University of Nevada, Reno The Caspian Sea Resources: The Foundation for a Path Forward for the Economic, Political and Social Development of Azerbaijan and Turkmenistan A thesis submitted in partial fulfillment of the requirements for the degree of Master of Arts in Political Science by Batyr Odeyev Prof. Robert L. Ostergard, Jr/Thesis Advisor May, 2011 THE GRADUATE SCHOOL We recommend that the thesis prepared under our supervision by BATYR ODEYEV entitled The Caspian Sea Resources: The Foundation For A Path Forward For The Economic, Political And Social Development Of Azerbaijan And Turkmenistan be accepted in partial fulfillment of the requirements for the degree of MASTER OF ARTS Prof. Robert L. Ostergard, Jr, Advisor Prof. Jiangnan Zhu, Committee Member Prof. Murat Yuksel, Graduate School Representative Marsha H. Read, Ph. D., Associate Dean, Graduate School May, 2011 i ABSTRACT This case study explores the Caspian Sea energy politics, specifically the Trans-Caspian Gas Pipeline (TCGP) project and the Azeri-Turkmen conflict over the three offshore oil and gas fields. The conflict has been a deadlock of the project. It is almost unfeasible constructing the TCGP underneath of the sea without finding a viable solution to the Azeri-Turkmen conflict. Discovering the essence of the problem may help to understand what is going on over there. However, without exploring domestic and international barriers in front of the bilateral (on the disputed offshore fields) and multilateral (on the TCGP project) negotiations, none could find a viable solution to these entangled problems. Thus, areas of the domestic-international interaction of the problem are addressed through a comparative analysis of the two countries under the guidance of the ‘two-level games’ theory. This study argues by making small compromises to each other Azerbaijan and Turkmenistan will see not only the long term economic benefits of the TCGP but also immediate political and social benefits. Consequently, this work suggests this is the right time to build the pipeline to develop oil and natural gas resources of the Caspian Sea for the economic, political and social development of Azerbaijan and Turkmenistan. ii ACKNOWLEDGEMENT I am thankful to my advisor, Prof. Robert L. Ostergard, Jr. for his clear guidance and close help for this study. I am also grateful to Prof. Jiangnan Zhu for her useful help to understand the Chinese part of the study and for her being on my committee. I thanks to Prof. Murat Yuksel for his being on my committee. Moreover, I appreciate my other professor’s and colleagues’ help to improve this study with their brilliant discussions. iii TABLE OF CONTENTS ABSTRACT ACKNOWLEDGEMENT TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES ABBREVIATIONS 1. INTRODUCTION 2. CASPIAN SEA BACKGROUND 2.1. Tripartite and Multipartite Struggles over the Caspian Sea Region 2.2. Puzzled Tangle: Disputed Legal Status of the Caspian Sea after 1991 3. THEORETICAL APPROACH & METHOD 3.1. Literature Review on International Negotiations 3.2. “Diplomacy and Domestic Politics: The Logic of Two-Level Games” 3.3. Method: A Metaphor for Domestic-International Interactions 4. DOMESTIC – INTERNATIONAL ENTANGLEMENTS 4.1. Domestic-International Interactions in the Azeri -Turkmen Conflict 4.2. The Importance of Win-Sets in a Viable Azeri-Turkmen Negotiation 5. WHO SUPPORTS WHOM? 5.1. Domestic Barriers of Bilateral and Multilateral Negotiations 5.1.1. Bureaucracy and Interest Groups in Turkmenistan and Azerbaijan 5.1.2. Ratification: Political Institutions at the Level II of Each Country 5.2. International Barriers: Matching National Interests and Resource Rivalries iv 5.2.1. Strategies and Maneuvers of the Level I Negotiators 6. CASPIAN SEA AND REGION – SMELLING ISHLEKLI 6.1. Bargaining Tactics: Help to Cook then You May Eat Ishlekli 6.2. Second attempt: Restructuring the Negotiation Process 6.3. Role of Visionary Leaders in a Viable Solution 7. CONCLUSION APPENDIX REFERENCES v LIST OF TABLES Table 1. Oil and Gas Review of Azerbaijan and Turkmenistan in 2009 Table 2. Estimated oil and gas reserves of Turkmenistan vi LIST OF FIGURES Figure 1. Effects of reducing win-set size. Figure 2. Claim of Turkmen side for its sector in the Caspian Sea Figure 3. Division of Stakes in “Contract of the Century Figure 4. Shareholders of BTC Oil Pipeline Figure 5. Shareholders of BTE Gas Pipeline Figure 3. Possible win-set sizes of a Azeri-Turkmen negotiation. Figure 4. Main natural gas transportation routes in the Caspian and South Caucasus Figure 5. Main oil transportation routes in the Caspian and South Caucasus Figure 9. Azerbaijan’s Natural Gas Production and Consumption 1992-2008 Figure 10. Azerbaijan’s Oil Production and Consumption, 1997-2008 Figure 6. Turkmen food Ishlekli Figure 12. Energy Production of Turkmenistan 1990-2008. Figure 13. Energy Production of Azerbaijan 1990-2008. Figure 14. Azerbaijan’s Current Gas Export. vii ABBREVIATIONS AIOC- Azerbaijan International Operating Company BP-British Petroleum BTC- Baku-Tbilisi-Ceyhan BTE-Baku-Tbilisi-Erzurum CACI-Central Asia-Caucasus Institute