Doc. 9635

12 December 2002

Europe and the development of energy resources in the Caspian sea region

Report

Committee on Economic Affairs and Development

Rapporteur: Mr Bernard Schreiner, France, European Democratic Group

Summary

The vast gas and oil resources of the Caspian Sea region make it of ever greater importance for overall European energy security and prosperity - especially when seen together with the region’s rich human potential.

The report explores the main issues of relevance for the continued successful development of these resources. They include the need to reach agreement on a legal status for the Caspian Sea and exploitation rights, to improve legal and regulatory regimes, and to ensure the highest possible environment protection.

The report views the continued liberalisation of European energy markets and the establishment of safe and efficient transport routes to them as being vital to the above effort. It calls for further efforts to reduce remaining political tensions in the area, for economic reforms to proceed, and for sufficient resources to be devoted to areas crucial to long-term development, such as education, public health and social cohesion.

The Council of Europe for its part, the report concludes, has a “major duty to contribute to the confidence-building measures that can further regional development and co-operation around the Caspian Sea, in a climate of democracy, human rights and the rule of law”.

I.        Draft resolution

1.       The Caspian Sea Region – whose littoral states include not only Council of Europe member states Russia and Azerbaijan, but also Kazakhstan, Turkmenistan and Iran – is increasingly central to European energy security and prosperity owing to its rich human potential and its significant oil and gas resources. Against the prospect of increasingly tight oil and gas supplies worldwide, it is vital for the countries in the region in particular, and for Europe and the world community in general, to pursue efforts to ensure the most fruitful and co-operative exploitation possible of these resources in the Caspian Sea region.

2.       Against this background, the Parliamentary Assembly encourages the countries in the Caspian Sea Region:

i.       to overcome the remaining obstacles to such cooperation and to reach an overall agreement on the legal status of the Caspian Sea, as well as on the division of the Caspian seabed and the rights of exploitation of energy resources;

ii.       to improve legal and regulatory regimes and to ensure transparent state administrations in order to encourage investment, enhanced competition and energy use efficiency;

iii.       to reduce political tensions between them that delay the construction of transport routes for oil and gas to international markets;

iv.       to improve protection of the Caspian Sea environment, both by remedying past pollution and ensuring environmental quality of present and future Caspian Sea projects.

3.       The Assembly welcomes the successful implementation of production sharing agreements in a number of states in the littoral region involving national and foreign companies, and the holding of a first regional summit in 2002 to discuss the resolution of outstanding issues. Notwithstanding the limited results obtained at the summit, the participating countries are strongly encouraged to try anew with the support of the international community, building, inter alia, on the example set through the bilateral agreements recently reached between Russia and Kazakhstan, Azerbaijan and Russia, and Azerbaijan and Kazakhstan on the delimitation of exploitation rights in the northern part of the Caspian Sea.

4.       Council of Europe member states can usefully assist in lowering the still excessively high price of Caspian Sea region oil and gas production by pursuing liberalisation of their own markets for energy, notably via European Union efforts, and by ensuring diversification of energy sources, by type and geographically. The Assembly in this context recalls the importance of the 1994 European Energy Charter for the secure transport of Caspian Sea oil and gas to European markets and refers to its own Resolution 1131 (1997), in which it called the treaty’s application “a matter of urgency if major investments are to be made”. It is particularly important that Russia ratify the Charter as soon as possible. The Assembly also hopes that negotiations for a supplementary agreement on Transit to the Charter can soon be concluded.

5.       The Assembly encourages the countries in the region to use oil and gas revenue to pursue economic reform in areas of importance for long-term development such as education, public health, transport networks, infrastructure, environmental protection and social programmes. It asks the Council of Europe to step up assistance in its fields of competence to member states in the region and hopes that the latter will soon be in a position to join the Council of Europe Development Bank. The Assembly resolves to work in favour of greater support being given in these areas by international institutions with which it has privileged relations, such as the European Union, the European Bank for Reconstruction and Development, the Council of Europe Development Bank, the World Bank and the International Monetary Fund.

6.       The Assembly draws attention to the extremely precarious situation of the Caspian Sea environment and to the need to devote more resources to environmental protection in connection with oil and gas exploitation and transport. It shares the concerns of Turkey over the major environmental and public safety risks arising from any further increase in oil and gas shipment through the Bosphorus Strait and views this as an additional argument for developing alternative transport routes from the Caspian Sea Region to European markets.

II. Explanatory Memorandum by the Rapporteur

Table of contents

1. INTRODUCTION

2. THE MAIN ISSUES

The Legal Status of the Caspian Sea

Export Pipelines and Freedom of Transit

Environmental Issues

3. THE MAIN PLAYERS AROUND THE CASPIAN

Russia

Azerbaijan

Kazakhstan

Turkmenistan

Iran

4. OTHER IMPORTANT PLAYERS

Turkey & Georgia

5. LATEST DEVELOPMENTS

6. CONCLUDING REMARKS

      Tables and maps

      Table 1:        Caspian Sea region Oil and Natural Gas Reserves

      Table 2:        Natural Gas Export Routes in the Caspian Sea Region

      Table 3:       Oil Export Routes in the Caspian Sea Region

      Figure 1:        Existing and Potential Caspian Oil and Gas Export Routes

      Figure 2:        Parties to the 1994 Energy Charter Treaty

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1.        INTRODUCTION

1.       On 7 May 2001 Mr Kirilov and others submitted a Motion for a resolution (Doc. 9091)¹ in which they drew the Assembly’s attention to the geopolitical situation around the Caspian Sea. “With its rich human and vast natural resources, especially in oil and gas, [this region] is of great and growing importance for the future economic development of all Europe”. The motion further states that the sharing and safe exploitation of Caspian resources should be “pursued in a spirit of good co-operation between all the countries concerned” in order to foster a “greater understanding in all Council of Europe member states of the region’s crucial role for European peace, security and prosperity”.

2.        The Assembly’s Bureau subsequently referred the Motion to the Committee on Economic Affairs and Development for a report. When the Rapporteur started his work, the shock wave of the September 11 terror attacks and the widespread fears that a prolonged military campaign in Afghanistan might destabilise the whole of central Asia caused many countries to reassess, among other things, their expectations as to the reliability of energy supplies from the region. As a result, the Caspian Sea region has taken on an even more important dimension in world geopolitics.

3.        The Rapporteur will aim to present as complete, up-to-date and objective a picture as possible of present and likely future developments around the Caspian and their implications for Europe, especially as concerns the security of energy supplies. He wishes in this context to thank Dr Panos Coroyannakis, international energy consultant; Mr Jean-Claude Charrault, Secretary General of the European Energy Foundation; Dr Ria Kemper, Secretary General of the Energy Charter Secretariat, and the European Commission of the European Union for valuable advice in the course of his work. Furthermore, at the invitation of the Russian parliament, the Rapporteur carried out a fact-finding visit to Moscow in February 2002 and included several highly useful observations by Mr Igor Yusufov, Minister of Energy Resources, and Mr Viktor Kaliuzhnyi, Deputy Minister of Foreign Affairs and Special Representative of the President for the Caspian Sea Region. Moreover, important additions to the report were made following a seminar on Caspian energy resources organised by the Assembly’s Committee on Economic Affairs and Development in Baku (Azerbaijan), in May 2002, in connection with the Committee’s meeting there. The Rapporteur is most grateful to the parliaments and governments of Russia and Azerbaijan for their assistance, and also thanks his colleagues in the Committee for their valuable contributions.

Background

4.        Over the last decade, the prospect of substantial hydrocarbon reserves in the Caspian region has attracted the attention of all the major oil and gas multinationals and has revived geopolitical interest in the region. After the dissolution of the Soviet Union, some of the newly independent states started to develop and export their hydrocarbon resources as an important means for their economic development. However, most of the oil and gas reserves in the Caspian region are still under development and many areas remain unexplored.

