Energy Sector Reform in Eastern Europe Working Papers
WP-EE-02
Energy in the Caspian Sea Region in the Late
1990s: The End of the Boom?
Christian von Hirschhausen and Hella Engerer
Reprint from
OPEC-Review, Vol. 23, No. 4 (December 1999), 273-291
Dresden University of Technology
DREWAG-Chair for Energy Economics
Energy in the Caspian Sea region in the late 1990s:
The end of the boom?
OPEC-Review, Vol. 23, No. 4 (December), 273-291
Christian von Hirschhausen and Hella Engerer1
Abstract
Since the early 1990s, the countries of the Caspian Sea region and Central Asia
(Azerbaijan, Kazakstan, Turkmenistan, Uzbekistan) have been expected to become
important players in the international oil and gas trade. Recent forecasts (1998) still
assume net exports of the Caspian region to increase to 75-118 million tonnes of oil
and 72-84 billion cubic metres of gas in 2010. However, the real development of the
energy sector in these countries since they gained national independence in 1991 has
been disappointing: oil production has so far hardly recovered from the post-Soviet
slump (47 million tonnes in 1997), and oil exports have remained marginal (17 million
tonnes, i.e. just 1% of international trade flows). The region’s gas production fell
from 146 billion cubic metres (1990) to 81 billion cubic metres (1997). Net gas
exports diminished from 61 billion cubic metres (1990) to a mere 7 billion cubic
metres (1997).
1 The authors are Research Associates, DIW German Institute for Economic
Research, Department of International Economics, Königin-Luise Str. 5, D14195 Berlin (Germany). Research assistance was provided by Katherina
Dittmann, Axel Schumacher, Wolfgang Härle and Grit Hannemann. The
authors wish to thank Paul Gregory (sen.) and Petra Opitz for comments on
an earlier version as well as the participants at the 4th European Conference
of the International Association of Energy Economists (IAEE, Berlin,
September 1998). Peter Jaschner provided editorial assistance. The usual
disclaimer applies.
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This paper analyses the development of the Caspian region’s energy sector over the
last decade. It also looks at the reasons why the high hopes concerning its potential
have so far been disappointed:
- the macroeconomic development of all Caspian countries suffered badly after the
collapse of the Soviet Union; furthermore, the incipient recovery after 1996/97 was
stifled by the fallout of financial turmoil in Russia and the CIS after August 1998;
- a number of technical, legal and political obstacles has so far prevented the
implementation of large investment projects; the drop of world oil prices has
aggravated the situation even more;
- the restructuring of domestic oil and gas companies is further complicated by socio economic obstacles, e.g. overemployment, intransparent systems of governance, and
the need to diversify regions dominated by a single industry.
In view of the existing structural problems, the paper concludes that a major
expansion of the region's energy output and exports is unlikely in the medium term.
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“Good for nothing, except maybe to grease a few wheels!“
Expert Commission’s appraisal of the subsoil resources in the Baku region to
Empress Catherine II, late 18 th century2
1.
Introduction
After the breakdown of the Soviet Union, there was a wide consensus among
energy economists that the countries of the Caspian region (Azerbaijan,
Kazakstan, Turkmenistan, Uzbekistan) would become important players in the
international oil and gas trade. The governments of the newly sovereign states
were not alone in hoping for economic development fuelled by energy.
International petroleum companies, too, spoke of the region's great “potential“
when they announced large-scale investment projects. Independent institutions
predicted growing energy production and export volumes for these countries
(EIA, 1998, IEA, 1998a). In addition to its potential exports to European and
international markets, the region’s geostrategic location also attracted worldwide attention (Brezinski, 1997). At times, the Caspian Sea was even
described as the "Gulf of the 21st century".
A decade after the first major involvement of a foreign company in the region
(Chevron in the Kazak Socialist Soviet Republic), and eight years after the end
of the Soviet Union, the high hopes for the development of energy in the region
have been dampened considerably. Recently, voices criticising the idea of an
energy boom in the region have been appearing in the specialised press
(Crow, 1998, Barnes and Saligo, 1998, Wyzan, 1999, Gobler, 1999).
Indeed, energy production (47 million tonnes of oil and 81 billion cubic metres
of gas in 1997) and exports (17 million tonnes of oil and 7 billion cubic metres
of gas) are small by international standards. Proven oil reserves in the Caspian
2
Quoted in Frederick P. Helbin (1966): Pipelines in Europa. Vienna; EuropaVerlag; p. 65.
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region that might be exported economically seem to be smaller than expected.
Legal conflicts have reduced the willingness to invest in the region's energy
sector. Also, the problem of export channels still remains to be resolved.
This paper analyses the development of the Caspian energy sector over the
last decade. It argues that the high hopes for this sector's growth have so far
been largely disappointed. Given the region's current proble ms, its financial
instability, and the glut of oil in international markets, a major expansion of
energy output in the Caspian basin seems unlikely in the medium term. Section
2 of the paper reviews macroeconomic developments in the four Caspian
countries since independence. Section 3 examines energy development in the
region and identifies a series of technical, legal, and political obstacles. Next,
three case studies highlight the complexity of energy projects in the peculiar
context of post-Soviet Caspian countries (section 4): the development of
Kazakstan's Tengiz oil field, Azeri efforts to secure routes for exporting their
oil, and Turkmen attempts to market their gas independently of Russia. Section
5 identifies additional socio -economic reasons why the idea of energy-based
economic growth continues to dominate policy debates around the Caspian
Sea and beyond. Finally, section 6 sums up the paper's main conclusions.