CPI- Corruption Perceptions Index EEZ-Exclusive Economic Zone EITI- Extractive Industry Transparency Initiative EU-European Union ILSA-Iran-Libya-Sanctions Act MEP - Multiple Export Pipeline LNG-Liquid Natural Gas Nabucco- Turkey–Austria gas pipeline NATO-North Atlantic Treaty Organization NOCs-National Oil Companies OPEC- Organization of the Petroleum Exporting Countries OSCE-Organization for Security and Co-operation in Europe SAIS- School of Advanced International Studies SIPA-Colombia University’s School of International and Public Affairs SOCAR- State Oil Company of Azerbaijan Republic SOEs-State Owned Enterprises TAP-Trans-Adriatic Pipeline TAPI -Turkmenistan-Afghanistan-Pakistan-India gas pipeline viii TCGP-Trans-Caspian Gas Pipeline TGI- Turkey-Greece-Italy UN-United Nations UNCLOS- United Nations Convention on the Law of the Sea US-United States USSR- Union of Soviet Socialist Republics 1 1. INTRODUCTION “Foreign policy is not as foreign as you think; there are domestic components of it”. (Robert L. Ostergard, Jr) Oil and natural gas resources of the Caspian Sea have become vital to Azerbaijan and Turkmenistan for their economic, political and social development. However, the land-locked location of these countries has made it difficult to export those resources successfully to the world market. The westward export option of the Turkmenistan, Trans-Caspian Gas Pipeline (TCGP) project has been primarily precluded because of its territorial conflict with Azerbaijan over the three disputed oil and gas fields in the Caspian Sea. On the other hand, as Tsereteli (2010) argued lack of strong political commitment and purchasing guarantee by the European consumers prevent Turkmenistan from taking such a risk. Thereby, construction of the TCGP is impossible by any unilateral endeavors. A viable solution for the problem necessitates 1) a bilateral negotiation between Azerbaijan and Turkmenistan over the disputed offshore fields, and 2) a multilateral agreement among participant countries of the project. First, a negotiation over the three disputed offshore oil and gas fields will accelerate the settlement of a new legal regime on the Caspian Sea. A step by step solution through bilateral agreements over the delimitation of the Caspian Sea has come to a deadlock between Azerbaijan and Turkmenistan. Azerbaijan’s unilateral activities in the development of above-mentioned fields caused a reaction from the Turkmen side in 1997. As Lee (2005) said the country has continued to explore oil in the Azeri and Chirag fields while stopped developing the Kyapaz field, even though Turkmenistan requested a stop to production at all of three fields until a maritime status of the Caspian 2 Sea is settled. Therefore, if they solve the problem, the same practice might be applied in the case of a disputed Inam field between Iran and Azerbaijan too. Finally, bilateral agreements which are a prerequisite for the general agreement on the delimitation of the Caspian Sea will be completed. On the other hand, there is an approach that the construction of the TCGP might be possible without a solution over the disputed fields. As Tsereteli (2010) said Turkmenistan could supply natural gas for the pipeline from the other fields in its sector. However, this option failed at the first attempt ten years ago because of the reluctance of oil companies to invest in such a disputed area and the failed bargaining between Azerbaijan and Turkmenistan over the volume share of gas supply through the pipeline. Otherwise, accomplishment of the TCGP will innately help to solve the conflict. Therefore, a viable solution to the conflict between Azerbaijan and Turkmenistan is a necessary step for the future security of the pipeline and to attract foreign investment. Second, an agreement among participant countries of the project will serve as a political commitment. As Tsereteli (2010) stated consumers of the TCGP which are Bulgaria, Hungary, Romania, Austria under the umbrella of the European Union (EU) could be a mediator to solve the conflict between Azerbaijan and Turkmenistan. Turkey will also buy a significant volume of the natural gas through this pipeline, but it is difficult to say it could be a mediator alone. Nevertheless, Turkey can play the role of a transit country and therefore, it could contribute to the solution of the problem. Georgia will participate to the TCGP project as a transit country. Greece, Italy and Ukraine, potential consumers will also support the project. 3 The vulnerable energy security of the European countries necessitates them to find an alternative supply which bypasses Russia. Otherwise, they will always face a Russian threat as they did in 2006 gas crisis. As Tsereteli (2008) argued Europe could handle this dependency by following a proactive policy and this also could be possible with a unified, strategic policy toward new alternatives of economic and energy security. He adds that the Black Sea and the Caspian region is a potentially significant market for the EU not only for energy resources but also for the trade and social potential of the region.