5.        Russia and Iran, the two largest regional energy producers, have maintained a dominant position in the energy export business by controlling access to a significant network of oil and gas pipelines and export sea ports to the Black Sea, the Gulf and elsewhere. At the same time, land-locked nations such as Azerbaijan, Turkmenistan and Kazakhstan, in cooperation with many national and international oil and gas consortia, unveiled ambitious plans to open new export corridors which would serve to reduce their dependence on Russia or Iran but which would also, by necessity, increase the reliance on new partners, such as Georgia and Turkey, that would play a major transit role.

6.        The European Union and the United States not only keep a vigilant eye on developments in the region but also actively seek to influence the Caspian equation in the direction of their own strategic interests. Other large energy consumers, such as China and Japan, are also present in the region as potential investors and energy buyers.

7.        Currently proven oil reserves for the entire Caspian Region are estimated at 78-95 billion barrels, compared with 17 billion barrels in the North Sea and 22 billion barrels in the US. Besides, there may be additional unproven and yet to be explored oil reserves of up to 235 billion barrels that would be roughly equivalent to the proven oil reserves in the Middle East. Moreover, proven gas reserves in the Caspian Region are estimated at 236-337 trillion cubic feet² (Tcf), comparable to North American reserves of 300 Tcf. Possible gas reserves could add an additional 300 Tcf. However, more recently the allure of Caspian oil and gas riches has somewhat diminished, as some fields appear to be less lucrative than originally thought and as drillings show some wells to be dry and some deposits to be difficult to exploit, especially in the southern part of the Caspian Sea.

2.        THE MAIN ISSUES

8.        Although the Caspian Sea thus has the potential to become one of the world’s most important sources of oil and gas, a number of obstacles have prevented this from happening so far. If not resolved, they will continue to frustrate the development of hydrocarbons in the region and their export to international energy markets.

9.        Firstly and perhaps most importantly, the littoral states need to reach agreement on the legal status of the Caspian. Until this is done, oil and gas companies, caught in the middle of boundary disputes, will hesitate to invest in some of the disputed areas. Besides, there is a number of conflict zones, such as in Chechnya and Nagorno-Karabakh, that obstruct regional co-operation and development.

10.        Secondly, the reluctance to invest is not limited to the development and production facilities of hydrocarbon deposits in disputed waters but also involves investment in export pipelines. There are two main reasons for this: the uncertainty about available volumes of oil and gas from existing or yet to be developed disputed fields; and the financial, institutional and legal uncertainties regarding the freedom of transit, an issue of particular importance for land-locked states in the region, such as Azerbaijan, Kazakhstan and Turkmenistan.

11.        Thirdly, the development, production and transportation of large volumes of hydrocarbons have severe environmental implications. The lack of political will and determination to conclude an international agreement for the protection of the environment is delaying the exploitation of Caspian hydrocarbon resources.

      The Legal Status of the Caspian Sea

12.        The Caspian is the world’s largest inland body of water, covering an area of approximately 370,000 km² and stretching 1200 km from north to south and 320 km from east to west. The main controversy surrounding the legal status of the Caspian Sea is whether it should be shared according to the principles of the Law of the Seas, or according to internationally accepted practices governing the sharing of lakes. A third option is a regime called Condominium, under which oil and gas reserves are developed jointly by all littoral states. Until the dissolution of the Soviet Union in 1991, the Caspian was treated as an inland sea not sorting under international maritime law but rather under bilateral treaties concluded in 1921 and 1940 between the Soviet Union and Iran, resulting in the Caspian Sea’s being divided into two equal parts between these states.

13.        At present there is no valid multilateral treaty defining the legal status of the Caspian Sea. Hence there is no guidance regarding the exploitation of the seabed. Russia’s proposals for dividing up the seabed and sharing the waters have inspired negotiations in recent years. There is also a fairly extensive exchange of views between the littoral states. Thus Iran has maintained that the Caspian Sea should be governed by a legal regime as if it were a lake. This would mean either joint control or a 20% share of the Caspian for each of the five littoral states. Russia, supported by Azerbaijan and Kazakhstan, considers the Caspian to be a closed sea with resulting rights for each littoral state to exploit the seabed within a national zone that may be defined within median delimitation boundaries. Such a formula, which has driven the negotiations for the past few years, would give Iran only 13% share off its coast. Turkmenistan has stayed in the middle, seeking to balance both sides. Russia at present controls about 19%, Kazakhstan 29% and Azerbaijan 21% of the Caspian seabed.

14.        Russia has in recent years presented a number of alternative proposals, such as an extension of the national exclusive zone from 12 to 45 nautical miles, or a sectoral division of the seabed coupled with shared use of surface transportation. In February 1998, Russia and Kazakhstan signed an agreement establishing seabed boundaries in their sectors. In May 2002 the two countries further agreed on a more detailed division of the northern part of the Sea (according to the modified median line) and on the joint exploitation of the Kurmangazy, Tsentralny and Khvalynsky fields lying on the median line. Moreover, Azerbaijan has concluded bilateral agreements with Russia and Kazakhstan, thereby clearing the obstacles for the exploitation of oil and gas in the northern Caspian.

15. There has been a number of border disputes, mainly between Azerbaijan and Turkmenistan. As two major fields under development by the international consortium AIOC - Azeri and Chirag - are in disputed waters, Turkmenistan in 1997 claimed its stake in the profits of the project with Baku. Turkmenistan has also made claims for the Kyapaz field and has requested international mediation for the resolution of these disputes. There is also a border dispute between Azerbaijan and Iran over the Alov (Alborz in Persian) offshore oil field, which both countries claim. These inter-state disputes have strained relations between the countries concerned, making co-operation on various projects difficult at times. One example is the planned natural gas Trans-Caspian Pipeline from Turkmenbashi across to Baku and onward to Georgia and Turkey. This project has been hampered by difficulties in deciding how the pipeline capacity should be allocated between Azerbaijan and Turkmenistan. Obviously, a clear definition of national sectors and clear demarcation lines are of fundamental importance, in order to avoid disputes of this kind.

      Export Pipelines and Freedom of Transit

16.        Once the issue of sharing under-water resources has been agreed upon through a legally binding international treaty, there is a great need to develop export routes that have the capacity to move the desired quantities of oil and gas to world markets. Of the five littoral states in the Caspian region, only Russia and Iran have direct access to international waters, allowing them to export significant quantities of oil through port facilities in the North Sea (Russia), the Black Sea (Russia) and the Gulf (Iran), whereas the remaining three land-locked states of Azerbaijan, Kazakhstan and Turkmenistan are largely dependent at present on Russian pipelines to carry the bulk of their hydrocarbons to world markets. The latter have frequently met with Russian policies which, through a system of transit tariffs and quotas, have tended to limit the volume of hydrocarbons that these countries can ship across Russia to other markets. Kazakhstan and Turkmenistan are still more politically, economically and militarily dependent on Russia than is Azerbaijan, and therefore more reluctant to oppose Russia on international issues.

17.        It is obvious that if the three land-locked states are to have more control over the transit of their resources, they have to build export routes that bypass the ‘traditional’ Russian networks, such as the Transnieft system for oil, the Transniefteprodukti system for oil products and the Gazprom system for natural gas. The states, as well as the oil companies involved, favour a system of multiple export pipelines. The aim is to reduce the dependence on a single transit state. Over the last decade plans have been made for Caspian oil and gas pipeline corridors that would either cross parts of Southern Russia, or bypass it altogether: to the west via Turkey; to the south via Iran; to the south-east across Afghanistan to Pakistan and India; and to the east across Kazakhstan and Uzbekistan to China and Japan.

18.        Most feasibility studies carried out by international consortia favour the westbound corridor. Thus, in March 2001, the first segment of a new westbound export route became operational as the Caspian Pipeline Consortium (CPC) opened the Tenghiz-Novorossijsk pipeline. Among the multitude of other oil and gas pipeline projects currently on the drawing board, the most prominent is the Baku-Ceyhan pipeline project, that would link the capital of Azerbaijan, across Georgia, to the Turkish oil terminal of Ceyhan in the north-eastern corner of the Mediterranean Sea. The United States and Turkey support the project as the main export pipeline, and this for a host of political, security and ecological reasons. While Kazakhstan, Turkmenistan and certain oil companies are in favour of a cheaper pipeline through Iran, the US government still opposes an Iranian route for political reasons, notably by sanctioning foreign and US investment in the Iranian petroleum industry³.