2.
Macroeconomic
environment:
from
post-Soviet
recession to financial turmoil in Russia
Caspian countries suffered badly after the collapse of the Soviet Union. Even
though they were not as heavily industrialised as, for example, Ukraine or
Slovakia, they participated fully in the socialist division of labour. Thus, the
Caspian economies were hit by the break-down of socialist barter trade with
other Soviet Republics. Real GDP fell continuously from 1992 to 1995. Since
then, it has shown only a few signs of stabilisation (except for Turkmenistan).
Absolute per capita income is among the lower in the entire former Soviet
bloc. In all Caspian economies, the energy sector plays an important role. Not
only is it the most important industrial sector. It also generates a large part of
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the countries' foreign-currency earnings. Energy is the most important export
sector in Azerbaijan, Kazakstan and Turkmenistan. Table 1 summarises the
region's main economic indicators for the years from 1992 to 97.
Table 1: Macroeconomic development of Caspian countries, 1992-97
ABOUT HERE
Economic recovery in Caspian countries was further hampered by the absence
of an institutional framework conducive to the development of a capitalist
market economy. So far, no stable legal framework has been adopted to
provide stable conditions for business activities. Due to the lack of liquidity in
the economies, as well as the absence of functioning banking and financial
systems, barter is the dominant form of trade. Inter-enterprise arrears are still
high and make it difficult to determine the economic value of enterprises. The
pace of privatisation is slow. The energy sector, in particular, remains largely
state-owned. The slow progress of institutional reform is reflected by the low
indicator of market reforms calculated by EBRD (1998), it is about the same
as that for European CIS countries (Russia, Ukraine, Belarus). By contrast,
the Central and Eastern European candidates for EU membership have
practically accomplished their institutional reforms (see table 1).
Financial turmoil in Russia and throughout the CIS, which followed the
devaluation of the Russian rouble in August 1998, has destroyed hope that the
Caspian countries might embark on a path of sustained growth. Financial
instability has spread throughout the region. Lending by private banks and
international financial institutions has been reduced. It will take years before
international capital markets regain confidence in the region. In the energy
sector, the situation has been aggravated by the fall of oil prices in late 1997
and all through 1998. Thus, the Caspian countries’ systemic transformation
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Energy in the Caspian Sea Region
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process still faces a number of difficulties, while macroeconomic developments
are likely to remain erratic in the medium-term.
3.
Development of the Caspian oil and gas sectors in the
1990s
3
3.1
Hope versus reality: stagnant energy output and exports
The development of real energy output contrasts sharply with the optimistic
forecasts made by Caspian governments themselves as well as by international
analysts (e.g. IEA, 1998a, EIA, 1998). The latter still assume that Caspia n oil
production will increase from 47 million tonnes (1997) to 69-79 million tonnes
by 2000, and then to 138-194 million tonnes by 2010. Net oil exports are
even expected to increase five- to eightfold, or in other words, to 29-33
million tonnes by 2000 and 75-118 million tonnes by 2010 (IEA, 1998, p. 3).
According to these scenarios, the Caspian region will indeed play an important
role in international oil markets early in the next decade. The development of
gas is forecast to be slightly less dynamic but still significant: gas production is
to rise from 96 billion cubic metres (1996) to 164-201 billion cubic metres
(2010), and net gas exports from 24 billion cubic metres (1996) to 72-84
billion cubic metres (2010).
In reality the situation looks very different. The region's countries have
remained rather small producers of oil and gas (see table 2). Oil production
3
This section draws upon earlier research, see Engerer and von Hirschhausen
(1998): The Energy Sector in the Caspian Sea Region. In: Economic
Bulletin, vol. 35, No. 9, September, pp. 21-33; and Dittmann et al. (1998):
Disenchantment in the Kazak and Caspian Oil and Gas Sectors. In:
Kazakstan Economic Trends, 3 rd Quarter.
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has hardly recovered from the post-Soviet slump. The 47 million tonnes
produced in 1997 represent no more than about one tenth of Saudi-Arabia's,
or one third of Norway's and Great Britain's output. Although oil exports have
steadily increased to about 17 million tonnes, they still account for just 1% of
international trade flows. Kazakstan is the only relevant exporter, as its exports
have tripled between 1994 and 1997.
Gas production in the region fell from 146 billion cubic metres (1990) to 81
billion cubic metres (1997), net exports from 61 billion cubic metres (1990) to
a mere 7 billion cubic metres in 1997. This is mainly due to export restrictions
imposed by Russia and the subsequent collapse of the gas industry in
Turkmenistan, where production fell from almost 90 billion cubic metres in
1990 to a mere 17 billion cubic metres in 1997. The other medium-sized
producer of gas is Uzbekistan, where consumption keeps rising roughly in step
with output, so that net exports remain insignificant (4.2 billion cubic metres in
1997).
Figure 1 compares the hope for Caspian oil to its real development. Although
most forecasts have been predicting a sharp increase in production and
exports, the actual level of output has remained more or less constant, which is
to say rather low.
Table 2: Energy production, net exports and domestic consumption in Caspian
countries, 1990-97
ABOUT HERE
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Figure 1: Hope versus reality in Caspian oil
Hope versus reality in Caspian oil
1998
200
150
2000
2002
2004
2006
2008
2010
Hope
years
Oil Production of Kazakstan,
Turkmenistan, Azerbaijan and
Uzbekistan
(estimated,
upper scale)
100
million
tonnes
Reality
(lower scale)
50
years
0
1990
1991
1992
1993
1994
1995
1996
1997
DIW 98
??
