Caspian Gas.

Oil once it is on board a tanker is an internationally tradable commodity. Gas export, on the other hand, is generally tied to dedicated pipelines for long-term sales into regional markets.

The Caspian is surrounded by a surfeit of proven gas reserves (more than two thirds of the world total), but with a corresponding absence of regional markets. For South Caspian gas this market is Turkey. For North Caspian and Central Asian gas it is Russia.

Until their recent economic collapse, Turkey was projecting a demand growth for domestic gas (primarily for power stations) rising to 44bcmy in 2005, 52bcmy in 2010, to 70bcmy in 2015. These demand numbers have now been radically downsized (by at least 30%) so that Turkish gas demand to 2010 should be met by existing gas sales and supply contracts with Russia (Balkan and Black Sea transit) Iran and Azerbaijan (Shah Deniz phase one), as well as from other supplementary LNG contracts.

The supply of Turkmen gas to Turkey via a Trans-Caspian gas pipeline is no longer feasible. Even the gas potential from the full field development of Shah Deniz exceeds Turkish short to medium term gas needs.

The currently stalled negotiations with Georgia for Shah Deniz phase one gas transit to Turkey may fit well with the slower pace of gas demand foreseen by Turkey.

Extension of existing and planned gas export routes to Southern Europe with Turkey as a transit hub, are feasible; but timing is difficult to predict. It would mean displacing Russian gas from the Balkans first, which is possible when Russia itself has better market alternatives for their gas.

For Central Asian gas, in the short to medium term, the Russian market is now their only option.

Transport of Central Asian gas to the potentially lucrative markets of Pakistan and India via Afghanistan is still an idea before its time. To take an alternative route through Iran to Pakistan an India is also suspect, as it is clearly not in the national interest of Iran with huge gas reserves of its own for export to allow potential erosion of these future markets.

The gas markets in China are also huge but geography politics and costs militate against an early Central Asian transport resolution. Therefore for Kazakhstan Turkmenistan and Uzbekistan short term or variable contract gas sales to Russia are their only option. Gazprom needs this "southern gas" to make up shortfalls in Russia's own declining gas production; to provide substitute supplies into a two tier domestic Russian gas market so that the more lucrative export of Russian gas by Gazprom to Europe can be maintained. But under these arrangements gas producers in Central Asia are hostage to a monopolistic and predatory buyer, Itera (a Gazprom private sector subsidiary). Their primary commercial objective is to buy gas at low cost and sell on high.

For the future development of gas in Central Asian and the Caspian Russia, holds the key. Perhaps the only way under which these interests could be more fairly balanced would be for the EU to take on a pro-active strategic role, to develop alternatives to Russian gas supply to Europe with gas supplies from Iran and the Caspian riparian states.

Conclusion:

There is now a very clear technical and commercial understanding of the realistic oil potential of the Caspian Basin. During the past five years western technology has to a very large extent confirmed Soviet predictions.

The Caspian has a proven remaining recoverable reserve of 18 to 20bnbls, with a future yet to find of some 50bnbls.

By 2010 the Caspian should be exporting some 3mmbd, two thirds from the north and one third from the south.

The Caspian is not and never will be a strategic alternative oil supplier to the producers of the Persian Gulf.

Some Caspian oil will move south to north Iran, but the bulk will be marketed in the Mediterranean and the Black Sea.

The future management of transit risk through the Black Sea-Bosphorous Strait could materially affect north Caspian net-back prices. A commercially viable Caspian oil export infrastructure is already in place that is about to be materially expanded. Multiple export options will be maintained for competitive and operational reasons.

However both infrastructure and financing risk are high, which could seriously delay the future progress of Caspian oil development.

The Turkish market for regional gas is already saturated with supply commitments from Russia Iran and Azerbaijan and elsewhere. For the foreseeable future Central Asian gas is primarily dependent on Russian internal domestic gas demand, with limited opportunities for commercial onward transit.

A positive strategic initiative from the EU would be needed to rebalance future gas supplies from the Caspian-Central Asian Region.