19.        Let us briefly turn to the issue of international law regarding transit, whereby a balance is sought between the needs of international traffic on the one hand and the sovereign territorial rights of transit states on the other. Focusing on transboundary pipelines, a distinction must first of all be made between submarine and terrestrial pipelines. Historically, the question of freedom of transit has been recognised in international law since the 17^th century onwards. Since World War I, countries have tried to agree on regulations that would satisfy both the exporting and the transit states. Certain multilateral conventions, such as the 1921 Barcelona Convention, the 1947 GATT, the 1965 New York Convention⁴, and other bilateral treaties have addressed access rights for states in general and land-locked states in particular, and partly deal with terrestrial pipelines as a means of transit transport.

20.        In these treaties much emphasis is placed on principles of non-discrimination and non-interruption, and the obligation not to impose any transit-fees or custom duties on traffic in transit nor unreasonable charges on goods in transit.⁵ However, these treaties do not create a self-executing right of transit or the building of terrestrial pipelines over neighbouring territories. Instead, they require individual land-locked and transit states to reach agreement on the modalities of transit in specific areas before these rights may be exercised.

21.        Concerning the laying of the proposed submarine Trans-Caspian-Pipelines⁶, the situation may be different. Under the UN Law of the Sea Convention, states are assumed to have the freedom to construct submarine pipelines. The sovereign rights of coastal states are limited, and may imply environmental and safety requirements as regards the construction of transit pipelines. Otherwise the freedom of transit prevails. Since the UN Law of the Sea Convention is not directly applicable to the Caspian Sea, it is up to the littoral states to decide on the appropriate legal regime relating to submarine pipelines.

22.        However, should the littoral states decide to divide the subsoil into national sectors and keep the body of water under common ownership, then this could have an even bigger impact on the limited freedom to lay pipelines under the Caspian Sea – especially if they agree that the submarine pipelines should not be treated as a part of the subsoil.⁷ National and international law relating to environmental protection and other legitimate safety aspects of the neighbouring state could then hamper construction. Furthermore, the consent of all littoral states would then be required, as spills from a damaged pipeline could have an ecological impact on the commonly owned body of water.

23.        The importance of establishing a general legal framework for the secure transport of oil and gas through pipelines from the Caspian region and the FSU to world markets - mainly Europe – provided one important impetus for the establishment of the Energy Charter Treaty (ECT) in 1994. This treaty is a legally binding multilateral instrument for some 50, mainly eastern- and western-European, states and for the European Communities (see Figure 2).

24.        While emphasising the principle of state sovereignty and the state’s sovereign rights over its natural resources, the ECT aims primarily to create an open and competitive market for energy materials, based on the principles of freedom of transit, non-discrimination and the obligation not to interrupt or reduce the flow of energy, even in the event of disputes with other countries concerning transit. The Treaty also aims to protect foreign investment and the inviolability of concluded contracts, to facilitate transit and to improve access to pipelines. Furthermore, since it became obvious that there is scope for further development of the transit provisions of the ECT, in 1998 a Transit Working Group was established with the purpose of creating a multilateral legal framework in order to secure and facilitate energy flows via existing and future pipelines. Negotiations on the final draft of the Energy Charter Protocol on Transit continue.

25.        Another initiative in assisting the establishment of an international legal regime around the Caspian and the Black Sea has been the INOGATE (Interstate Oil and Gas to Europe) programme, financed under the TACIS programme of the European Union. Under the aegis of INOGATE, a multilateral “Umbrella Agreement” was negotiated and signed between 12 NIS states in 1999. This Agreement aims to provide the legal basis for the further development of multilateral oil and gas pipeline schemes in the Trans-Caucasus region and Central Asia. It has had limited success and continues at present with some small-scale investments and feasibility studies.

      Environmental Issues

26.        The Caspian Sea is a unique ecosystem with a rich aquatic, aerial and terrestrial wildlife. While media and governments have placed much emphasis on the political and economic situation surrounding Caspian developments, little attention has been paid to environmental risks connected with oil extraction and transportation. Past oil ventures have left the inland sea polluted, and since 1978 the Caspian has for reasons not yet fully known risen by almost 3 meters, flooding coastal areas and oil platforms, and further polluting the area. Just as mysteriously, the level of the Caspian has recently started lowering.

27.        Environmental issues in the Caspian region are numerous and diverse. The hydrocarbon production includes the establishment of production infrastructure, offshore drilling platforms and pipelines, which easily become a main source of pollution. It is important, however, not to overstate the significance of offshore oil activities in the overall environmental picture. Azerbaijan - with extensive offshore oil production facilities as well as onshore oil industry, including a number of refineries on the Apsheron peninsula - is a significant polluter. At the same time, the runoff from the Volga, the Ural and other rivers are heavily polluted with heavy industry wastewater. This seems to account for almost 65 %⁸ of the total oil pollution load of the Caspian. However, future large-scale offshore oil developments may end up being major sources of pollution as well. Intense demographic pressure – around ten million people live on the shores – adds to the burden on the environment, especially since it has not been accompanied by the necessary investment in wastewater treatment. Finally, illegal practices such as poaching threaten biodiversity of fish stocks.

28.        Against the background of mounting international pressure to curb and possibly reverse the environmental damage in the Caspian, Azerbaijan is defining for its oil and gas sectors new environmental limits comparable to those in the North Sea and the Gulf of Mexico. Its recent Production Sharing Agreements with foreign consortia contain stricter environmental regulations. This is also the case in Kazakhstan, where exploration permits in the shallow north-eastern part of the Caspian (depth averaging 6 meters) and recent oil discoveries have the potential of adding to the heavy pollution of the region.

29.        Since the currently used national and international environmental and technical standards are hopelessly outdated and still not uniform among the Caspian littoral states, it is urgent to examine what international law and good international practice could be adopted in order to mitigate and prevent a possible future ecological disaster.

3.        THE MAIN PLAYERS AROUND THE CASPIAN

30.        The five main players of the region have often taken diametrically opposite views as regards ways of addressing some of the most serious regional problems. Russia and Iran have significant energy resources not linked directly to the Caspian region, as well as well-developed transport infrastructure and access to seaports. They have a dominant position in the region and in regional politics. Russia still exerts significant political influence in the former Soviet Republics of the region, particularly in Turkmenistan and Kazakhstan. Azerbaijan, with strong links to Turkey, is actively pursuing the development of new export routes and is often supported by the United States, as in the case of the Baku-Ceyhan pipeline project described earlier.

Russia

31.        Russia is the world’s second largest oil producer⁹. Its oil reserves are estimated at 6.7 billion tonnes (49 billion barrels) corresponding to 4.7% of proven global reserves. The bulk of the remaining reserves lie in western Siberia and in the Caspian (with an estimated 2.7 billion barrels of proven reserves for the latter region - see Table 1). The structure of the reserve base has been deteriorating, as some 55%-60% of remaining reserves are classified as ‘difficult to recover’. Furthermore, it is estimated that over 70% of the reserves now exploited yield such low flow rates that their development is only marginally commercial. This may explain why Russia has been so interested in the developments of the Caspian region.

32.        Significantly, Russia is estimated to hold around one third of the world’s natural gas reserves or approximately 46,9 tcm (trillion cubic metres). It is by far the biggest gas producer in the Caspian Region, accounting for 585 bcm (billion cubic metres) a year while other countries, such as Uzbekistan, Turkmenistan and Kazakhstan extract respectively 50 bcm, 45 bcm and 10 bcm annually. Gazprom - 38% state-owned and the world’s largest gas production, transmission and exporting company - holds licenses covering 65% of Russian reserves. The rest of reserves are largely controlled by Itera and other traders. More than 85% of the current total Russian gas production comes from three giant fields in Western Siberia: Medvezhye, Urengoi and Yamburg. These fields, however, are considerably depleted. It is estimated that 78% of the resources of Medvezhye, 57% of Urengoi and 46% of Yamburg have been produced. The balance is made up by oil companies (extracting associated gas) and increasingly smaller fields. At present about 40% of western Europe’s demand for gas and 80 to 90% of that of central and eastern Europe’s is supplied by Russia.