3.2. Obstacles to sustained development
What are the reasons for the stagnation in the Caspian energy sector? Here,
technical issues related to physical availability and costs (a and b) must be
distinguished from the legal and political issues of resource ownership and
export routes (c and d):
a) In fact, little is known about the precise amount of reserves that can be
exploited economically in and around the Caspian Sea. So far, resources have
neither been comprehensively appraised with regard to criteria applied in a
market economy, nor according to international technological standards.
Discrepancies remain between national estimates and those of international
analysts. The latter tend to converge, however. Crude oil reserves classified as
"proven" amount to about 2 billion tonnes. Over half of this is accounted for by
Kazakstan, and most of the rest by Azerbaijan (see table 3). Known natural
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gas reserves are put at between 4.5 and 7 trillion cubic metres. On top of this,
between 23 and 28 billion tonnes of oil, and approximately 8 trillion cubic
metres of natural gas, are thought to be deposited in the region, but it is far
from clear whether these can some day be recovered economically. Thus, the
region accounts for only about 2% of global oil and 3-5% of global gas
reserves. The Caspian Sea is therefore not, as is often claimed, the "Gulf of the
21st century". Oil reserves are not even as large as those in the North Sea,
and gas reserves are only slightly bigger.
Table 3: Estimates of Caspian oil reserves (billion tonnes)
ABOUT HERE
b) Even if reserves were as large as assumed, there would still be the question
of the international competitiveness of Caspian oil. Although the production
cost of existing Caspian oil fields is on average modest (ca. 35 USD per
tonne), transport and transit costs are higher than those of producers in
competing regions. This is due to complex transport schemes and low
transport volumes. Konoplyanik (1998) estimates that the c.i.f. price of
Caspian oil (excluding taxes) on the European market is between 60 USD per
tonne (Baku-Supsa-Genoa) and 100 USD per tonne (Tengiz-Aktau-BakuSupsa-Genoa), while the price of the Kazak CPC-project (TengizNovorossiysk-Genoa) hovers around 70 USD per tonne. This calculation
already assumes full economies of scale, that is 30 million tonnes a year, which
is unlikely to be reached soon. With regard to the costs of adding extra daily
peak crude oil production capacity, the Caspian countries also seem to be
rather expensive. In Azerbaijan marginal investment costs for additional
capacity are supposed to be about 12,000 USD per barrel and day, and in
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Energy in the Caspian Sea Region
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Kazakstan about 13,000 USD per barrel and day (Konoplyanik, 1998). 4 This
puts the total investment costs of potential suppliers in the region above those
of comparable countries, such as Venezuela (5,000 USD) or Gabon (6,000
USD). 5
c) Legal questions concerning property rights further complicate the picture
(IEA, 1998a, Gregory, 1998). Following the dissolution of the Soviet Union,
the distribution of the rights to the waterways and the resources beneath the
seabed became a contentious issue among the Caspian's new littoral states.
Russia, for example, insisted that the Caspian was a land-locked lake, and that
therefore the condominium principle was to be applied, whereas Kazakstan
took the view that the Caspian was an open sea and should therefore be
divided up according to the equidistance principle. In the spring of 1998
Russia, which up to that point had been unwilling to compromise, conceded
ground and signed a bilateral agreement with Kazakstan. According to this
deal, the seabed will be divided up between the two countries, while the sea
waters will be used jointly by both. However, this compromise between
Russia and Kazakstan was not endorsed by the other countries involved. In
particular, Iran, which wants to implement the very condominium principle
initially propagated by Russia, refuses to join the bilateral treaty and insists on
an agreement between all Caspian countries.
d) Although the debate over export routes has been very intense all through
the last decade, it has not yet produced any result.6 Given their one-sided
reliance on Russia's pipeline network, the Caspian countries are keen on
4
Of this, infrastructure costs alone are likely to amount to between 3500 and
7000 USD per barrel and day.
5
By way of comparison: the investment costs for additional capacity of one
barrel per day are around 500-1,000 USD in Iraq, 2,500-4,000 USD in
Saudi Arabia and 8,000 USD in Iran (IEA, 1996).
6
The most detailed description of projects is provided in IEA (1998a), see
also Konoplyanik (1998).
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Energy in the Caspian Sea Region
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develo ping alternative routes skirting Russia. Figures 2 and 3 indicate the
major existing, as well as planned, pipelines for oil and gas. Concerning oil, the
most intensely debated issue is a link between Azerbaijan and the Black Sea
and/or the Mediterranean. As of today, though, the only fully operative route is
still the one to the Russian port of Novorossiysk, to which Kazakstan also
wants to be linked. Fewer options are being discussed concerning the
transport of gas, as Turkmenistan is the only potential exporter. Many of the
routes under discussion run through crisis-prone regions, such as Chechnya,
Georgia, Kurdistan, and Afghanistan. Geopolitical motives have also decisively
influenced the composition of the international consortia set up in recent years
to build or modernise transport infrastructure. Foreign companies, many of
them based in the USA, have increased their presence in the region until 1997.
For the time being, only small, and thus less costly, projects have succeeded,
such as the reconstruction of the Baku-Supsa oil pipeline, or the short gas
pipeline linking Western Turkmenistan to Iran (Crow, 1998).
