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Thursday, December 07, 2006

A Sea of Oil

prime minister of RF Fradkov5 December 2006 - Kommersant -// The fight for Caspian oil will be one of the biggest issues in international politics in years to come. Although Russian Prime Minister Mikhail Fradkov declared when he arrived in Baku that Russia and Azerbaijan should develop cooperation in all aspects, and not in energy alone, energy issues nonetheless are the most important for both sides today. And the issues are complex. Azerbaijan announced before Fradkov's visit that it may reroute oil that would have been transported across Russia to the Baku-Tbilisi-Ceyhan pipeline. Not long before that, Azeri President Ilham Aliyev visited Brussels.
Kazakh President Noursultan Nazarbaev also made a European tour not long ago. It was followed by a visit by an EU delegation to Astana to reach agreement on energy cooperation. The Europeans want to set up a system of information exchange and assess the volume of long-range investment needed in the production and transit infrastructure in Kazakhstan.
Relations between the Caspian countries and Russia and European Union will probably be one of the biggest intrigues in international politics in the near future. There are all the signs of a second wave of “Caspian fever” beginning. “World energy security is directly tied to the reserves and the perspectives for production of the Caspian states,” a UN report published last week reads.
The first wave of Caspian fever struck the world in the 1990s, when the Caspian states, only just appearing on the map, declared the colossal oil reserves under the Caspian Sea. Later several investment projects fell through because of inadequate assessment of the region's resources and international corporations temporarily cooled relations with the region as oil prices fell and the division of Caspian between Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan seemed far off in the future. The status of the Caspian has still not been finally determined, but significant progress has been made and that problem is no longer an obstacle to the development of several large deposits. Meanwhile, fuel prices have jumped dramatically, and with them in long-term investment in new deposits.
Proven reserves of Caspian oil and natural gas amount to 4 percent of the world supply. International Energy Agency analysts estimate that the regions oil reserves may prove to be 20 percent of the world supply. Experts in a U.S. Congress research group note that, besides the size of the reserves, Caspian oil has the advantage of being cheap to produce. Only Middle Eastern oil can compare to it in both those respects.
Political risks in the region are significant, but lower than in Africa. It is also important that only one of the Caspian states, Iran is an OPEC member. That is also positive difference between the Caspian and African countries, which either belong to OPEC (Nigeria and Algeria) or intend to join it (Angola has just announced its desire to be part of OPEC, and Sudan is expected to). “The countries that plan to join OPEC have an anti-Western policy, and the price for their resources is the most important of all for them,” noted Sergey Chernavsky, who heads a laboratory at the Russian Academy of Sciences Central Economics and Mathematics Institute. “But the Caspian states are counting on partnership with the West. Several of them plan to join the WTO in the near future.” The Caspian may soon become the world's largest oil non-OPEC producing region.
Four major forces are gathering around the Caspian. They are China, Russia, the United States and the EU. Several factors limit investors at present: Russia's control over most of the delivery routes to Europe, an undeveloped infrastructure and political risks that are mainly connected with the Iranian nuclear program. Heritage Foundation analysts say that none of them will be able to dominate the region single-handedly. The U.S., Europe, Russia and China will have to learn to cooperate to attain security and the necessary ace of development of the rich resources. Russia is unlikely to succeed in preventing diversification of supply channels for Caspian oil. That means that its relations with Kazakhstan and Azerbaijan will have to take on a substantially different nature from earlier days.
Iran is the most serious problem. But experts are expressing guarded optimism. “There is an influential group of technocrats in Iran that want to see Iran not a nuclear power, but a great energy power,” says Alexey Malashenko of the Moscow Carnegie Foundation. Malashenko thinks that the current problems with Iran are but temporary distractions from one of the most important energy projects for decades to come – the energy flow from the Caspian region to Europe and China.

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