Pipelines and Pipe Dreams: Energy Development and Caspian Society
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Pipelines and Pipe Dreams: Energy Development and Caspian Society Martha Brill Olcott t is time to develop a new conventional wisdom to apply to the eight states of the Caspian Basin region,1 one that better recognizesI the regions implicit social weaknesses as well as its potential economic strengths. While the Caspian Basin states do have considerable oil and gas reserves, and while they are likely to eventually benefit from foreign direct investment in their energy sectors, the development of these sectors will take longer than was anticipated only a few years ago. This means that there is an increasing risk that the regions numerous social and economic problems will fester before adequate resources can be applied to remedy them. ...sole reliance on the energy sector is compromising the economic health of the Caspian states. While no one thought the economic transition necessitated by the end of Communist rule would be easy, the citizens of these states expected that the oil and gas beneath their feet would alleviate most of the pangs of that transition. In addition, they believed that their governments would make an honest attempt to provide for their basic social needs and that children would be able to live better than their parents had. In many of the Caspian Basin countries these dreams no longer seem likely to be realized. Numerous obstacles to extracting the regions energy have dulled visions of energy-generated wealth. As dreams of petrodollars fade, most of the states of the Caspian region have come to know the harsh realities of independence. During the Soviet era, Moscow policymakers drew the boundaries of the Caspian regions republics so that each was too weak to 1 The Caspian region consists of the three states of the south Caucasus (Armenia, Azerbaijan and Georgia) and five Central Asian states (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan). Journal of International Affairs, Fall 1999, 53, no. 1. © The Trustees of Columbia University in the City of New York. Journal of International Affairs stand on its own. The political vacuums left in the wake of the Soviet Unions collapse have highlighted these weaknesses and made these states breeding grounds for ethnic rivalries and extreme nationalist and religious groups. While the hot wars that characterized the regionGeorgia-Abkhazia, Armenia- Azerbaijan and the civil war in Tajikistanhave all cooled, the areas potential for violence is not yet exhausted. Disappointment over the decreasing prospect of oil windfalls has exacerbated some of the problems that independence has brought, decreasing the regions ability to realize its energy potential. Major Western oil companies are willing to do business with dictators, but they dont like making major investments in war-torn states. Developing oil and gas reserves in the landlocked Caspian region is challenging even under the best conditions. Serious social and political instability could result in oil companies choosing not to exercise their rights of deposit exploitation and withdrawing after the exploration stage. While all of these states have plans to develop diversified economies, economic recovery is still proceeding slowly, and even the partial withdrawal of Western oil companies would serve as a serious blow to the economic reform prospects of the region. Moreover, the region is heavily interconnected, and problems in one state spread easily to another. This is especially true within the two sub-regions of the Caspian Basinthe south Caucasus (Armenia, Azerbaijan and Georgia) and Central Asia (Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan and Uzbekistan). Trans-Caspian ties are rapidly growing stronger, driving all eight to greater interdependence. More than ever before, the solution to one states problems will likely involve all the others. THE CASPIAN CRAZE The international community has intuitively recognized these interconnections, and the fear that these make the region highly unstable helps to explain why energy companies did not immediately see the collapse of the Soviet Union as a potential bonanza. In 1991, when it first looked like these states were about to become independent, the international community was frightened by the likelihood of instability in the region. In all three south Caucasian states violent inter-ethnic disputes erupted, and several other potential conflicts were simmering. The five Central Asian states were considered even more fractious. Boundaries had been drawn to create diaspora communities throughout the region, 306 Martha Brill Olcott and fears were rampant that radical Islamic elements could further destabilize the situation. Islamic groups were already active in Central Asia, and their numbers were sure to grow due to the more fluid borders that independence was certain to bring. Several factors began to change this perspective, and by late 1993 interest in the Caspian region was on the rise in most Western countries. Although independence brought renewed violence to the region, outside observers began to see that the risk of widespread civil unrest could be contained. This seemed especially true if Russias role could be restricted. Moscow appeared as a strongly biased party in the Armenia-Azerbaijan dispute over the status of Nagorno-Karabakh,2 and even more so in the struggle between Georgia and the breakaway region of Abkhazia.3 Only in Tajikistan did Russia appear to be making a genuine contribution to peacemaking efforts, but the price Moscow was extracting was higha continuous military presence in the region.4 A few years earlier Russias meddling would not have seemed so troubling, but by this time Western oil companies were becoming keenly interested in the development of the Caspian Basins oil and gas reserves. The first post-independence estimates of these reserves indicated that the region was likely to be a new North Sea.5 In 1993, for example, Kazakhstans state statistics 2 In 1989 the soviet of the Nagorno-Karabakh autonomous region (situated within the Azerbaijan Soviet Socialist Republic) declared its autonomy, with the support of nationalists in Armenia. After the collapse of the Soviet Union, tensions between the Armenians and Azerbaijanis developed into open warfare between the two states. By October 1993 approximately one-fifth of Azerbaijani territory was under Armenian control. Since that time a cold war has continued between Armenia and Azerbaijan, and the conflict is currently under adjudication by the Minsk group of the Organisation for Security and Cooperation in Europe, which includes both the United States and Russia. 3 In 1989 there were violent clashes between Abkhaz and Georgian nationalists. The conflict between the two groups sharply heightened after nationalist figure Zviad Gamsakhurdiya came to power as president of Georgia in 1991. The Abkhaz peoplewho had an autonomous republic that was part of Georgiasought independence. Since 1993 the Abkhaz have enjoyed de facto independence while Russian-sponsored peace negotiations between the two sides have failed to break the impasse. 4 Tajikistan was a member of the Commonwealth of Independent States (CIS) throughout its civil war. By contrast, neither Azerbaijan nor Georgia were members of the CIS until 1993; they joined in part to give Russia a new incentive to develop a more neutral position. 5 North Sea output rose from roughly 2 million barrels a day in 1980 to 6.1 million in 1998about 8 percent of world demand. (Data provided by Petroleum Market Intelligence published by Energy Intelligence Group.) Proven oil reserves in the Caspian Basin are currently estimated at 15 to 31 billion barrels, about 2.7 percent of total world proven reserves. Individual country reserves in billon barrels are estimated at 3.6 to 6.3 for Azerbaijan, 10 to 22 for Kazakhstan, 1 to 1.5 in Turkmenistan and less than 1 in Uzbekistan. Future exploration may show that the 307 Journal of International Affairs committee predicted that the countrys natural gas production would reach 22 billion cubic meters by 2000 and 28.4 billion by 2010.6 This increased the potential strategic and economic interest of the region to Russia as well, which only frightened Western leaders about Moscows intentions. Not only did the Russians harden their position in negotiations over transit routes for pipelines, but they also claimed that the Caspian Sea reserves could not be developed without the consent of all parties. This combination of developments made the Caspian Basin region more strategically important for the United States and other members of the North Atlantic Treaty Organization (NATO) nations. Western oil companies became increasingly attracted to the region as well, especially since they continued to be frozen out of new projects in both Iran and Iraq. Energy development came to dominate Western discussions of the region. From the onset, analysts from international financial institutions understood that income from oil and gas development projects alone would not be sufficient to create the desired economic turnarounds in these countries. International financial assistance was made available for a host of economic projects with the goal of creating diversified and sustainable economies. Whenever possible, this aid was targeted toward stimulating macroeconomic reforms, which were seen as a necessary first step for even the richest states. Another priority was investment in transportion and communications, as their development potentially reduced dependence on Russia. However, outside donors assumed