Caspian Sea Energy: Oil, Politics and Development in the Caspian Sea Region Chris Light CPE 825 01 May 2004 Table of Contents Objective 1 Geographical Areas of Interest 2 Caspian Sea 2 The Russian Federation 3 Islamic Republic of Iran 5 Republic of Azerbaijan 7 Republic of Kazakhstan 9 Republic of Turkmenistan 11 Oil Reserve Definitions 13 Caspian Sea Reserve Estimates 14 Caspian Oil Reserves in Perspective 16 Caspian Oil Production 17 Transportation of Caspian Petroleum Products to World Markets 18 Current Infrastructure 18 Proposed Projects 19 Project Development – Political and Economic Issues 20 Legal Debate on International Division of the Caspian Sea 22 Geopolitics in the Caspian Region 25 Summary 30 Works Cited 32 Appendices Appendix A: BP Statistical Review of World Energy 2003 Appendix B: Oil and Gas Journal Worldwide Look at Reserves and Production Appendix C: Energy Information Administration Oil Export Routes and Options in the Caspian Sea Region Appendix D: 1982 United Nations Convention on the Law of the Sea Objective Oil and natural gas fuel the economies of the world. Energy consumption can be directly correlated to national development, impacting virtually every aspect of a society from national security to the average citizen’s standard of living. The technological advances of the last hundred years require governments to secure sizable reserves and reliable sources of petroleum. Since the infancy of the oil industry the Caspian region has played an important role in world events. As an example, the oil fields of Baku represented key strategic objectives in both World War I and World War II. Many have argued that the outcomes of these conflicts could have been significantly altered had Germany succeeded in seizing and exploiting these assets. Prior to 1991 the Caspian was, for all practical purposes, a Russian lake. The dissolution of the Union of Soviet Socialist Republics in 1991 had a profound impact on the Caspian region. The conflicting interests of the newly independent nations surrounding the Caspian and the discovery of potentially enormous hydrocarbon reserves has once again thrust Caspian oil to the forefront of international politics. The purpose of this paper is to present the major issues impacting Caspian hydrocarbon development. Specifically, a number of topics including the regions geography, history, governments, politics and reserves will be introduced to provide the reader with the framework necessary to fully understand the current and future importance of the Caspian to the international community. After establishing this foundation, current and future projects as well as legal issues and disputes will be discussed. Finally, the reader will be introduced to the geopolitics of the region as well as the related topic of foreign investment. Ultimately, the goal of this paper is to provide the reader with a general, unbiased view of the Caspian region, its resources, historical and future challenges and its relevance to world petroleum markets. 1 Geographical Areas of Interest Caspian Sea The Caspian Sea is the largest lake in the world. Covering 144,000 square miles, this salt lake lies between Europe and Asia. It is bordered on the northeast by Kazakhstan, on the southeast by Turkmenistan, on the south by Iran, on the southwest by Azerbaijan, and on the northwest by Russia. The Caspian reaches its maximum depth of 3,200 feet in the south; the shallow northern half averages only about 17 ft. The Caucasus Mountains rise from the southwestern shore, and the Elburz Mountains parallel the southern coast. Although the Caspian receives inflows from five rivers including the Volga (which supplies more than 75% of its inflow), Ural, Emba, Kura, and Terek Rivers, it has no outlet. The damming and diversion of the Volga's water for industrial and residential use have been the leading reasons for the historical lowering of the Caspian's water level, a problem of serious proportions. Underlying the Caspian are some of the world's largest oil reserves, and the five surrounding countries, all with major stakes in oil-field development, have disputed zones of control. (Source: The Columbia Electronic Encyclopedia, 6th ed. Copyright © 2003, Columbia University Press) The current and future development of Caspian Sea oil reserves will be determined by those nations bordering the Caspian. These culturally and politically diverse nations include Russia, Iran, Azerbaijan, Kazakhstan and Turkmenistan. A brief introduction and overview of each of these nations is presented as general background. 