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KAZAKHSTAN - Part 1 - The Prospects After Yeltsin-Nazarbayev Deal On North Caspian

Leaders in the former Soviet republic of Kazakhstan are hoping that their state's hydrocarbon production by the year 2020 would have reached 3.4 million b/d of oil equivalent, mostly from the offshore in its northern sector of the Caspian Sea. But today, while offshore exploration and field development estimates there have gone way above costs in the Arabian peninsula, world crude oil prices are at their lowest level since the crash of mid-1986.

At one time in the past week, the spot market value of Arabian Light fell to $8.40/barrel, the low reached in July 1986. With Iraq producing 2.25 million b/d and exporting 1.65m b/d compared to 1.45m b/d in June, prices will continue to be low in the coming months. Unless the winter months in the northern hemisphere are cold, crude oil prices will not recover in late 1998 or early 1999.

It is too early to tell whether or not exploration and development of giant oil structures in the northern Caspian will proceed as planned, with drilling of the first well scheduled to begin in October and expected to cost $100m. Oil prices may not be high enough to justify massive investment in the Caspian.

The economic recession in Asia, the main cause of depressed world oil demand, is deepening and may not be over before 2002. By then, a great deal of new non-OPEC oil will have come on stream. New oil provinces to come on stream will include the Gulf of Mexico, the West African coast and the Caspian region. Already, the market is receiving new Caspian crude oils from Azerbaijan and Kazakhstan. Their combined volume will rise from 80,000 b/d in June to 160,000 b/d in the third quarter and to 210,000 b/d in the first quarter of 1999 (see Part 2).

New Caspian oil production from the Azeri, Kazakh, Russian and Turkmen sectors may exceed 4.8m b/d by 2010, if E&P projects in the four regions proceed as planned. If by then the UN sanctions on Iraq have been lifted and Iraq's production capacity has risen to 6m b/d as planned by Baghdad, there would be a major oil glut on the market, assuming that the production in the North Sea and other non-OPEC areas has not fallen or stopped by 2010.

Kazakhstan estimates its sector of the northern Caspian has up to 100 bn barrels of oil and another huge reserve of gas. Leaders in Baku, capital of Azerbaijan, claim their country's sector of the southern Caspian holds almost 50 bn barrels of oil and a huge reserve of gas. Leaders in Turkmenistan say their sector of the southern Caspian has up to 40 bn barrels of oil and more than 50 TCF of gas. Iran may have at least 2 bn barrels of oil and 5 TCF of

gas in its part of the sea, though Tehran still insists that the resources of the entire sea must be shared by the five littoral states (see following).

The explored reserves in the whole Caspian region to be recovered, according to one report, are 32 bn barrels of oil and 100 TCF of gas.

Yeltsin-Nazarbayev Deal: Presidents Boris Yeltsin of Russia and Nursultan Nazarbayev of Kazakhstan on July 6 signed an agreement on dividing the seabed resources of the northern Caspian between the two countries. This is another turn in the "Great Game" between Russia and the US (see APS Diplomat's News Service). It is a power struggle in which China has stepped in by pledging to invest $9.5 bn in a set of Kazakhstan oil ventures which would include a pipeline from the Central Asian republic to the Yellow Sea (see Gas Market Trends).

Below the shallow sea waters off western Kazakhstan lies "another Kuwait" to be explored and extracted by Western oil companies. But the July 6 agreement specifically states that other issues such as pipelines or telephone cables will have to be governed by subsequent agreements, which deals a blow to a US- proposed system of trans-Caspian oil and gas pipelines to the West.

Washington has worked hard on promoting the trans-Caspian system, or "corridor" as US experts prefer to call it. This was to consist of oil and gas pipelines from Kazakhstan and Turkmenistan to run under the Caspian waters to a point near Baku. From there, overland pipelines would run all the way to Turkey's Mediterranean terminal of Ceyhan. The "corridor" was to by-pass both the Russian pipeline system and Iran. In the "Great Game", these two states were rivalling the US-Turkish alliance, with China stepping in with its own agenda.

The US Trade and Development Agency has put up $750,000 to help fund feasibility studies for this project. For its part, the Clinton administration sold the idea to each Central Asian leader who visited Washington over the past year: Saparmurad Niyazov of Turkmenistan, Nazarbayev of Kazakhstan and Gaidar Aliyev of Azerbaijan.

By then all the major US oil companies had become involved in Caspian E&P together with big European companies, whether in Azerbaijan, in Kazakhstan or in Turkmenistan. These companies had lobbied strongly for a convincing US role in selling the "corridor" idea.

To get the agreement, President Nazarbayev had to trade Russia's recognition of Kazakhstan's offshore mineral rights for a Moscow veto over the "corridor" or any other pipeline project proposed to be built under the Caspian waters.

Moscow may have a valid reason for vetoing such projects, as in the case of Tehran which has turned against the July 6 deal. The Caspian Sea is earthquake prone. The seabed is unstable, with mud volcanoes having caused it to rise, according to some geologists. The sea itself has risen by almost three metres since 1978. In some places, the sea has advanced inland by more than 70 km, with the resultant flooding having caused serious problems to oil operators.

Then there is the problem of pollution with more than 4.5 MCM/day of sulphurous natural gas being flared. The oil to be produced from the Kazakh

sector of the northern Caspian is expected to have a large content of hydrogen sulphide, which can kill in seconds. Resultant mountains of sulphur on the coast could make that part of Kazakhstan a potentially dangerous area.

The head of the Russian working group on Caspian issues at the Russian foreign ministry, Yuri Mirzlyakov, was quoted on July 7 as saying: "We thought of undersea pipeline in the 1980s, and concluded that it was infeasible on environmental grounds... We consider such a pipeline to be very dangerous".

Turkmen-Iran Opposition: Although the July 6 agreement unblocked Caspian resources for all the other littoral states, Iran and Turkmenistan objected to the deal on July 7. While Presidents Yeltsin and Nazarbayev were meeting in Moscow, Turkmen President Niyazov flew to Tehran and met with Iranian President Mohammed Khatami. On learning of the agreement upon arrival, Niyazov said the Caspian states "must reach a fairer division" of the sea's resources.

On the same day, July 6, the Turkmen foreign ministry gave conflicting signals about Niyazov's stance on the subject. It said that Turkmenistan objected to dividing the Caspian into "five seas". But it added that every country should have full sovereignty over its own sector and that the middle of the sea could be a common zone.

Iran has been opposed to any unilateral use of the sea's resources or any bilateral agreement on dividing the area. Moscow used to be in line with Tehran's position that the Caspian was a lake and that its legal status was based on the Soviet-Iran treaties of 1921 and 1940 (see Gas Market Trends). On July 7, the Iranian foreign ministry said Tehran did not recognise the validity of the agreement between Russia and Kazakhstan.

Turkmenistan's ambivalent position reflects President Niyazov's way of bargaining with Moscow. He keeps opposing Russian initiatives - or trading of concessions with Kazakhstan or Azerbaijan - concerning the Caspian until he gets his way.

Turkmenistan is in dispute with Azerbaijan over offshore territories which include oil-rich areas and Niyazov wants the Russians to stand on his side. These areas include an offshore oilfield called Serdar by the Turkmen side and Kyapaz by the Azeris. Turkmenistan also has claims over the Azeri and Chirag offshore oilfields now being developed by BP-led consortium Azerbaijan International Operating Co. (AIOC).
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Publication:APS Review Oil Market Trends
Article Type:Article
Geographic Code:9KAZA
Date:Jul 20, 1998
Previous Article:AZERBAIJAN - The Geology
Next Article:KAZAKHSTAN - Historical Background

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