33.        The energy industry of Russia has undergone significant transformation since the dissolution of the Soviet Union. In the turmoil of the post-Soviet era, restructuring and privatisation schemes were ‘rushed’ through the fledgling Russian political system. As a result, a handful of powerful officials, often supported by the administration of the day, were able to gain considerable influence over large industries and a significant part of the natural resources, including oil and gas. The so called ‘oligarchs’ attained wide-ranging control of vital sectors of the Russian economy, often keeping industrial profits, wherever they existed, away from Russia’s state coffers, by not paying dividends or taxes. This well-known situation greatly impeded the reform process, including in the oil and gas industry.

34.        The new Russian President, Vladimir Putin, has attempted to accelerate reforms and limit the power of the oligarchs, by pursuing two main goals:

• Firstly at the domestic level, to re-establish control over the economy and the reform process by ensuring that private companies as well as state-controlled corporations, such as Gazprom and others, function efficiently and pay taxes. This has allowed President Putin to reinforce his political standing as a strong, patriotic and uncorrupted leader of Russia;

• Secondly internationally, using the energy sector as an important tool to reach geopolitical objectives, by presenting Russia as a reliable energy supplier to world markets and particularly to the European Union. To this end Russia has entered into a lengthy dialogue with the EU in order to agree on a long-term plan for strategic energy co-operation that would guarantee stable energy supply to the EU and allow Russia to gain access to recently opened EU energy markets.

35.        In the Caspian region, the role of Russia continues to be vital for the stability and future development of the region. Its main hydrocarbon producing area is Siberia and not the Caspian. (As Table 1 shows, 2.7 billion barrels of proven reserves out of total 78-95 billion barrels of proven reserves in the whole of the Caspian region belong to Russia). This notwithstanding, Russia has over the last decade experienced a sharp decline in oil production from over 500 million tons (3.7 billion barrels) down to less than 300 million tons (2.2 billion barrels) per year. In view of continued under-investment in the oil sector, this picture is not expected to change considerably within the foreseeable future.

36.        Recent exploration successes, however, and major new finds, such as the giant Kashag field discovered in Kazakhstan, indicate significant potential reserves of about 14 billion barrels that may also lie in the Russian part of the Caspian Sea (see Table 1). Russia has therefore every interest in maintaining a strong presence in the region. It could be a major player as an investor or partner in field exploration and development, as well as in pipeline projects; as a transit country; as a competitor in export markets; or as a large domestic market in its own right. Lately, Russian companies have actively pursued oil and gas co-operation with neighbouring countries such as Kazakhstan and Azerbaijan, as well as many countries in eastern and southeastern Europe. The prospect of diminished control over hydrocarbon export routes around the Caspian may also have led Russia to soften its earlier reservations – essentially for geopolitical reasons – against the construction of the Baku-Tbilisi-Ceyhan pipeline.

37.        For all the above reasons, Russia appears to have softened its position over time regarding the division of the Caspian Sea. Regarding energy transit, however, Russia continues to resist the pressure from the NIS republics to allow more transit of hydrocarbons across its pipeline systems. Furthermore, although Russia signed the Energy Charter Treaty in 1994, it has yet to ratify it. Thus, energy transit across Russia remains relatively ineffective, as no international legal obligations compel Russia to allow or facilitate such transit through its territory¹⁰.

38.        Indeed, Russia’s Gazprom has at times refused to transit hydrocarbons of other countries (such as Turkmen gas to Central and Western Europe), proposing instead either to buy the gas itself or to transport it to export markets of its choice, such as Ukraine, which in the past has often delayed payments for its energy imports. The Russian Transnieft had also imposed quotas on Kazakh oil exports across the Atyrau to Samara pipeline, limiting exports to 6-10 million tons per year. However, these limitations are being eased as more export pipeline capacity becomes available via new pipelines and the conclusion of bilateral agreements regarding joint exploitation of major hydrocarbon fields in the Caspian.

      Azerbaijan

39.        A major oil and gas producer of the region, Azerbaijan has about 3.6-12.5 billion barrels (bbl) of proven oil reserves and about 11 Tcf (310 bcm) of proven gas reserves. It is thought to hold up to 35 Tcf (990 bcm) of possible oil reserves (see Table 1) in the Caspian. Over 90% of Azerbaijan’s hydrocarbon reserves are offshore. Azerbaijan’s oil production peaked in 1940¹¹ when it supplied 70% of the total USSR crude oil production. In more recent times, Azeri oil production fell by almost 30% during the 1990-1996 period of economic crisis (from 12.5 to 9 million tons annually). After 1997, however, production increased substantially, from 9 million tons in 1997 to 13.5 million tons in 1999¹² allowing for a marked increase in oil exports.

40.        Since 1995, several factors have contributed to a gradual return to a more stable political and economic climate, as President Haidar Alyev has consolidated his position in the country and an armistice was reached in 1994 with Armenia over Nagorno-Karabakh. At the same time, foreign oil and gas consortia have confirmed significant offshore reserves under the section of the Caspian claimed by Azerbaijan, albeit some of the section is contested by Turkmenistan and may contain less oil and more gas than expected. The Socar company is the integrated national oil and gas producer, also responsible for the negotiation of contracts and agreements with foreign investors, whereas the Azerigas company assures the transportation, storage and sales of gas. Since 1994, Socar has signed 21 Production Sharing Agreements (PSAs) worth $55 billion with foreign partners. In general, these Agreements have been working very well.

41.        Azeri foreign policy aims to continue attracting foreign investment in the hydrocarbon sector and to ensure the diversity of oil/gas export routes in order to avoid dependence on any one transit country. Major oil export pipeline projects are connected with the Azerbaijan International Operating Company (AIOC), which has developed the Azeri, Chirag and deep-water Guneshli fields. As part of its contract with the government, it is also involved in building export routes. The construction of oil pipelines was divided into an ‘early oil’ phase for production volumes of up to 300 000 barrels a day and a later ‘main oil’ phase, capable of handling 700 000 - 800 000 barrels a day of AIOC and other oil. In October 1995 it was decided to split the ‘early oil phase’ between two export routes: the ‘northern’ route to the Russian port of Novorosijsk via Grozny (in Chechnya), opened in December 1997; and the ‘western’ route across to the Georgian port of Supsa.

42.        Because of the Chechen conflict, the ‘northern’ route has been damaged or shut down at times, causing concern to oil shippers. Ultimately, the Russian government and Transnieft constructed a $200-million-worth 283 km bypass between Khasavyurt in Dagestan and Tikhoretsk. This bypass shows Russia’s determination to maintain the ‘northern’ route as an attractive option as a main oil pipeline.

43.        The $315-million-worth 920 km long ‘western’ route, including a 240 kt oil terminal and storage facility in Supsa, with an initial capacity of 115-120 kb/day, became operational in April 1999 (see Table 3). An upgrade to 210 kb/day, at an additional cost of $300 million, is planned for 2002.

      44.        In addition to the northern and western routes, the Mediterranean port of Ceyhan emerged as a third option for oil exports. The project (Baku-Tbilisi-Ceyhan or BTC), supported by the United States and Turkey, is estimated at between $2.5 and 3.4 billion depending on the route, and may stretch the pipeline to a total length of 1,700 km. Although the project, despite its environmental attractiveness for bypassing the Bosphorus straights, still has to prove its cost effectiveness against other competing routes, a set of bilateral agreements have been signed between the three governments involved (Azerbaijan, Georgia and Turkey) and construction started in 2002. The South Caucasus Pipeline for gas exports from Shah Deniz field is being built and will run parallel to the BTC pipeline from Baku to Tbilisi (Georgia) and Erzurum (Turkey). Both pipelines are expected to be finished by 2005.