FIGURE 2: Major oil fields and pipelines in the Caspian region
ABOUT HERE
FIGURE 3: Major gas fields and pipelines in the Caspian region
ABOUT HERE
4.
Case studies on major energy projects
The following case studies highlight the complexity of key Caspian energy
projects, which has so far delayed the hoped-for dynamic developments. They
also point at the specifics of post-Soviet systemic change with which these
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Energy in the Caspian Sea Region
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countries are currently going through. In the early 1990s, their problems
looked similar to those encountered in other regions of the world. Now,
however, it seems that it will take much longer to solve the Caspian problems.7
4.1
The Tengiz oil field in Kazakstan
Development of the Tengiz field attracted the highest interest in the region even
before the break-up of the Soviet Union. Already back in the Soviet era,
Chevron, an American corporation, pledged to invest 40 billion USD in order
to develop what was considered to be one of the largest unexplored oil fields,
with estimated reserves of up to 1.5 billion tonnes. As soon as Kazakstan
became independent, it promoted the creation of “Tengizchevroil“ (created in
April 1993), a joint venture between Kazakstan and Chevron to develop the
field under a 40-year production-sharing agreement. In the first euphoria of
independence, Tengizchevroil even refused to join the Russian-led Caspian
Pipeline Consortium (CPC), which sought to export Kazak oil via Russia, and
tried to develop alternative outlets, e.g. direct sales to Azerbaijan across the
Caspian Sea (Aktau-Baku), transport by rail to Latvia and Estonia, and swaps
with Iran (Uzen-Turkmenbashi). The Kazak government considered Tengiz to
be its most important project involving foreign direct investment, and the
cornerstone of its efforts to develop an independent domestic oil and gas
industry. Production was to rise to 35 million tonnes per year by 2010.
However, field development has so far proceeded anything but smoothly
because of the difficult political environment, transport restrictions, and the low
quality of Tengiz crude oil, which requires additional treatment before shipping.
The search for alternative outlets turned out to be too expensive, so that
Tengizchevroil had to join the CPC in 1996. Yet political quarrels over the
7
The case studies are based on personal interviews, national sources, and the
works cited in this paper.
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composition of the consortium and the financing of the 4-billion-USD pipeline
project (for shipping 67 million tonnes per year to the Russian port of
Novorossiysk) have delayed construction thus far.8 Tengiz output has only
reached 7 million tonnes, with investment of around 500 million USD.
Thus, almost ten years after Chevron first arrived at Tengiz, initial plans have
not been fulfilled. Instead, prospects for the envisioned large-scale investment
keep deteriorating. The fact that Chevron gave up its pole position and
accepted other consortium partners in Tengizchevroil shows that it no longer
considers the Tengiz project to be of strategic importance. As of early 1999,
no less than eight international energy groups are represented in either
Tengizchevroil or the CPC.9
4.2
Azerbaijan: unresolved transport issues
Much of the Caspian energy hype is based on the hope that Azerbaijan can
resurrect its “glory days“ of the early 20th century when, for example, the
Nobel brothers made it the world’s number one oil producer. After peaking in
1940, output has steadily declined ever since. Nonetheless, the off-shore fields
near Baku have attracted great interest since they were re-opened to foreign
8
The Kazak and Russian governments contribute the land and existing
pipelines, while the investment is to be fully paid for by the foreign
companies. The Russian regions (Astrakhan, Kalmykia, Krasnodar,
Stavropol and Novorossiysk) have refused the right of way unless some
capacity is reserved for their local oil traders. Russia’s Transneft provided
only 3 million tonnes of export capacity in 1996, while the remainder had to
be shipped by railway.
9
Aside from Chevron, these are Lukoil and Rosneft (Russia), Amoco, Arco,
Mobil, Onyx (USA), British Gas (UK) and Agip (Italy).
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Energy in the Caspian Sea Region
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investment in the early 1990s. 10 They are said to offer the lowest production
costs in the Caspian region (less than 2 USD per barrel). Foreign companies
were grouped together in the Azerbaijan International Operating Company
(AIOC). Exports of so-called “early oil“, which, in fact, continued traditional
oil flows, started in late 1997. However, additional pipeline capacity was
considered necessary for the 25-30 million tonnes of “main oil“ expected per
year. Since 1992, a variety of options has been discussed: i) to expand the
capacity of the existing pipeline from Baku to Novorossiysk (Russia); ii)
partially to reconstruct the pipeline to Supsa (Georgia); and iii) to build a new
pipeline to Ceyhan (Turkey) in order to gain direct access to the
Mediterranean.
However, the glory days of Baku and Azerbaijan have not come back so far.
Until early 1999, the hoped-for discovery of large oil fields in the Caspian Sea
has not occurred. 11 Instead of increasing, oil production remained flat at only 9
million tonnes per year (see table 2), while exports fell to an insignificant 1.5
million tonnes in 1997. The problem of new pipelines for Azeri oil exports is
further complicated by the potentially high costs of building a new line.12 The
10
As early as June 1991, Amoco was negotiating a contract for the
development of one field, followed by BP, Ramco (UK), Exxon, Pennzoil,
Unocal (USA), TPAO (Turkey), Lukoil (Russia), Itochu (Japan) and DeltaNimir (Saudi-Arabia).
11
After significant amounts of oil failed to be discovered in the offshore
Karabakh and Absheron fields, all hope is now focused on the deep-water
Shah-Deniz field, which is being developed by a BP-led consortium.
