caucasus and Central Asia. This poses a considerable risk factor for Caspian energy development and its transportation to global markets.

The northern routes from Baku and Tengiz through Russia will continue to be subject to chaos because of the disagreement between Russia’s central and regional authorities over the distribution of transit fees, instability in northern Caucasus, Russian use of pipelines as a political lever, as well as poor weather conditions and overcrowded port facilities at Novorosiisk. Already the early oil pipeline from Baku to Novorosiisk has been disrupted several times as a result of disagreements between Russia and Chechnya. Similarly, final completion of the Caspian Pipeline Consortium agreement has been delayed because of the disagreements between federal and local authorities regarding the distribution of transit fees.

Western routes under construction or negotiation have also possibility to be disrupted by instability in the region. The Nagorho-Karabakh conflict between Armenia and Azerbaijan represents the most serious threat to a western route. In Georgia, considerable progress has been made toward establishing a federal structure far more acceptable to the country’s ethnic minorities. However, the possible renewed hostilities between Ossetia, Abkhazia and Georgia could result in attacks against the Baku-Ceyhan pipeline that has to pass through Georgia. Finally, although its possibility is lower, Kurdish separatists in Turkey also represent a security risk for Baku-Ceyhan pipeline.

The southeastern routes will remain frozen until the civil wars in Tajikistan and Afghanistan are settled. The southern routes from the Caspian states via Iran and eastern routes from Kazakhstan Via China to Asia face no open hostilities now. However, there is potential for future conflicts, which could undermine stability in the region and complicate pipeline development. Two examples are northern Iran, which is home to more ethnic Azeris than Azerbaijan itself and the Uighur province in western China, where Uighur nationalists have called for a revival of an independent Turkestan, which could threaten both Kazakhstan and China.

Disputed Property Rights of The Caspian Sea

Resolution of the legal status of the Caspian Sea is an important issue affecting the sovereignty of the Caspian states, the pace of private sector investment in Caspian energy development and prospects for trans-Caspian pipeline development. Russia and Iran are attempting to block oil and gas development in the Caspian Sea by claiming that it is a lake and, therefore, that the Law of the Sea, which allows for national sectors on the continental shelf does not apply. There are three issues to be resolved. First, should be Caspian Sea be divided into national sectors or be subject to joint management of the littoral states? Second, should this rule be applied to each country’s entire national sector or be limited to subsea resources, with joint management governing fishing, navigation and environment? Third, should any littoral state have the right to exercise veto power over the construction of subsea pipelines outside its respective national sectors? Without an agreement on the status of the Caspian Sea, international financiers and multilateral development banks could withhold financing. In contrast, establishment of national sectors for subsea resources would encourage rapid energy development and a network of pipelines to export rising production.

Problems In The Turkish Straits

Caspian Sea oil from terminals in the Black Sea must pass through the narrow, congested, and ecologically sensitive Turkish Straits, the Bosphorus and the Dardanelles. Although Turkey remains committed to the 1936 Montreux Convention, which allows free shipping through the Bosphorus Straits, Turkey has objected to a dramatic increase of oil traffic through the already congested Straits on safety and environmental grounds. In the wake of the collapse of the Soviet Union, the sharply higher shipping accidents, mounting public safety and environmental concerns in Turkey's historic and most densely populated city, Istanbul, now represent important political problems for Turkey. As a result, due to the high probability of a serious tanker accident in the future, producers cannot rely on the status quo.

US Sanctions

U.S. sanctions policy directly affects Caspian pipeline development, notably through the Iran-Libya Sanctions Act (ILSA). The goal of the ILSA is to press for a change in Iran's foreign policy, which was widely criticized as being supportive of terrorism and weapons proliferation as well as undermining the Middle East peace process. In practical terms, ILSA prohibits foreign direct investment in Iran's energy capability and infrastructure and applies to U.S. business as well as third parties. However, geographically, Iran is an attractive outlet for Caspian Sea. Several main export pipeline options through Iran are under consideration.

Policy Recommendations

In the fall of 1997, as the deadline for the final judgment of the Azerbaijani International Oil Consortium (AIOC) on the routing of pipelines from the Azerbaijani oil fields grew closer, the Clinton administration appeared to have skillfully laid the groundwork for a favorable decision. Its comprehensive strategy of diplomacy, economic rewards and the promise of closer military ties had solidly placed President Aliyev, and thus Azerbaijan, in the U.S. camp. Azerbaijani officials welcomed their new alliance with Washington, recognizing that the westward routing of the transit pipelines would cement a strategic relationship with the United States into the next century. However, the AIOC’s successive refusals to commit to a specific route, ending in a final, indefinite postponement of any decision until today, created a disappointment for the US, Turkey, Georgia and Azerbaijan.

There are many reasons for this failure. While the US focused its lobbying on the Azerbaijani government, they paid insufficient attention to the oil companies which constituted the AIOC and were responsible for the ultimate decision. This neglect of oil companies carries important lessons in a world where multinational corporations often now influence geopolitical developments to an equal or greater extent than sovereign governments. While the support of the Azerbaijani government was crucial to construction of Baku-Ceyhan, that support was not sufficient by itself. The issue of the Caspian Sea pipelines remains a matter for the private sector. The oil companies are the primary customers of pipelines; consequently, the oil companies must pay the costs for new pipeline construction. Amoco, Mobil, and British Oil hold no concern for U.S. geopolitical interests or the Western orientation of Central Asian republics; their only priority lies in more profit. As a result, the combination of expensive construction/transit costs and low oil prices doomed the Baku-Ceyhan for the time being.

If genuine American national interests are at stake, the US government needs to enhance its efforts throughout the region to support the Baku-Ceyhan pipeline route as well as to support American companies. Other governments, such as Japan recognized the commercial opportunities in the region and have supported strongly their companies with high-level engagement, extensive credit lines, and other incentives. While understandable from a perspective of political feasibility, Clinton administration’s firm refusal to consider any direct US assistance to reduce the costs of the Baku-Ceyhan route strongly undermined its prospects for success until now. If the US government places so much strategic value in the construction of Baku-Ceyhan pipeline, it should offer greater incentives for the oil companies. Alternatively, it should persuade Turkey to provide significant reductions in transit fees and other concessions to reduce the overall costs of the Baku-Ceyhan pipeline.

Finally, the US government should encourage greater communication and dialogue between AIOC representatives and Turkish, Georgian and Azerbaijani government officials. Turkish government officials are reluctant to engage in specific negotiations with AIOC representatives over cost issue. The US government should encourage Turkey to be more cooperative. The US government should also consider offering greater economic assistance in comparison with the commercial relief the Turkish government should offer.

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