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Arabs cast wary eye on Caspian oil.

Arab oil producers were quick to voice solidarity with Central Asian republics as they emerged from Soviet rule in the early 1990s. It was a solidarity driven by a sense of Muslim brotherhood and cultural affinity. But as the vast oil reserves of the Caspian basin start to flow onto already glutted world markets, Arab producers may be having second thoughts.

With real oil prices at historic lows, many Arab governments, dependent on oil revenues, are uneasily anticipating the rising export production levels in the countries of the Caspian basin.

Ten years ago, as those Central Asian countries emerged from decades of Soviet rule, they were embraced by the Saudis and Kuwaitis as fellow Muslims and by the Turks as tribal relatives sharing similar languages. The Iranians embraced them as neighbours with whom the wealth of the Caspian basin would be shared.

But as the Central Asian countries (the former Soviet republics of Azerbaijan, Kazakhstan, Kirgizstan, Russia, and Turkmenistan, as well as Iran) work to realise their vast energy wealth, strains have emerged.

Arab oil producers have been hard pressed to maintain even today's low energy prices, and the prospect of vast new Central Asian supplies hitting the market could actually push prices down to or below break-even levels.

The scale of those reserves is awesome; the region has been called "the next oil and gas frontier".

Proven oil reserves for the entire Caspian Sea region are now placed at just under 40 billion barrels - larger than proven reserves in the United States (22 billion barrels) or the North Sea (17 billion barrels). Estimated reserves (allowing for future discoveries) push the Caspian totals to 191 billion barrels.

The region's proven natural gas reserves are also significant, accounting for over two-thirds of the proved hydrocarbon reserves in the Caspian Sea basin. based upon proven reserves, Kazakhstan, Turkmenistan, and Uzbekistan each rank among the world's 20 largest natural gas countries. Proven gas reserves in the Caspian region are estimated at 236 - 337 trillion cubic feet, comparable to North American reserves (300 trillion cubic feet). Estimated reserves are now set at 665 trillion cubic feet (see graphic overleaf).

The Caspian basin is not the only oil and gas producing region which is competing with the Gulf to supply world markets. Many experts point to Siberia (which is geographically close to the industrialised economies of China, Korea and Japan), Mexico, and Nigeria as regions offering similar promise.

But the scale of the reserves in the Caspian basin has drawn in major oil companies and equipment suppliers - including such familiar names as Arco, BP, Chevron, Dresser Industries, Halliburton, Mobil, Schlumberger, Texaco and Total. Even at today's low prices, estimated reserves in the Caspian basin represent a $2.2 trillion fortune in oil, and an additional $1.5 trillion fortune in natural gas.

It has also attracted the interests of regional and global powers, intent on controlling the flow of that oil.

In a sobering analysis of the region, a study released last April by the James A. Baker III Institute for Public Policy at Rice University warns that, the energy issue aside, Central Asia and the Caucasus location between Russia, China, Iran and Turkey "makes it a magnet for foreign powers and a flash point for potential conflict among them".

In addition to neighbouring countries, the US, Europe and Japan have all exhibited keen interest in the regions economic potential.

So far, there is little to show for it. Only a small trickle of Caspian oil is presently coming onto world markets. Total production barely exceeds 1.1 million barrels per day (b/d), of which only about 150,000 b/d is exported outside the former Soviet Union. By comparison, North Sea oil production runs better than six million b/d; Venezuelan oil production stands at 3.5 million b/d. But the wells are being drilled, and analysts believe that with pipelines in place, by the year 2010, Caspian export oil production could reach 3.5 million b/d.

Oil exports will increase substantially as oil begins flowing from two major joint ventures currently underway in the Caspian region: the Azerbaijan International Oil Consortium (AIOC) in Azerbaijan and the Tengizchevroil project in Kazakhstan.

While industry experts forecast that Persian Gulf oil producers will continue to hold a 35 per cent share of global markets, Caspian players could control a significant 10 per cent share by 2030, as more fields are brought on line and more efficient delivery is assured.

Country Oil Gas
 (billion barrels) (trillion cu. ft.)

Azerbaijan 38 46
Iran(*) 12 11
Kazakhstan 101 171
Russia(*) 5 N/A
Turkmenistan 34 314
Uzbekistan 1 123


* For Russia and Iran, only regions near Caspian Sea are included.

Sources: US Department of Energy; JAM Research

In the global oil and gas markets, that share is enough to move prices sharply up or down, despite the fact that proven Saudi reserves alone (269 billion barrels) far exceed those of the entire Caspian basin.

It helps to put the hydrocarbon reserves in perspective. Proven oil reserves of the Caspian basin are pegged at about 2.7 per cent of total world proven oil reserves. Proven natural gas reserves of the Caspian basin represent about seven per cent of total world proven gas reserves. By comparison, proven oil reserves of the Middle East represent 55 per cent of world proven reserves while South America equals eight per cent.

But the full figures aren't in yet. Some geologists assert that proven reserve numbers for the Caspian basin are misleadingly low because huge areas of the region have not been explored.

For the Saudis and other major Persian Gulf producers, there is a consolation that the Caspian oil will not hit world markets in significant amounts for at least a decade.

It could take much longer. For one thing, the region is remote (over 4,000 miles from China and Japan, and 2,000 miles from Western Europe). And it is landlocked, preventing easy ocean-borne transport of the oil and gas. To resolve that problem, some 16 pipelines, 15,000 miles in all, costing $45 billion, will have to be built through unmapped, war-torn, or geographically challenging territories.

The impact may not be as great as once feared. For one thing, production is to be phased in over a 10 to 20-year period. Secondly, lack of proper finance may cause further delays. Arab unwillingness to cut production has led to low oil prices which also limit the resources oil companies and the Central Asian states can use to develop Caspian basin production.

Cushioning the blow through delaying tactics might ease the pain. But the fact remains clear that the Caspian basin countries will be major players in global energy in the 21st century. It is a fact that the Arabs, like the Americans and Europeans before them, will have to get used to.
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Comment:The problem of Arab oil producing countries regarding low oil prices has been compounded by the prospect of vast oil and gas reserves in Central Asian countries.
Author:Martin, Josh
Publication:The Middle East
Geographic Code:9AZER
Date:Apr 1, 1999
Previous Article:Global publications target Middle East.
Next Article:Franchises in the Gulf: burgers rule.

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