12
Estimates for the Baku-Ceyhan pipeline vary from 1 to 4 billion USD. This
means average transport costs of 2.80 USD per barrel from Baku to Italian
ports, which exceeds the cost of existing routes by 1.40 USD per barrel
(this calculation assumes capacity of 0.8 million barrels per day , cf. Barnes
and Soligo, 1998). Once hailed as a realistic option for the transport of
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October 1998 decision was not to invest in any of the three routes at all. Given
the low production and export volumes available, additional capacity was no
longer regarded as necessary.
4.3
Turkmenistan: gas revved up with no place to go
In Soviet times, the Turkmen Socialist Republic had been a mid -sized gas
producer. It was therefore not unreasonable to expect newly independent
Turkmenistan to continue its role as a supplier of gas to Eastern Europe. In
addition, growing demand for gas in Asia (Pakistan, India) seemed to bode
well for the country's gas industry. After a variety of cooperative projects had
been concluded between 1992 and 1996, the Turkmens thought that their
economy could move from depression to growth based on the development of
its gas sector.
These hopes were dashed, though, by the collapse of the Turkmen gas
industry. Once the supply of know-how and technology from other republics
had stopped, the infrastructure necessary for the production and transport of
gas gradually fell apart. Since 1992 practically no maintenance work has been
carried out. Nor has the equipment been upgraded. Exploration activities and
new field development were stopped. And the small-scale production that still
continued was hampered by constraints on export capacity. Russia, now the
country's main competitor in the Eastern European and Turkish markets,
limited access of Turkmen gas to its grid by raising tariffs and introducing strict
quotas. The Pakistan-India project did not get under way at all.13 Thus, the
"main" oil, the Baku-Ceyhan route is now generally considered to be “bad
economics, bad politics, bad idea“ (Barnes and Soligo, 1998).
13
In 1995, a first, but unsuccessful, foreign investor was replaced by a USSaudi Arabian consortium that promised to market the gas itself. But it, too,
was discouraged by political upheaval in neighbouring Afghanistan, uncertain
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Energy in the Caspian Sea Region
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only successful project was the gas pipeline to northern Iran, carrying some 24 billion cubic metres to a power plant.
Another factor holding back Turkmen gas development may be the
intransparent governance structure of the industry. Largely state-owned, the
industry depends on personal decisions made at the highest political level,
sometimes even by the President himself. Turkmengas, the body responsible
for exploring, producing, processing and transporting natural gas, operates at
the mercy of the Ministry of the Oil and Gas Industry, to which it reports
directly. According to IEA (1998a, p. 248), the Ministry continues to exert
considerable managerial control. Private capital, be it foreign or domestic, is
not actively sought for this strategic sector. In the absence of an established
legal framework, contracts with foreign investors are negotiated on a case-bycase basis; they are not very consistent over time and must be renegotiated
when political powers change.
5.
The
socio-economic
issues
at
stake:
energy
independence, unemployment and local restructuring
Why has the “myth“ of Caspian countries' energy wealth survived thus far,
even though the performance of most countries and companies should have
been a rather sobering experience? Aside from technical and economic
factors, the discrepancy between official forecasts and real-world
developments can also be explained in terms of socio-economic factors that
are important in connection with the restructuring of the energy sector.
Although they are discussed less often and harder to quantify, they should not
be underestimated. While the specifics vary from country to country, the
following socio-economic aspects generally apply to all newly independent
republics of the former Soviet Union:
levels of solvent demand in Pakistan and India, as well as the Turkmen
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a) As these countries have only recently escaped from decades of Russian and
Soviet domination, their economic-policy debates are largely determined by
the issue of national security and energy independence. After the loss of
additional cheap energy imports from Russia, and the decline of traditional
domestic supplies (e.g. coal in Kazakstan, gas in Turkmenistan), these
countries are trying to develop new national energy sources, no matter what
the cost. Thus the hope for the development of the domestic oil and gas sector
reflect the policy priority of national energy independence.14 Kazakstan
provides a case in point: during the Soviet era, it largely depended on its
domestic coal industry. As its coal reserves are being depleted, the
development of indigenous oil and gas reserves is the only way to avoid to
become dependent on energy imports from Russia (including the proposed
purchase of Russian nuclear power plants).
b) The Caspian oil boom also benefits those foreign powers that are not yet
well established in this geostrategically important region, in particular the
United States of America. Indeed, the political, military, and business interests
of the main foreign operators are closely intertwined (Brezinski, 1997,
Gumpel, 1997, Bolukbasi, 1998). In this context, promises of large
bureaucracy; the project was canceled in late 1998.
14
These ideas are illustrated, for example, by E. A. Utembaev, a Kazak
minister and current chairman of the Agency for Strategic Planning and
Reforms Utembaev (1998): Strategic Planning and Control in the Republic
of Kazakstan. In: Kazakstan Economic Trends, second quarter, April-June,
17-25. Utembaev identifies national security and national unity as the two
top long-term priorities. In other words, they are more important than
economic growth or social issues. The priority of energy policy is “to rapidly
increase the production and export of oil and gas, earning revenue which will
stabilise economic growth and improve the life of the people. The
development effort will focus on meeting local market demand and
establishing an export-oriented fuel and energy industry“ (p. 23).