45.        A National Oil Fund – at present amounting to $ 500 million – has been created by presidential decree for the purpose of accumulating revenue from oil and gas sales for future needs and for the financing of the non-energy sectors of the economy.

      Kazakhstan

46.        A substantial producer of oil and gas, Kazakhstan has 60-68 billion barrels of proven oil reserves around the Caspian (the Kashagan, Tenghiz and Karachaganak fields) and an additional 92 billion barrels of potential reserves (see Table 1) plus about 53-83 Tcf of proven gas reserves and an additional 88 Tcf of possible gas reserves. Its existing oil and gas pipelines were designed and built to cater for Soviet Union needs, and, as a result, are often more integrated with the systems of neighbouring countries than within the country itself. The country exports oil mainly through the Atyrau-Samara pipeline (see Figure 1) – constrained, however, by quotas imposed by Russia’s Transnieft that limit these exports to 6-10 million tons per annum.

47.        Kazakhstan was one of the first NIS states to proceed with extensive economic reforms in an effort to attract foreign investors. Early restructuring and the privatisation of several energy companies (mostly in the electricity and gas transport areas), has led to the auctioning off of facilities to foreign buyers. The latter acquired the assets at discount prices in exchange for specific commitments to invest in the modernisation of the facilities in question (power stations, gas pipelines, distribution systems etc.). Following the restructuring of the oil sector, two state-owned companies emerged: Kazakhoil, the oil company with stakes in many other Kazakh oil and gas producers and refineries; and KazTransoil, the company for oil pipeline transport.

48.        The privatisation experience in the gas sector however was quite painful for Kazakhstan. In 1997, the gas transportation and gas transit functions of the state-owned Kazakhgaz were granted on a concession basis to the private company Intergaz Central Asia, owned by the Belgian Tractebel. After a series of problems and complications, Intergaz pulled out of Kazakhstan in 2000. The gas transmission assets of Intergaz were returned to Kazakhgaz.

      49.       One of the success stories in Kazakhstan is the Caspian Pipeline Consortium (CPC). The CPC was formed in 1992 by the governments of Kazakhstan and Oman, later joined by that of Russia, several oil companies, notably Chevron and Mobil, as well as Lukoil, Rosnieft, British Gas and Agip. Its oil pipeline, to be built in four phases, will link the large Tenghiz oil field in Kazakhstan with the Russian port of Novorossijsk, via the Astrakhan, Kalmykia, Krasnodar and Stavropol regions. The first phase of the project, yielding up to 560 000 barrels a day, was completed in March 2001. The next phases are to be commissioned over the coming few years. The complete 1440 km pipeline is expected to have a peak capacity of 1.34 million barrels a day.

50.        The CPC project had to overcome many financial and regulatory difficulties in providing a major alternative export route for Tenghiz and Karachaganak oil. Some quantities of oil that continue to be shipped by barge to Baku for exports via the northern and western routes (which prevailed before the opening of the CPC pipeline in 2001) are expected to diminish over time, as the rail-barge-pipe route is less economic than the CPC pipeline. Kazakhstan plans to triple its oil output over the next fifteen years from about 900 000 barrels a day at present, as the Tenghiz and Karachaganak onshore fields boost production and the first offshore oil comes on stream at Kashagan after 2005.

      Turkmenistan

51.        Turkmenistan’s hydrocarbon resources consist mostly of natural gas. The country has about 98-155 Tcf of proven reserves and up to 159 Tcf of additional probable reserves. Proven oil reserves amount to 1.7 billion barrels and up to 80 billion barrels additionally constitute possible reserves (see Table 1). The reserve estimates vary substantially, as geological data are closely guarded by the government and as official estimates tend to be at the upper end of the estimates range. Before the break-up of the Soviet Union, Turkmenistan was the fourth largest gas producer in the world, after Russia, the US and Canada. Its peak annual gas production reached 90 Bcm, declining to a low of 17 Bcm in 1997.

52.        The oil and gas sector is entirely in state hands. President Sapurmurad Nyazov, former Chairman of Turkmenistan’s Supreme Council and the country’s last First Secretary of the Communist Party (he is also called Turkmenbashi, i.e. the father of all Turkmen), is actively involved in the shaping of the national energy policy.

53.        Until recently, Turkmenian gas exports depended entirely on Russia, which has allowed Turkmenistan limited access to the Gazprom pipeline system, though only for the export of limited quantities of gas to Ukraine. Unlike Kazakhstan and Azerbaijan, Turkmenistan has so far met with limited success in its efforts to attract foreign capital. The slow pace of economic reform, and a not always transparent functioning of the government apparatus are held to be primarily responsible for the relative lack of investment in the country. Turkmenistan has attempted to persuade foreign investors to invest in new gas export pipelines. The main routes considered are: via Iran to Turkey (and possibly further west from there to Europe); via Afghanistan to Pakistan and possibly India; and across the Caspian to Azerbaijan, Georgia and Turkey.

54.        The construction of the first of the above-mentioned routes has been rendered more difficult as a result of the threat of US sanctions against companies that invest in projects involving Iran. However, this has not prevented Turkmenistan from building (using Iranian financing and material) a 144 km, 12 Bcm/year pipeline across the border into Iran. It opened in December 1997. The $190 million project was realised by an affiliate of the National Iranian Oil Company (NIOC) and is to be paid back in kind through Turkmen gas supplies for the Neka power station in Northern Iran¹³. This pipeline has broken the oil and gas export monopoly held by Russia until then.

55.        The second route for a gas pipeline, to be built by American Unocal and Saudi Delta, has been temporarily shelved due to recent events and the war in Afghanistan in the autumn of 2001. A Unocal/Delta-led project for an oil export pipeline across Afghanistan to Pakistan suffered the same fate.

56.        The third route across the Caspian is still under consideration (see Table 2). The pipeline is planned to run from the Caspian Sea port of Turkmenbashi to Azerbaijan and onwards to Georgia and Turkey, following a path parallel to the Baku-Supsa ‘early oil’ pipeline. The project could make use of an existing 720 km gas pipeline which originates at the Neft Dashlary field off-shore Azerbaijan and runs via Baku to the Azeri-Georgian border and from there via Tbilisi to Kutaisi in western Georgia. From there it would be necessary to build a 300-km pipeline to Trabzun (Turkey) on the Black Sea coast.

57.        Other long-term projects being considered tend to be eastbound, multi-billion dollar schemes towards China and Japan, crossing Uzbekistan and Kazakhstan. Difficulties in resolving the immense legal, political and financial complexities involved make the realisation of such projects unlikely in the foreseeable future, and certainly not before the end of the second or third decade of this century.

      Iran

58.        Iran is OPEC’s second largest oil producer. It currently produces 3.4 million barrels/day, of which 2.2 million is exported and 1.2 million consumed domestically. Iran holds approximately 9% (90 billion barrels) of the world’s oil reserves, of which 10 billion barrels are located in the vicinity of the Caspian. It also holds approximately 15% of the world’s gas reserves (812 Tcf)¹⁴ of which only 19.6 Tcf are estimated to be linked to Caspian Sea hydrocarbons.

59.        Following the Islamic revolution, which removed the Shah from power, Iran entered a period of isolation with the west and much of the rest of the world. The Iranian conservative forces (a mix of religious, cultural and military leaders) now control key institutions and effectively run the economy of Iran. However, the coming to power of President Mohamed Khatami and his recent re-election has led to a turn of Iran towards more moderate policies and the political will to introduce reforms towards a more participative democratic society. Despite their control of parliament, reformists still have to establish control of the state machinery, the army, the judicial system and the economy. The third five-year development plan has introduced ambitious reform and economic growth objectives. However, the continued opposition by hard-line conservatives and traditional clerics headed by Ayatollah Ali Khamenei has made these reforms difficult to implement.