2 Russian Federation Background: With a land area almost twice the size of the United States the Russian Federation is the largest nation in the world. Despite an abundance of natural resources including large deposits of oil, natural gas, coal and thousands of miles of coastline Russia is not favorably located in relation to major sea lanes. Prior to 1991Russia was the epicenter of the Union of Soviet Socialist Republics (USSR). From 1917 to 1991Russia and its satellite nations were characterized by communist governments and tightly controlled command economies. In December 1991 the USSR splintered into 15 independent republics. Since then, Russia has struggled in its efforts to build a democratic political system and market economy to replace the strict social, political, and economic controls of the Communist period. In the Caspian Sea region Russia shares a border of 284 km with Azerbaijan and a border of 6,846 km with Kazakhstan. Additionally, Russia shares a border of 723 km with Georgia, a country which occupies a key geographical position between the Caspian Sea and the Black Sea. Other borders of political interest include shared borders with China, Mongolia and Ukraine measuring 3,645 km, 3,485 km, 3 and 1,576 km respectively. Russia’s maritime claims include territorial seas of 12 NM, an exclusive economic zone of 200NM and continental shelf zone of 200 meter depth or to the depth of exploitation. The Russian Federations population of nearly 145 million is composed of numerous ethnic groups. The largest ethnic group by far is Russian (81.5%) followed by Tatar (3.8%) and Ukrainian (3%). Major religions include Russian Orthodox and Muslim. The Russian Federation is a constitutional federation with a legal system based on civil law and judicial review of legislative acts. Important political figures include the Chief of State, President Vladimir Vladimirovich Putin and the head of the government, Premier Mikhail Mikhaylovich Kasyanov. Economic overview: Despite the best efforts of its leaders The Russian Federation is still struggling to establish a modern market economy. Russia is striving to establish stable conditions including low inflation rates in the 3-5% range, a strong central banking system, and an effective rule of law. If Russia ever hopes to become a member of the European Union (EU) they must attain these goals. In Russia’s first five years of independence the economy contracted severely as it struggled with the challenges associated with converting the economy from a centralized system to a market system. Following the 1998 depreciation of the ruble (60% depreciation) and a debt default by the government the economy subsequently rebounded, growing by an average of more than 6% annually in 1999-2002. In 2002 the estimated real GDP growth rate was 4.3%; however, the inflation rate during this period was 15%. The majority of the economic growth realized over the last few years can be directly linked to higher oil prices and the depreciation of the ruble. In Fiscal Year 2001 Russia received $979 million in economic aid from the United States and $200 million in aid from the EU. It is important to note that oil, natural gas, metals, and timber account for more than 80% of Russian exports, leaving the country vulnerable to swings in world prices. (Source: Central Intelligence Agency World Factbook) 4 Islamic Republic of Iran Background: Unlike the Russian Federation, Iran is ideally located in relation to major sea lanes. Iran’s eastern and southern borders include the Persian Gulf and the Strait of Hormuz, considered vital sea lanes for crude oil transport. Prior to 1935 Iran was known as Persia. In 1979 Iran became an Islamic republic following the exile of the Shah. Conservative clerical forces established a theocratic system of government with ultimate political authority vested in a religious scholar. During 1980-88, Iran was involved in a war with Iraq over disputed territory; the outcome of the war was generally regarded as indecisive. In recent years poor economic conditions and dissatisfaction with the government has created pressure for political reform. Iran borders the Caspian Sea, with 740 km of the Caspian’s shoreline contained within its borders. In the Caspian Sea region Iran shares a border of 432 km with Azerbaijan (in addition to 179 km shared with the Azerbaijan-Naxcivan exclave) and a border of 992 km with Turkmenistan. Other borders of political interest include shared borders with Iraq (1,458 km), Afghanistan (936 km), Armenia (35 km), Pakistan (909 km), and Turkey (499 km). Iran’s maritime claims include a contiguous zone of 24 NM, territorial seas of 12 NM, an exclusive economic zone comprised of bilateral agreements or median lines in the Persian Gulf and a continental shelf zone defined by natural prolongation. Like Russia, Iran’s population of nearly 70 million people is composed of numerous ethnic groups. The five major ethnic groups include Persian (51%), Azeri (24%), Gilaki / Mazandarani (8%), and Kurd 7%. In addition a small number of Arab (3%) and Turkmen (2%) peoples also reside in Iran. Iran is almost exclusively Muslim with Shi'a Muslims comprising 89% of the population and Sunni Muslims accounting for 10% of the population. 5 The Islamic Republic of Iran is a theocratic republic containing 28 provinces. The Iranian legal system is based on Islamic principles of government.