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investments and reiterations of the region’s “potential“ can be seen as attempts
to establish a foothold in this corner of the world. 15
c) Employment considerations are always at the core of economic policymaking. This is particularly true for countries facing an unprecedented
recession and turmoil in the labour market. Not only were energy industries in
Caspian countries massively overstaffed. They also provided indirect
employment, e.g. in mechanical engineering, construction, and services.16 In
this context, the expansion of activities and the creation of new employment in
the oil and gas sector are best understood as an attempt to avoid social
distress, the consequences of which are well known from coal miners’ strikes
in Russia.17
15
In the years following the Soviet collapse, i.e. in the early 1990s, it seemed
that “the flag followed trade“. Since then, the situation may have been
reversed, with governments beseeching companies to maintain and extend
their business commitments in the region, the modest outlook for profits
notwithstanding.
16
In 1996, for example, the Uzbek oil and gas industry alone employed
90,000 people. This number was even higher than the Russian employment
average, which itself was thought to represent three- to fivefold overstaffing.
In all Caspian countries, oil refineries employ thousands of people, even
though they operate at very low utilisation rates.
17
Azerbaijan represents a special case with regard to the redeployment of its
labour force. In addition to its oil production and refining industries, Azerbaijan
had, in the Soviet era, built up a huge oil and gas equipment industry. As a
result, it supplied some 65% of the USSR’s well service, production and
workover equipment. Yet only 6% of Azerbaijan's output of equipment was
for the republic's own needs (IEA, 1998a, p. 189). As the demand from
former Soviet republics for Azerbaijan's oil and gas equipment has declined,
the entire industry must now redirect its activities, establish joint ventures, and
18
Energy in the Caspian Sea Region
Opec Review
d) Closely linked to the problem of employment is the issue of structural
change at the local level, i.e. at the level of former industrial cities or entire
oblasts (regions). Indeed, many regions in Caspian countries are dominated by
a single industry. These industrial monocultures depend heavily on the energy
sector (e.g. the Baku-Sumgait strip in Azerbaijan, the AktyubinskKarachaganak area in Kazakstan, or the Mary and Chardzhou areas in
Turkmenistan). As it should be clear to policy-makers that the structure of
industry will have to change in step with the transformation towards a market
economy, their calls for energy-based development can best be understood as
an attempt to delay the inevitable structural change at the local level. As long
as innovative conversion policies are not implemented at the local level, the
political pressure for additional investment in oil and gas will be considerable.
e) Last but not least, certain individuals also have an interest in maintaining the
hype concerning the alleged “Caspian boom“, because they personally benefit
from it. Indeed, the governance structure of the Caspian energy industry is
anything but transparent. High-level politicians and managers of the stateowned companies decide most matters at their own discretion, with little
outside control. In the absence of transparent economic criteria for investment
decisions, the sector is dominated by the rent-seeking behaviour of a small
group of individuals. Such behaviour is evident, for example, in the way that
concession rights are granted, confidential information is sold, or benefits are
simply derived from the induced effects of the “boom“ (such as construction
work, hotel services, consulting jobs, and the like).
6.
Outlook: much ado about ... little
This paper has tried to show that the Caspian oil and gas sector is rather small
by international standards. Any hopes that the volume of production and
adjust to international quality standards. Still, overemployment will remain a
serious social problem.
19
Energy in the Caspian Sea Region
Opec Review
exports will grow substantially are therefore unlikely to be fulfilled. Although
foreign investment has increased over the past year, a major expansion of the
Caspian region's energy output should not be expected. A number of smaller
production and pipeline projects may indeed succeed; however, any big new
projects face much economic and political uncertainty. The optimistic forecasts
made by Caspian governments and a few international analysts diverge from
real-world developments over the last decade. Under the conditions of a
capitalist market economy, modest energy prices, and unstable financial
markets, the Caspian region should no longer be considered as “energy-rich“.
Does this mean that the Caspian energy boom was just a “Caspian Dream“
(Crow, 1998)? Not necessarily. Should international energy prices pick up
again, financial markets throughout the CIS regain confidence, and the
macroeconomic situation of Caspian countries improve, there may be some
room for a slight expansion of energy production and exports. It does mean,
however, that the myth of energy-based growth in the region should no longer
dominate policy debate in the region. The main obstacles for the development
of the oil and gas sector are to be found in the region itself, i.e. in the difficult
transformation of Soviet-style industries into market-and profit-oriented
business enterprises. Therefore, policy debate should shift its focus from
technical issues (such as reserve estimates, export routes, and potential
exports) to the ‘soft’ factors important for development, i.e. the socioeconomic factors discussed earlier. They must also be taken into account
when the over-optimistic forecasts are revised.
20
Energy in the Caspian Sea Region
Opec Review
List of References
Barnes, Joe, and Soligo, Ronald (1998): Baku-Ceyhan Pipeline: Bad
Economics, Bad Politics, Bad Idea. In: Oil&Gas Journal, Oct. 26, 29-34.
Brezinski, Zbigniew (1997): The Grand Chessboard, American Primacy and
1st Geostrategic Imperatives. Basic Books; New York.
Bolukbasi, Suha (1998): The Controversy over the Caspian Sea Mineral
Resources: Conflicting Perceptions, Clashing Interests. In: Europe-Asia
Studies, Vol. 50, No. 3, 397-414.
Crow, Patrick (1998): Caspian Dreams. Oil&Gas Journal, Oct. 26, 32.
EBRD (various issues): Transition Report: Economic Transition in Eastern
Europe and the Former Soviet Union, London; European Bank for
Reconstruction and Development.