60.        At present Iran is actively working with Turkmenistan and Turkey in order to facilitate exports of Turkmen as well as Iranian gas to the rapidly growing Turkish market. Furthermore, Iran continues to promote a north-south transport corridor to the Persian Gulf. It has therefore proposed the construction of a 300 km oil pipeline meant to link Azeri oil exports with its pipeline network on towards export points in southern Iran and the Gulf. As long, however, as the ILSA (the United States Iran and Libya Sanctions Act of 1996) remains in force, it is unlikely that international consortia will invest in pipelines across Iran.

4.        OTHER IMPORTANT PLAYERS

61.        To turn the production and exploitation of Caspian Sea hydrocarbons into a viable commercial success, Turkey and Georgia play an important strategic role in providing alternative transit corridors for the export of Caspian oil and gas to world markets, bypassing the Russian pipeline systems.

      Turkey

62.        Turkey, strategically located at the meeting point of Europe and Asia, is a key country in the region. Not only does it provide the only over-land link of the Caspian region to Europe that can bypass Russia, but it also stands out as a rapidly expanding energy market with a voracious appetite for oil and gas. Despite its recent financial difficulties, Turkey has a relatively stable political regime and a developed banking system, which can support large infrastructure projects such as oil and gas pipelines across its territory, as well as new gas-fired power stations. Linguistically and ethnically, Turkey is closely linked with Azerbaijan and, to a lesser extent, Turkmenistan, where Turkish investment and a sizeable Turkish labour force are involved in a number of projects. In its capacity as a candidate for European Union membership, a member of NATO and a close ally of the United States, Turkey enjoys a privileged position in the region.

63.        Some uncertainty prevails, however, as regards the transit passage of oil tankers through the Bosphorus waterway. Turkey, profoundly concerned about the implications of significant amounts of Caspian oil being shipped through the Bosphorus, insists that the maximum capacity of movement which the Turkish Straits are able to carry has already been reached.

64.        However, Turkey’s right to regulate traffic through the Bosphorus is still limited by the 1936 Treaty of Montreux. The Treaty requires complete freedom of transit and navigation without the formalities of taxes, fees and requirements for local pilots. While the agreement still has the support of its signatories, Turkey’s desire to take necessary measures to protect the safety of traffic through the Strait is generally seen as legitimate¹⁵. Against the opposition of Russia and other Black Sea states, but with the support of the International Maritime Organization (IMO), Ankara has succeeded in imposing certain regulations on passage¹⁶. There is therefore an urgent need to promote other routes, so as to avoid any overcrowding of the environmentally sensitive Bosphorus Straits. One such route – Baku-Tbilisi-Ceyhan oil pipeline – is to become operational in 2005.

      Georgia

65.        Even though Georgia has no significant energy resources of its own, it is a key transit country in the region. Given the political tensions between Azerbaijan and Armenia over the disputed area of Nagorno-Karabakh, and despite some political instability due to a prolonged internal conflict in the Georgian area of Ossetia, Georgia provides an important westbound corridor for Caspian energy exports towards the Black Sea and on to Europe, and one that runs outside Russia. It has signed several inter-governmental agreements with its neighbours Azerbaijan and Turkey, thus adhering to a number of route proposals, including the ‘western’ route for ‘early oil’ from Baku to Supsa, the Baku-Ceyhan project, the gas pipeline Turkmenbashi-Baku-Tbilisi-Turkey and others.

66.        The strategically highly significant Georgian ports of Supsa and Batumi compete with the Russian port of Novorossijsk for oil exports across the Black Sea (in 2000, the overall transportation tariff from Baku to Supsa was reported at $3.10 per tonne of crude, compared to $15.67 per tonne for the transport to Novorossijsk). Furthermore, given the pressure from Turkey to avoid excessive traffic through the Bosphorus Straits, these two ports are suitable for exports to the western Black Sea terminals of Burgas in Bulgaria (onwards to Alexandroupolis, Greece, and/or to Vlore in Albania), to Costanta in Romania, or to Odessa in Ukraine (for transport across the Odessa-Brody pipeline to Europe). Feasibility studies are being carried out in order to establish which of these routes are economically viable.

5.        LATEST DEVELOPMENTS

67.        The terrorist attacks on the United States on 11 September 2001 in New York City and Washington D.C. and their aftermath are expected to have a significant impact on the geo-politics of the Caspian Sea region. The strong support of most of the Caspian Sea littoral states (with the exception of Iran, which declared support but opposed the armed intervention in Afghanistan) for the broad coalition against international terrorism may be an opportunity to bring the Caspian states closer together. Moreover, shifts in strategic thinking may lead to stronger US-Russian co-operation on Caspian energy exports by the northern transport corridors and, eventually, the acceptance of Afghanistan as a partner for the new transit routes of Caspian oil and gas exports to the south-east (towards Pakistan and possibly India). Much will, of course, hinge on whether Afghanistan can emerge from the war as a stable country and regional actor. A more secure central Asia may also offer opportunities for new energy corridors to China.

68.        On the other hand, the uncertainty that surrounds the future course of the international war against terrorism and the risk that it may spill-over into other parts of the region may influence investors negatively. In case of a protracted conflict, it is too early to tell what is going to be the new geopolitical balance between the various countries of the region at the end of it. These uncertainties, however, might increase the attractiveness of Russia, Georgia and Turkey as more secure pathways for oil and gas pipelines from the Caspian region towards European energy markets.

69.        There is no doubt about the potential of the Caspian to provide large quantities of energy to the world market over coming decades. Importantly, Caspian oil from the former Soviet republics of Azerbaijan, Kazakhstan, Russia and Turkmenistan does not fall under the OPEC regime¹⁷. A stable flow of Caspian energy exports would thus lessen the dependence of western markets on Gulf exporters. Worries about supply security could offset the extra costs of Caspian oil and make the region emerge as an important rival to the Gulf region that is at present the biggest source of western oil imports.

70.        Both Caspian littoral states and their neighbours involved in energy transit have much to gain from using energy exports to further develop their economies, although some of the major players may be tempted to exert political and economic pressures on the other countries of the region. The European Union and the United States have an important strategic interest in the secure and stable development of oil and gas exploitation sites around the Caspian, and, more generally, in promoting regional stability that could also help to improve relations between Pakistan and India as possible beneficiaries of Caspian energy exports through their territories.

71.       A major Caspian Summit among the leaders of the five littoral states Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan was held in the Turkmen capital Ashgabat in April 2002, for the purpose of reaching an agreement on the future division of exploitation rights in the extra-territorial parts of the Caspian Sea but also for the joint environmental and water management of the area. No agreement was reached, however. Later, Russia managed to conclude a bilateral agreement with Kazakhstan. The agreement establishes a modified median delimitation line of the seabed in the northern Caspian between the two countries and stipulates that three hydrocarbon fields (Kurmangazy, Tsentralny and Khvalynskoye) on the median line are to be exploited on a parity basis by the two countries. Moreover, Russia offered Kazakhstan the opportunity to sign a long-term deal on the transit of some 15 million tonnes of Kazakh oil a year through the Baku-Novorossijsk pipeline. This means that Russia can exploit its hydrocarbon fields under less competitive threat from offshore fields in the southern part of the Caspian Sea, where Azerbaijan, Turkmenistan and Iran are still locked in disputes over seabed boundaries. The most pertinent division therefore is now between the northern and the southern parts of the Caspian Sea.

72.       European governments would be well advised to reassess the security of their future gas supply in a way that reflects their rapidly rising imports and the ongoing liberalisation of the domestic and European markets. Europe will soon depend on imports for about two-thirds of its gas demand, as only five European countries are self-sufficient or net exporters. At the same time, major European gas companies worry that liberalisation might kill long-term contracts and the security of supply they provide. Conversely, hesitant liberalisation in countries like France and Germany could actually reduce security by delaying the rise of new suppliers at a time when the certainties of traditional markets disappear. Whatever, there can be no doubt that the Caspian will be a strategically vital supplier to Europe in the decades to come.


