ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

Caspian states fight over oil and gas riches

Two decades after the collapse of the Soviet Union and the birth of three new Caspian republics, the legal status of the Caspian Sea and its abundant hydrocarbon resources remain uncertain.

     The issue will be on the negotiating table at the fourth Caspian summit in Astrakhan, Russia, on Sept. 29, when Azerbaijan, Kazakhstan and Turkmenistan will sit down with Russia and Iran, the other Caspian littoral state. But agreement on the basin's legal status appears unlikely as Russia exercises a newly defiant foreign policy in the Caspian region, while the three new republics focus on escaping Moscow's control over oil and gas exports.

   "It is impossible that the issue is going to be sorted out at the summit," said Barbara Janusz-Pawletta, research associate at the Free University of Berlin and author of the upcoming book, "The Legal Status of the Caspian Sea."

     "From a legal standpoint, it's very important whether you call it a sea, or a lake, or a condominium, because then you have to follow rules according to international conventions," Janusz-Pawletta told the Nikkei Asian Review. "However, the Caspian states are not talking about these options anymore, but rather discussing new ones. If they don't call it a sea, or a lake or condominium, then they can just create their own rules," she said.

Troubled waters

As a new regional order emerged in Central Asia from the ashes of the Soviet Union, the five Caspian coastal states recognized the need for an update of the Soviet-Iranian treaties that had regulated the basin since 1921. Russia initially tried to veto any deal involving oil and gas, only to take a step back in the late 1990s, when it agreed to bilateral treaties with Azerbaijan and Kazakhstan that granted sovereign rights over the resources off their coasts.

    Although Iran and Turkmenistan never recognized these agreements, the treaties gave Azerbaijan and Kazakhstan legal grounds for the development of oil and gas fields. With the construction of the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, which came on stream in 2006 and 2008 respectively, Caspian hydrocarbons began flowing from Azerbaijan on the west coast of the Caspian to Turkey, and on to western Europe. Both pipelines are outside Moscow's control.

    Russia's foreign policy has now taken a dramatic twist, as the Ukraine crisis breathes new life into the Kremlin's ambitions to strengthen its leverage over former Soviet territories. The Caspian region is no exception and, in a sudden turnaround, the Kremlin has renewed its support for the 1921 Soviet-Iranian treaty. The change was confirmed by Igor Bratchikovthe Russian Foreign Ministry's ambassador-at-large, at a briefing for reporters in Moscow on Sept. 22.

    "Right now (the Russians) have a great foreign policy incentive to try to stop the flow of oil and gas to Europe," said Jim von Geldern, professor of Russian and international studies at Macalester College in the U.S. state of Minnesota. "If they go back to the 1921 convention, they treat the basin more like a lake, which means they have to negotiate any division of resources. If it is negotiation, rather than law, then it is to the advantage of the more powerful countries such as Russia and Iran."

     Dmitry Shlapentokh, professor of Soviet and post-Soviet history at Indiana University, also in the U.S., said Russia's main objective is to protect its gas sales to Western Europe from Caspian Sea competition. "Because of that, Turkmenistan and its large endowment of gas resources is a major cause of concern for Moscow. If (Turkmenistan) joins forces with Azerbaijan through a trans-Caspian pipeline, that would pose a serious threat to the Russian monopoly. This is why Russia's priority is to prevent such a pipeline from seeing the light."

 Bye-bye, bear

   Yet this is exactly what the two former Soviet republics are aiming at. On Sept. 20, Azerbaijani President Ilham Aliyev marked the start of work on a new Baku-Tbilisi-Ceyhan gas pipeline capable of carrying up to 16 billion cu. meters gas annually to Turkey from the giant Shah Deniz field. The 3,500km pipeline is being developed by a consortium of oil companies led by BP, and is expected to reach Europe in 2018. It could also link to a future trans-Caspian pipeline carrying gas from Turkmenistan west across the Caspian Sea.

     Turkmenistan is already moving forward with an internal east-west pipeline network that will connect the Galkynysh gas field, the world's second-largest of its kind, with the country's eastern Caspian shoreline. From there it can be sent either north to Russia or west to Baku, across the sea. Separately, Turkmenistan is considering a pipeline southward to supply gas to Afghanistan, Pakistan, and India.

    Kazakhstan is seeking export alternatives as well. Talks with Azerbaijan are underway to use tankers to ship some future production from the Kashagan field in Kazakhstan to Baku for onward pumping westward. Iran has shown interest in resuming oil swaps with Kazakhstan, and it will activate a Kazakhstan-Turkmenistan-Iran railway link in a matter of months. But its ability to absorb Kazakh oil will depend on the outcome of international negotiations on Iran's nuclear program, and the lifting of sanctions on Iranian oil exports.

     Before the swap agreements were suspended, Kazakhstan delivered crude oil to Iran, which refined it in facilities serving northern provinces far from its oil fields in the south. In return, Iran sold an equal volume of crude at its Persian Gulf terminals on Kazakhstan's behalf. The scheme saved both countries the cost of moving oil across Iran, and offered Kazakhstan access to export routes in the Persian Gulf.

    Turkmenistan and Kazakhstan are also strengthening ties with China, to the east. Chinese concerns have already laid several pipelines across Central Asia and bought major interests in the Kashagan and Galkynysh fields.

     The feasibility of many of these export options depends on the talks over the Caspian Sea's legal status. With Russia playing a more aggressive geopolitical game, the three former Soviet republics may find it difficult to reach or sustain agreements that give them the export rights they want.

    They do not want to comply with the Soviet-Iranian treaties, "But they will do it if they are compelled to, and Russia has been known for doing things like that," said von Geldern. The likely outcome is that agreement on the status of the Caspian will be postponed again, leaving pipeline and production projects worth many billions of dollars stranded in legal limbo.  

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends October 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more