Energy Information Administration (1998): International Energy Outlook
[www.eia.doc.gov/oiaf/ieo98/oil.html]
Gregory, Paul R. (1998): Developing Caspian Energy Reserves, the Legal
Environment. Paper prepared for the Conference “The Caspian Energy
Resources: Implications for the Arab Gulf“, The Emirate Centre for
Strategic Studies and Research, Abu Dhabi, October.
Gobler, Paul (1999): Where Reforms Trump Resources. In: RFE/RL
Research Service, vol. 3, No. 4, part II (January 7).
Gumpel, Werner (1997): Caucasus, Turkey and the Oil Problem. In: Global
Economic Review, vol. 26, No. 1 (Spring), 19-27.
Hirschhausen, Christian von, and Hella Engerer (forthcoming in 1999): PostSoviet Gas Sector Restructuring in the CIS - A Political Economy
Approach. In: Energy Policy.
IEA (1996): Oil, Gas and Coal Supply Outlook. Paris.
IEA (1998a): Caspian Oil and Gas, the Supply Potential of Central Asia and
Transcaucasia, Paris.
21
Energy in the Caspian Sea Region
Opec Review
IEA (1998b): World Energy Outlook. Paris.
Konoplyanik, Andrei (1998): Middle East, Russia and Caspian Region - New
Geopolitics for Oil and Gas Flows in the Eastern Hemisphere. Paper
presented at the IVth European Conference of the International
Association of Energy Economists, Berlin, September.
Seck, Andrew (1997): Oil&Gas Finance and Investment in the Former Soviet
Union. PhD-Dissertation at the University of Dundee, Centre for Energy,
Petroleum/Mineral Law and Policy.
U.S. Department of State (1997): Report to Congress on Caspian Region
Energy Development. Washington, D.C.
United States Energy Information Administration (US-EIA) (1998): Country
Economic
Profile
(various
countries):
[http://www.eia.doe.gov/emeu/cabs/“country“.htn].
Walede, Thomas, and von Hirschhausen, Christian (1999): Regulatory Reform
in the Energy Industry of Post-Soviet Countries: The Third Way? In:
Seidman, A., Seidman, R.B. and Waelde, T. (eds.): Making
Development Work: Legislative Reform for Institutional Transformation
and Good Governance. London; Kluwer Law International.
Wyzan, Michael (1999): Oil and Gas no Panacea for Caspian Countries’
Economic Woes. In: RFE/RL Research Service, vol. 3, No. 1, part I
(January 4).
22
Ceyhan
0
0
100
200
300 Miles
300 400 500 km
Samsun
Black Sea
Odessa
to Central Europe
Mediterranean Sea
Alexandroupolis
to Trieste
Brody
Supsa
existing pipelines
projected “
Novorossijsk
Tikhoretsk
oilfield
Grozny
Komsomolskaya
Caspian
Sea
Tengiz
to Persian Gulf
(Kharg Island)
Turkmenbashi
Uzen
Atyrau
Isfahan
SchachDeniz
to Samara
DIW
via
Afghanistan
to Pakistan
(Gwadar)
?
to China
(Xinjang)
Chardzhou
Aral
Sea
Aktjubinsk
Figure 2: Major Oil Fields and Pipelines in the Caspian Sea Region
24
0
0
100
200
300
300 Miles
400 500 k m
Mediterranean Sea
Ceyhan
Ankara
Samsun
Black Sea
to Bulgaria
and Western Europe
to Central Europe
existing pipelines
projected “
Tuapse
gasfield
Baku
Kaspian
Sea
Aleksandrov Gaj
Kord Kuy
Okarem
Turkmenbashi
Tengiz
DIW
Dauletabad
AralSea
?
to
Pakistan
to China/Japan
Aktyubinsk
Figure 3: Major Gas Fields and Pipelines in the Caspian Sea Region
Energy in the Caspian Sea Region
Opec Review
Table 1
Macroeconomic developments of Caspian Sea countries, 1992-97
1992
1993
1994
1995
1996
Azerbaijan (population: 7.6 mn)
Annual real GDP growth (%)
..
-23.1
-18.1
-11.1
1.3
GDP per capita (USD, PPP)
..
730
1345
1665
..
Inflation (CPI, year to year, %)
..
1130
1664
412
20
Share of energy in industrial production
(%, current prices)
16
25
32
41
..
Trade balance (USD mn)
..
-122
-163
-275
-549
Indicator of market-oriented reform 1/
..
1.3
1.6
1.8
2.0
Kazakhstan (population: 15.9 mn)
Annual real GDP growth (%)
GDP per capita (USD)
Inflation (year to year, %)
Share of energy in industrial production
(%, current prices)
Trade balance (USD mn)
Indicator of market-oriented reform 1/
Turkmenistan (population: 4.7)
Annual real GDP growth (%)
GDP per capita (USD)
Inflation (year to year, %)
Share of energy in industrial production
(%, current prices)
Trade balance (USD mn)
Indicator of market-oriented reform 1/
Uzbekistan (population: 23.8)
Annual real GDP growth (%)
GDP per capita (USD)
Inflation (year to year, %)
Share of energy in industrial production
(%, current prices)
Trade balance (USD mn)
Indicator of market-oriented reform 1/
1997 1998 (e)
5.5
..
8.5
..
4
..
-619
2.3
6
..
-967
..