73.       Recent fluctuations in oil prices in international markets has been a taxing experience for investors in the Caspian, where exploration and development is comparatively costly. The production cost for Caspian oil stands at between $12 and $15 per barrel, similar to the high cost end of North Sea oil but two to three times more expensive than equivalent oil from the Persian Gulf¹⁸. Over time, Caspian oil extraction costs will have to be lowered to $8-10 per barrel to compete successfully at international level, unless of course a general price rise occurs due to scarcity of supply or political calamities. Finally, investors would be greatly helped by more precise estimates of Caspian hydrocarbon reserves.

74.       On their way to European markets, Caspian hydrocarbons will face fierce competition in the south from Middle East and North African producers who hold a dominant position in markets around the Mediterranean. Central and north-western Europe may therefore be more welcoming markets, especially in view of the expected decline in oil and gas production in the North Sea. Here, Russia and countries of southeast Europe hold key intermediary positions. In all scenarios, Russia will remain Europe’s key partner in securing energy supply in the decades to come.

6.        CONCLUDING REMARKS

75.        An ageing Russian oil and gas industry, which only more recently has begun to recover from a long period of under-investment and a monopolistic market structure, has given rise to a significant decline of hydrocarbon production volumes over the last decade. Despite the ability of Russia to maintain and increase its export delivery volumes, there is a need, particularly in Europe, to diversify energy supplies and energy transport and transit corridors.

76.        Against this background, the Caspian region is strategically positioned as a major alternative supplier. With rich oil and gas reserves, it is expected to be a significant player in world and European energy markets. However, the issues dividing the Caspian region and frustrating the completion of major energy projects there are many and complex. They include:

• legal disputes over the status and the sharing of the Caspian

• uncertain legal and regulatory regimes that inhibit the influx of capital and the completion of energy projects

• political tensions and economic difficulties in some countries of the region

• the continued dominant role of Russia and its opposition to some investment projects

• the continued isolation of Iran despite recent moderation of its policies.

77.        The keen interest of major economic powers such as the European Union, the United States, China and Japan, illustrates the geopolitical importance of the region. Furthermore, despite the adversities mentioned above, slow but steady progress is being made. The willingness of the states involved to attract more investment and the inventiveness of the oil and gas enterprises in addressing difficulties and resolving technical, financial, legal and regulatory issues are further indications of the strategic and economic importance of the region.

78.        The signing of the agreement for the Main Export Pipeline (Baku-Tbilisi-Ceyhan) in Istanbul in November 2000, and the beginning of operation of the first phase of the CPC (Caspian Pipeline Consortium) in March 2001, indicate that the Caspian region has passed from the phase of proposing and planning to the long awaited stage of delivering more energy to the world markets.

79.       The Council of Europe, which includes among its members several countries of the region, has a major duty to contribute to the confidence-building measures that can further regional development and co-operation around the Caspian in a climate of democracy, human rights and the rule of law. Its Assembly must work at inter-parliamentary level so as to foster greater understanding, intensified exchanges among the states of the region and determined action against economic crime.

TABLES AND MAPS

Table 1. Caspian Sea Region Oil and Natural Gas Reserves

	Proven Oil Reserves	Possible Oil Reserves	Proven Gas Reserves	Possible Gas Reserves
Azerbaijan	3.6-12.5 BBL	32 BBL	11 Tcf	35 Tcf
Iran*1*2	10.1 BBL	30 BBL	19.6 Tcf	12 Tcf
Kazakhstan	60-68 BBL*3	92 BBL	53-83 Tcf	88 Tcf
Russia*1	2.7 BBL	14 BBL	N/A	N/A
Turkmenistan	1.7 BBL	80 BBL	98-155 Tcf	159 Tcf
Uzbekistan	0.3 BBL	2 BBL	74-88 Tcf	35 Tcf
Total	78.4-95 BBL	235 BBL	236-337 Tcf	328 Tcf

BBL = billion barrels, Tcf = Trillion Cubic Feet

*¹only the regions near the Caspian

Sources: United States Energy Information Administration

*² Asia Pulse PTE Ltd, 25 January 2001

*³ The Wall street Journal, 05 March 2001.

Table 2: Natural Gas Export Routes in the Caspian Sea Region

Name/Location/Route	Gas Capacity	Length	Status
Aksai-Atyrau (Kazakhstan)	7 million tonnes / year	635 km	Completed in May 2002; start of shipment in 2003
Baku-Tbilisi-Erzurum (Shah Deniz Gas)	Initial 175 bcf/year rising to 350 bcf/year. Additional pipes could raise capacity to 565 bcf/year.	500 km renovation pipeline; 280 km extension to Erzurum	Agreement signed on 12 March 2001; start of shipment in 2004
Centgas: Dauletad or Yashlar Fields (Turkmenistan) - Pakistan. May extend to India	700 bcf/year	1440km to Multan in Pakistan (+ possibly 640km to India)	Memorandum of Understanding signed among Turkmenistan, Pakistan, Afghanistan & Uzbekistan
Turkmenistan - Kazakhstan - Russia – Europe	3.5 Tcf	N/A - uses existing routes	Operational -uses existing Russian system.
China Pipeline: Turkmenistan - Xinjiang (China)	1 Tcf/year	8,000 km (+ possible extension to Japan	Preliminary feasibility study done by Exxon, Mitsubishi & CNPC
Trans - Caspian (Kazakhstan Twin Pipelines): Caspian coast (Kazakhstan) - Baku - Ceyhan	N/A	N/A	Feasibility study agreement of December 1998 by Royal Dutch/Shell, Chevron, Mobil & Kazakhstan
Southern Russia – Ankara (Turkey) via the Black Sea	N/A	1200 km	The first of 2 lines completed in February 2002; the second to be completed by 2003
Trans – Caspian: Turkmenbashi (Turkmenistan) - Baku -Erzurum (Turkey)	1.1 Tcf/year	1680 km	Preliminary feasibility studies completed. Shell will be operator of the project; unsure
Trans-Georgian: Russia-Turkey via Georgia and Armenia	425 bcf/year	200 km	Gazprom's plans to complete preparations in 1999 were shelved
Turkmenistan – Iran: Korpeje (Turkmenistan) to Kord-Kui (Iran )	283 - 350 bcf/year; expansion proposed	144 km	Opened in December 1997
Turkmenistan – Iran (Serakhs)	Initial 0.7 Tcf/y; expansion to 1.8 Tcf/year	N/A	Proposed
Turkmenistan - Iran (Tabriz) - Ekarem (Turkey)	1 Tcf/year	2160 km	Feasibility study done by Royal Dutch/Shell; plan shelved

Bcf= Billion cubic feet ; Tcf = Trillion cubic feet

Source: United States Energy Information Administration, June 2000.

Table 3: Oil Export Routes in the Caspian Sea Region

Name/Location/ Route	Crude Capacity	Length	Status
AIOC Main Export Pipeline: Baku - Tbilisi-Ceyhan	1million bl/day	1720 km	Istanbul Agreement signed in November 2000. Completion targeted by 2005
AIOC Early Oil Western Route: Baku (Azerbaijan) - Supsa (Georgia)	0.115 million bl/day design capacity; upgrades by 2002 to 0.21 million bl/day	820 km	Exports began in April 1999
AIOC Early Oil Northern Route: Baku - Novorossisk (Russia) via Chechnya	0.1 million bl/day; possible upgrade to 0.3 million bl/day	1390 km; 144 km are in Chechnya	Exports began in late 1997
AIOC Northern Route - Chechnya bypass: Baku - Makhachkala - via Dagestan to Tikhoretsk (Russia) connecting to Novorossijsk (Russia)	In 2000: 0.12 million bl/day (rail and pipeline 0.16 million bl/day); In 2005: 0.36 million bl/day	325 km	Completed in April 2000.
Atyrau - Samara : Atyrau (Kazakhstan) - Samara (Russia)	Current 0.21 million bl/day; increase to 0.31 million bl/day	690 km	Project modifies existing pipeline to Russia; upgrades began in 1999
Caspian Pipeline Consortium (CPC): Tengiz (Kazakhstan) - Novorossisk (Russia)	Phase 1: 0.56 million bl/day; peak: 1.34 million bl/day	1490 km	Phase 1 flows began in March 2001; peak in 2015
Gardabani - Batumi Pipeline: Gardabani (Azerbaijan) -Batumi (Georgia) oil refinery	N/A	Rebuilding of an existing pipeline	The World Bank & the EBRD may provide financing
Baku (Azerbaijan) - Tebriz (Iran)	0.2 - 0.4 million bl/day	300 km	Proposed by ElfTotalFina
Iran Oil Swap Pipeline: Iranian Caspian port of Neka - Tehran	175 000 bl/day, rising to 370 000 bl/day	330 km	Swap began in March 2001
Kazakhstan - Xinjiang (China) - New Delhi (India)	0.4 - 0.8 million bl/day	2880 km	Agreement in 1997; Work started in May 2002
Kazakhstan -Turkmenistan - Kharg Island in the Gulf (Iran)	1million bl/day	1490 km	Proposed completion in 2005
Khasuri-Batumi pipeline: Port of Dubendi (Azerbaijan) -Batumi (Georgia)	Initial 70 000 bl/day, rising to 140 000 bl/day	Rail system and 230 km Khasuri-Batumi pipeline	Chevron signed agreement in September 1999
South Pipeline: Kazakhstan -Turkmenistan - Afghanistan -Pakistan	1 million bl/day	1660 km	Memorandum of Understanding
Trans - Caspian: Aktau (Kazakhstan) - Baku - Ceyhan (Turkey)	N/A	590 km to Baku	Feasibility study agreement, December 1999

