It was not very long ago that rich oil deposits were discovered and prospected in the Caspian Sea shelf and adjacent areas. Oil was produced there before, but nobody could foresee that close-to-the-surface deposits would be discovered there and prove to contain much more and better-quality oil than existing ones.

Caspian oil has drawn interest from many Western companies, and many countries have expressed a willingness in taking part in the deposit’s development as well as pipeline construction, including Turkey, China and the countries of Central and Western Europe. Without a doubt, Caspian oil belongs in Russia’s sphere of interest, because Russia has access to the Caspian Sea and owns a part of its shelf.

As things stand today, the bulk of discovered oil reserves worldwide are located in the countries of the Middle East, North America and Russia, which, all combined, make up approximately 80-85 percent of the total (see Table 1).

According to estimates made on the basis of geological data and the first successful drilling, the Caspian Sea area may contain some 4 billion to 6 billion tons of oil, i.e., 2.5-3.5 percent of global reserves. Many experts assume that in the course of development, the area’s recoverable oil capacity will increase to approximately 4-5 percent of the global reserve (see Table 2). Obviously, the high potential and proximity to major oil-importing countries make Caspian Sea deposits extremely attractive for investors. Of course, the Caspian Sea is not a second Persian Gulf, but in the medium-term, after oil production in the North Sea has diminished due to depletion, the Caspian Sea will definitely become the main source of hydrocarbons for Western Europe.

At the moment, it does not appear possible to make any accurate risk assessments for Caspian oil-development projects, because capacity estimates differ. Besides, the problem of shelf division between the countries accessing the Caspian Sea has not been resolved, and its solution will require the countries to reach a compromise.

Meanwhile, having a relatively minor share in Caspian oil, Russia has started to implement alternative oil projects in effort to protect itself from possible losses to be caused by the future arrival of Caspian oil in markets. Besides, Russia’s positions in the region have weakened, for obvious reasons.

In this situation, Russia is pinning its hopes primarily on the Timan-Pechora oil and gas province and Sakhalin shelf deposits. According to expert estimates, Timan-Pechora may give up to 55 million tons a year by 2005-2007, and the output of the Sakhalin shelf may be as large as 35 million to 40 million tons a year by 2004-2006. It is necessary to note that the Timan-Pechora and Sakhalin projects are direct rivals of the Caspian ones, because are oriented to the very same markets (Timan-Pechora to Western Europe and Sakhalin to the Asian markets).

A possible variant of how events may develop in the situation of direct competition between these projects is illustrated in Table 3.

Russia has good prospects in both the European and Asian options and, therefore, pipeline and other oil transportation projects related to them will be attractive for investors.

Existing pipelines and possibilities for extension

In the C.I.S., apart from Russia, the largest producer of oil is Kazakstan; its oil-production potential is estimated at over 30 million tons of oil a year. Kazakstan exports its oil mostly to Western Europe by moving it through Russia along the existing Atyrau-Samara pipeline with a throughput of approximately 10 million tons a year, via Russia’s oil terminals at the Black Sea and the Baltic Sea and through the Druzhba pipeline system. In line with an intergovernmental-cooperation agreement between Russia and Kazakstan, several projects are underway aimed at increasing Kazakstan’s oil transit through Russia, including a route from the port Aktau via Azerbaijan and Georgia to the Black Sea ports and a route from the port at Makhachkala to the port at Novorossiisk. Obviously, the latter project is more attractive for Russia, though its implementation has already caused some worsening of Russia’s relations with Georgia and Azerbaijan and prompted these countries into devising rival projects, including the Central Asian pipeline (Central Asia-Pakistan-Afghanistan-Arabian Sea), Main Export Pipeline (Kazakstan-Azerbaijan-Georgia-Black Sea-Mediterranean Sea) and Baku-Jeikhan (Kazakstan-Azerbaijan-Turkey-Mediterranean Sea).

Obviously, these projects are not making Russia happy because, if implemented, they will cause a reduction in Kazakstan’s oil transit through Russia. At the same time, they will not affect Russia’s interests in the region drastically. The fact is that Russia’s principal directions of developing its oil and gas sectors include pipeline construction on its own territory to link the deposits of Eastern Siberia and the Timan-Pechora oil and gas province with the markets of Europe and Asia, integration of pipeline systems of the countries around the Caspian Sea into a single common system and modernization of existing pipelines. In these plans, the stress is put on ensuring independence from transit via territories of foreign countries.

Baku-Novorossiisk

This pipeline will integrate the pipeline systems of Azerbaijan, Kazakstan and Georgia into a common system from which oil will be transported via existing Mediterranean Sea route to Western Europe. Despite its considerable length, the pipeline’s cost will be moderate. Besides, the possibility of cooperation between Russia and Azerbaijan is likely to put an end to the smoldering conflict over the Nagorno-Karabakh area and hence help improve the situation in the whole region. What is negative about the project is that it envisions tanker transportation via the overloaded Bosphorus Strait and blending high-quality Azeri oil with the lower-quality Russian brand, Urals. The pipeline’s total length is over 1,400 kilometers and the required volume of investment is $2.3 billion.

Central Asian Pipeline

This project calls for laying a pipeline via the territories of Kazakstan, Turkmenistan, Afghanistan and Pakistan toward the ports on the Indian Ocean. In the longer run, the project may be joined by Russia in order to supply oil to regions with traditionally higher oil prices. Also, the project appears to be promising in view of the forecast 600 percent growth of demand for combustible materials in Asia in the next 15 years (see Table 2). What complicates its fulfillment is the situation in Afghanistan and Pakistan, though the United States maintains that the conflict will be regulated soon. Incidentally, the United States has expressed a willingness to emerge as the pipeline’s constructor and operator. The pipeline’s total length is over 1,500 km and the project’s cost is $2.5 billion to $3.5 billion.

Kazakstan-China pipeline

This project calls for laying a 2,800 kilometer-long pipeline with a minimum throughput of 20 million tons a year from Kazakstan to the Xinjiang Uigur Autonomous Region in China. A feasibility study for the project has been made and its results indicate that the project is technically realistic. There is no doubts that if the project is launched Russia will join it by integrating its oil producing and oil processing facilities in Samara and Orsk with the newly commissioned ones in Pavlodar (northern Kazakstan) and Chimkent (southern Kazakstan). The project would cost above $4 billion.

Kazakstan-Turkmenistan-Iran

This project calls for constructing a pipeline to export Kazakstan’s and Turkmenistan’s oil and gas to Iran.

In conclusion, it has to be noted that the relatively small oil deposits of the Caspian Sea have triggered a very real struggle for spheres of influence. In addition to main participants – countries that have direct access to the sea – major oil-importing countries and also countries seeking to strengthen their geopolitical influence in the region have gotten involved. Thus, the United States undoubtedly plans to take part in those projects that would eventually check Russia’s influence on the market. Russia, for its part, will back those projects that will help consolidate its presence on oil markets in Europe, Central Asia and Southeast Asia. In their efforts, Russian oilmen are backed by Russian pipemakers who want their pipes to be approved for the Caspian projects. This is confirmed by the recent invigoration of efforts in the field of organizing up-to-date tube productions to manufacture large-diameter pipes with polymeric coating; until now, Russia only imported such pipes.

We obviously must conclude that the Caspian oil problem is strongly entangled by geopolitical disputes and a struggle for influence in the region that involves Russia, the United States and China, and also by the domestic interests of the countries involved and their industries.