-5.3
3827
1519
-9.2
3316
1571
-12.6
2569
1900
-8.2
2426
170
0.5
2510
39
2.0
2713
17
-2.5
2645
7
21
-1117
..
21
-1560
1.7
22
-1453
2.1
22
-572
2.6
26
-603
2.6
29
-777
2.8
..
-1801
..
-5.3
2674
494
-10.0
2413
3102
-18.8
1929
1748
-8.2
1626
1005
-3.0
1592
992
-17.0
..
87
-1.0
..
25
25
1141
..
27
1101
1.2
26
486
1.1
26
404
1.1
..
159
1.5
..
-477
1.5
..
-386
..
-11.1
..
528
-23.0
..
857
-4.2
..
1314
-1.2
..
305
13
18
..
2.0
27
37
827
2.4
..
..
..
2.3
1.6
..
5.2
..
4.4
..
64
28
22
..
-131
2.4
..
-136
2.3
..
-140
..
1/ Source: EBRD, values can vary between 1 (no reform) and 4 (market-reforms accomplished); the average for
the European Union accession countries in 1997 is 3.3, for the European CIS-countries 2.3
.. : not available
Sources: National statistics, EBRD, IEA (1998a), BMWi Dokumentation Nr. 420 and Nr. 459
Table 2
Energy production, net exports and domestic consumption in Caspian countries, 1990-97 1)
1990
1991
1992
1993
1994
1995
1996
1997
Crude oil (million tonnes)
Kazakhstan
Production
Net Export
Domestic consumption
Turkmenistan
Production
Net Export
Domestic consumption
Azerbaijan
Production
Net Export
Domestic consumption
Uzbekistan
Production
Net Export
Domestic consumption
Total Caspian
Production
Net Export
Domestic consumption
1998
25.8
-1.7
27.5
26.6
3.9
22.7
25.8
3.9
21.9
23.0
7.2
15.8
20.3
6.3
14.0
20.5
10.2
10.3
23.0
16.5
6.5
25.7
16.5
9.2
25.9
14.6
11.3
5.7
2.6
3.1
5.4
2.1
3.3
5.2
0.2
5.0
4.9
0.8
4.1
4.4
0.7
3.7
4.7
0.3
4.4
4.4
0.3
4.1
4.5
0.3
4.2
6.3
1.3
5.0
12.5
3.1
9.5
11.7
2.5
9.2
11.1
4.0
7.1
10.3
2.8
7.5
9.6
2.1
7.5
9.2
0.9
8.3
9.1
1.2
7.9
9.0
1.5
7.5
11.4
4.1
7.3
2.8
-9.0
11.8
2.8
-8.4
11.2
3.3
-6.1
9.4
3.9
-5.4
9.3
5.5
-2.6
8.1
7.6
-1.0
8.6
7.6
-1.4
9.0
7.8
-1.4
9.2
8.0
-1.6
9.6
46.8
-5.1
51.9
46.5
0.1
46.5
45.4
42.1
39.8
2.0
5.4
6.5
43.4
36.7
33.3
Natural gas (billion m3)
42.0
10.4
31.6
44.1
16.6
27.5
47.0
16.9
30.1
51.6
18.4
33.2
8.1
-6.0
14.1
6.7
-4.2
10.9
4.5
-4.4
8.9
5.9
-4.4
10.3
6.4
-4.5
10.9
6.1
-4.5
10.6
6.2
-4.7
10.9
60.1
51.8
8.3
65.3
48.1
17.2
35.7
27.2
8.5
32.3
25.7
6.6
35.2
24.0
11.2
17.0
7.0
10.0
13.2
3.7
9.5
7.9
-3.8
11.7
6.8
-2.3
9.1
6.4
-2.0
8.4
6.6
0.0
6.6
6.3
0.0
6.3
6.3
0.0
6.3
5.6
0
5.6
42.8
1.5
41.3
45.0
1.4
43.6
47.2
3.9
43.3
48.6
4.4
44.2
49.0
4.2
44.8
51.2
4.2
47.0
54.8
6.2
48.6
118.9
43.5
75.4
123.8
43.0
80.8
93.8
24.7
69.1
93.4
25.7
67.7
96.9
23.7
73.2
80.6
6.7
73.9
79.8
5.2
74.6
Kazakhstan
Production
7.1
7.9
Net Export
-5.9
-5.9
Domestic consumption
13.0
13.8
Turkmenistan
Production
87.8
84.3
Net Export
71.9
70.0
Domestic consumption
15.9
14.3
Azerbaijan
Production
9.9
8.6
Net Export
-8.4
-8.4
Domestic consumption
18.3
17.0
Uzbekistan
Production
40.8
41.9
Net Export
2.9
2.9
Domestic consumption
37.9
39.0
Total Caspian
Production
145.6
142.8
Net Export
60.5
58.6
Domestic consumption
85.1
84.2
1) Excluding changes in inventories.
Source: DIW database on East European energy.
Table 3
Estimates of Caspian oil reserves (billion tonnes)
Estimates of international analysts
U.S. Department of
State (1997)
IEA (1998)
BP (1998)
Azerbaijan
0.5
0.5-1.5
1.0
Kazakhstan
1.4
1-3
1.1
Turkmenistan
0.2
0.15 - 0.2
n.a.
Uzbekistan
0.0
0.03
0.1
Total
2.2
1.7-4.7
2.2
1/ as cited in IEA (1998), and national sources
National estimates
1/
2.5
2.1 - 3.1
6.7
0.6
12.9