The Caspian Sea Region; Where Politics and Energy Collide

The Caspian Sea Region; Where Politics and Energy Collide

The wider Caspian basin has been a prolific producer of oil for over a century, but only since the fall of communism has meaningful progress been made in mapping out the region’s offshore potential.

Since the 1990s, a series of oil and gas fields have come into production off the coasts of Azerbaijan, Russia, Kazakhstan and Turkmenistan, and further projects are in the pipeline, notably in Russian waters. The Caspian therefore continues to offer international oil companies (IOCs) and contractors lucrative business opportunities. However, operating in the region also carries risks, not least because of the ongoing territorial dispute between the sea’s five littoral states.

Based on field-level data, the Caspian Sea is conservatively estimated to have around 19.6 billion barrels of crude oil and gas condensate and 3 tcm of natural gas in proven and probable reserves. The true oil and gas reserves figures may well be much higher than official estimates, however, as disagreement over maritime boundaries and limited exploration have precluded definitive assessments of them.

Notably in this context, the US Geological Survey (USGS) estimates that another 20 billion barrels of crude oil and 6.9 tcm of natural gas are conventional technically recoverable, but as yet undiscovered, resources, with around 65% of the undiscovered oil and 81% of the natural gas estimated to be in the South Caspian Basin. The Arctic-like northern area of the Caspian Sea is also relatively unexplored, and USGS estimates significant amounts of undiscovered resources there as well.

Key Locations
The Caspian Basin area also offers a prime strategic location between both Asian and European markets, with rivers from the sea also discharging into Georgia, Armenia and Turkey, which has meant that for IOCs the high level of investment often required for exploration and development may often be mitigated by assistance from state-controlled companies.

However, a key concern for foreign firms remains the lack of clarity over the legal demarcation of different fields. This is principally centred on whether the Caspian water is defined as a ‘sea’ or a ‘lake’.

In the former’s case, coastal countries would apply the ‘United Nations Convention on the Law of the Sea’ (UNCLOS, 1982), in which event each littoral state would receive a territorial sea extending up to 12 nautical miles (22 km) from its coast, an exclusive economic zone (EEZ) up to 200 nautical miles (370 km), and a continental shelf.

In practice, this would mean that countries such as Turkmenistan and Azerbaijan would have exclusive access to offshore assets that Iran would not be able to access.

In the case of the latter – whose tenets currently informally prevail – the countries could use the international law concerning border lakes to set boundaries, by which each country effectively possesses 20% of the sea floor and surface of the Caspian.

Iran is now in legal discussions with a major law firm in New York to lobby for a caveat in this arrangement. That is, that for two neighbouring states (e.g. Iran and Azerbaijan), the one with easier-to-recover hydrocarbon resources receives 2.5% less out of its 20% cut of the revenues (i.e. 17.5%), whilst its neighbour receives 2.5% more (i.e. 22.5%).

Additionally, the difficulty in transporting Caspian energy resources increased substantially with the dissolution of the USSR, as exports of oil and natural gas tended to rely on old Soviet pipeline networks, meaning high initial investment in related infrastructure.

Once constructed, as well, the cost of offshore projects remains relatively high in global terms, given that the Caspian Sea periodically freezes, forcing companies to use canals from the Black Sea to move drilling and maintenance equipment to production areas near the affected basin.

Prolific Potential
Even so, the potential of the Caspian basin area is too great, and its ability to generate hard currency earnings for the five littoral states too important, for any of them to jeopardise the overall further exploration and development of the region.

Ever since a BP-led consortium signed the deal with Azerbaijan to develop the country’s offshore reserves and discovered the giant Azeri-Chirag-Guneshli (ACG) field, the importance of estimated – and possible – reserves for both IOCs and for the five partners of the area has been clear, with the launch of the giant Kashagan oilfield off the coast of Kazakhstan late last year underlining the point.

Source: Your oil & gas news