Bl = barrels  

Source: United States Energy Information Administration, June 2000.

Figure 1: Existing and Potential Caspian Oil and Gas Export Routes



Source: United States Energy Information Administration, June 2000.

Figure 2: Parties to the 1994 Energy Charter Treaty



ECT Signatory States (Albania, Armenia, Austria, Australia, Azerbaijan, Belarus, Belgium, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Cyprus, Denmark, Estonia, European Communities, Finland, France, Georgia, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Kazakhstan, Kyrgyzstan, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mongolia, Moldova, Netherlands, Norway, Poland, Portugal, Romania, Russian Federation, Slovakia, Slovenia, Spain, Sweden, Switzerland, Tajikistan, Former Yugoslav Republic of Macedonia, Turkey, Turkmenistan, Ukraine, Uzbekistan, United Kingdom)

Observer States (Algeria, Bahrain, Canada, Kuwait, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, United Arab Emirates, United States of America and Venezuela)

Reporting committee: Committee on Economic Affairs and Development

Reference to committee: Doc. 9091, Ref. 2616 of 22.5.2001

Draft resolution unanimously adopted by the committee on 20 November 2002

Members of the committee: Mrs Zapfl-Helbling (Chairperson), Mr Kirilov, Mrs Burbiene (Vice-chairpersons), Mr Adam, Mr Agius, Mr Agramunt, Mrs Akgönenç, Mr I. Aliyev (Alternate: Mr. Abbasov), Mr Anacoreta Correia, Mr Arnau, Mr Assis Miranda, Mr Berceanu, Mr Billing,  Mr Braun, Mr Brunhart, Mr Budin, Mrs Calner, Mr Cerrahoglu, Mr Cosarciuc, Mr Crema (Alternate: Mr Rigoni), Mr Djupedal, Mr Duivesteijn, Mr Elo, Mr Eyskens, Mr Galoyan, Mr Grachev, Ms Griffiths, Mr Grignon, Mr Gülek, Mr Gusenbauer, Mr Haupert, Mrs Hoffmann, Mr Hrebenciuc, Mr Kacin, Mrs Kestelijn-Sierens, Mr Klympush, Mr Lachnit, Mr Le Guen, Mr Liapis, Mr Makhachev (Alternate: Mr Slutsky), Mr Masseret, Mr Melcak, Mr Mikkelsen, Mr Naumov, Mr O’Keefe, Mr Palis, Mrs Patarkalishvili, Mr Pavlidis, Mrs Pericleous-Papadopoulos, Mrs Pintat Rossell, Mr Pleshakov, Mr Podgorski, Mr Popa, Mr Popovski, Mr Prokes, Mr Puche, Mrs Ragnarsdottir, Mr Ramponi, Mr Reimann, Mr Riccardi, Mr Rivolta, Lord Russell-Johnston, Mr Rybak, Mr Schmitz, Mrs Schoettel-Delacher, Mr Schreiner, Mr Seyidov, Ms Smith, Mr Stefanov, Mr Tepshi, Mr Torbar, Mr Tosic, Mrs Vadai, Mr Voog, Mr Walter (Alternate: Baroness Hooper), Mr Wielowieyski, Mr Wikinski, Mr Zhevago, Mr Zvonar.

N.B. The names of those members present at the meeting are printed in italics

Head of Secretariat: Mr Torbiörn

Co-Secretaries to the committee: M. Bertozzi, Ms Ramanauskaite and Ms Kopaçi-Di Michele

¹ “Need for greater European concern for the development of the Caspian Sea region” (ref. 2616)

² 1 cubic feet = 0,028 m³ ; 1 barrel of oil = 158,986 litres

³ White House Executive Order 12957 (16 March 1995) and the Department of Treasury’s Iranian Transaction Regulations prohibit US involvement in petroleum development in Iran; The US Iran and Libya Sanctions Act of 1996 (ILSA) targets foreign companies with sanctions if the investment exceeds US$ 20 million annually.

⁴ 1921, Barcelona Convention and Statute on Freedom of Transit (LNTS, vol. 7, p.11); 1947 GATT, Art. V (UNTS, vol. 55, p.194); 1958 High Seas Convention, Art. 3 (UN Doc. A/CONF. 13/C 5/L); 1965 New York Convention on the Transit Trade of Land-locked States (UNTS, vol. 597, p.42); 1982 UNCLOS, Art. 125 (21 I.L.M. 1261).

⁵ Art. V GATT, Art 3, 4 Barcelona Convention 1921, Principle V 1958 High Seas Convention, Principle IV 1965 New York Convention, Art. 127 UNCLOS, Art. 7 ECT.

⁶ From Aktau (in Kazakhstan) to Baku (further to Ceyhan) and from Turkmenbashi to Baku (Ceyhan).

⁷ Russia and Iran strongly oppose such laying because of the alleged environmental impact.

⁸ See: TACIS document on Caspian Environment Programme, Facilitating Thematic Advisory Groups in Azerbaijan, Kazakhstan, Russia, & Turkmenistan, Oil Contamination of the Caspian Sea, February 2000.

⁹ In 1989 the Soviet Union was the world’s largest oil producer, ahead of Saudi Arabia, with about 600 million tonnes of annual production. In 1996, the production of the former Soviet Union states had fallen to some 350 million tonnes, before resuming growth to reach 395 million tonnes in 2000. (Source: EBRD)

¹⁰ Russia has certain obligations to facilitate energy transit arising from its provisional application of the ECT but even so Russia and/or its energy companies continue to frustrate transit.

¹¹ “Caspian Oil & Gas”, International Energy Agency, OECD, Paris, 1999.

¹² “Oil Information 2000”, International Energy Agency, OECD, Paris, 2000.

¹³ “Caspian Oil & Gas”, International Energy Agency, OECD, Paris, 1999.

¹⁴ Source: World Bank ant the US Energy Information Administration, June 2001.

¹⁵ The Montreux Convention could be revised in accordance to the rebus sic stantibus principle of international law, which postulates that all treaties remain in force only as long as the circumstances under which they were concluded have not changed radically. Turkey would have to prove that a “radical change of circumstances” - according to Art. 62 (1.) (b) of the 1969 Vienna Convention on the Law of Treaties – have arisen.

¹⁶ Since November 2000, certain classes of tankers have, for instance, to be accompanied by tugboats.

¹⁷ OPEC - Organisation of the Petroleum Exporting Countries – consists of eleven oil-producing and exporting countries from Africa, Asia, the Middle East, and Latin America: Algeria, Indonesia, Iraq, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

¹⁸ T. Adams, Caspian Energy Programme, University of Dundee