The Caspian Sea - The Legal Issue.

Continued uncertainty over the Caspian Sea's legal status is hindering further oil and gas development in the area. The five littoral states have failed to agree on a plan to divide up the sea's resources, including the oil-rich seabed.

Azerbaijan, together with Russia, and Kazakhstan, have advocated establishment of maritime boundaries based on an equidistant division of the sea. But Iran and Turkmenistan disagree.

Azerbaijan remains locked in disputes with Turkmenistan and Iran over competing claims to overlapping petroleum fields. Turkmenistan and Azerbaijan have traded harsh words over the Kyapaz-Serdar, Khazar, and Osman fields, while Azerbaijan has objected to Iran's decision to award Shell and Lasmo (now part of the ENI group of Italy) a licence to conduct seismic surveys in Alborz, a region of the Southern Caspian Sea which Azerbaijan considers to fall in its territory.

In July 2001, tensions flared in the South Caspian when a BP seismic ship, licenced to explore Azerbaijan's Araz-Alov-Sharg concession, was ordered to leave the area by an Iranian gunboat, since Tehran considers that region, which it calls Alborz, to be a part of the Iranian sector of the sea. Although a long-delayed summit of the rulers of the Caspian littoral states was held in Ashgabat in April 2002, the meeting, as expected, failed to produce a final resolution of the sea's status.

Tehran maintains that the 1921 and 1940 agreements between the Soviet Union and Iran on the inland sea are valid until a new legal regime has been agreed by the five littoral states. Tehran, meanwhile, regards any unilateral or bilateral deals for energy exploration of the Caspial as being null and void.

At issue are not only the economic resources of the Caspian but also the security of the littoral states. Three options have been proposed:

A. Joint ownership of both the seabed and surface of the Caspian. B. Division of the seabed and common sovereignty over sea water. C. Dividing up both the seabed and water.

Legal experts in the region have said that, since Option A is not practicable, the choice must be between Options B and C.

Russia favours Option B, with its common sovereignty over the sea's surface, because it will provide the best security. Regarding the seabed, much to Tehran's chagrin, Russia has divided it with Kazakhstan, accepting a share of 16.5%.

Tehran goes along with the idea of joint sovereignty over the surface but wants an equal division of the seabed between the five littoral states. Equal division of the seabed would give Iran a share of 20%, whereas its shoreline only covers 13%.

This is the gist of the issue between Iran and Azerbaijan, with which Tehran shares its Caspian maritime border. Azerbaijan is not willing to cede its area of the seabed to the south to boost Iran's share, especially as that zone is believed to have large oil resources.

On Aug. 1, 2001, after the Iranian warship threatened to fire on BP's oil search vessel doing a seismic survey of the disputed area, President Heidar Aliyev warned Tehran that it must not use force to get its way in this issue. Speaking before flying to the Russian resort of Sochi for an informal summit of the 12 CIS rulers on the Caspian, Aliyev told reporters: "No country should use force against another country. Those are the principles of the United Nations and other international organisations and every country should observe them. We observe them and want that all countries should live in a friendly atmosphere and not allow conflicts to happen".

Aliyev chided Turkmenistan for staking its own claim to parts of the Azeri sector of the Caspian, saying: "Turkmenistan is also putting forward claims which have no basis in international law. We have sent them a note of protest". Earlier in 2001 Turkmenistan had recalled is five-member diplomatic mission from Baku.

On July 31, 2001, a group of ethnic Azeris living in northern Iran sent a letter to Aliyev saying they were ready to take up arms against Tehran if there was an attack on Azerbaijan. Asked about the letter, Aliyev said: "We don't need that sort of thing because we have never wanted to allow the worsening of relations with Iran. The Azeris living in northern Iran are Iranian citizens and I am telling them this: we recognise the territorial integrity of each country and do not interfere in any country's internal affairs. Therefore we do not accept that kind of statement. We do not need to create any kinds of incidents". (Some Azeri nationalists had suggested that the Azeri-populated region of northern Iran should be absorbed into Azerbaijan).

In January 2002 Aliyev said in Moscow after talks with Russian President Vladimir Putin: "We agreed to begin work on drawing a median line between Russia and Azerbaijan". By then Russia and Azerbaijan had signed bilateral deals with Kazakhstan to draw a line between their sectors of the Caspian. Aliyev added that once Russia and Azerbaijan reached such an agreement, "use of the Caspian mineral resources will be fully solved between our three nations".

However, after his meeting with Putin in St. Petersburg in June 2002, no accord was reached; and Aliyev said "we have failed to clarify a couple of points" on the proposed agreement and he described these as being "of small significance". Aliyev's visit to Tehran in May 2002 had done little to resolve the dispute. And his son Ilham, who then was vice president of the State Oil Company of the Azerbaijan Republic (Socar), ruled out any prospect of joint exploration of the disputed area.

In mid-2003, Tehran rejected a proposal from Moscow that Iran join forces with a Russian consortium to develop oil blocks on the border between the Iranian and Turkmen sectors of the Caspian. Iran's Caspian representative, Mehdi Safari, said the five littoral states were first to sign a treaty on demarcation of their respective sectors - with Tehran insisting on a 20% share of the sea.

The Russian group, Zarit, was embarked on a project to develop oil prospects on a Turkmen sector of the sea being claimed by Iran. This area is believed to contain big oil reserves. Russia's Caspian envoy Viktor Kalyuzhny said it was important for Iran to join the group and thus help end the dispute with Turkmenistan. This, he said, would also pave the way for a solution of the territorial disputes between Iran and Azerbaijan and between Azerbaijan and Turkmenistan.

The northern part of the Caspian is said to contain more hydrocarbons than the southern part. The whole sea has six separate hydrocarbon basins, although most of its oil and gas reserves have not been developed yet. The sea's reserves - oil and gas deposits considered 90% probable - are estimated at 17-33 bn barrels, comparable to those in the US (22 bn barrels) and the North Sea (17 bn barrels).

The sea's possible reserves - defined as 50% probable - could yield another 233 bn barrels of oil. 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.

Overall, proven gas reserves in the Caspian are estimated at 177-182 TCF. Possible reserves could yield another 293 TCF of natural gas.