June 2000

Caspian Sea Region

The Caspian Sea region is important to world markets because it has large oil and gas reserves that are only now beginning to be fully developed. Developing these resources has resulted in competition both between companies to get the contracts to develop this potential, and between nations to determine the final export routes.

Note: information contained in this report is the best available as of June 2000 and can change.


The Caspian Sea region's oil and gas potential has attracted much attention since the breakup of the Soviet Union. The nations in the Caspian Sea region - Azerbaijan, Iran, Kazakhstan, Russia, Turkmenistan, and Uzbekistan - are already major energy producers, and production will increase with additional investment, technology, and the development of new export outlets. The Caspian Sea is 700 miles long and contains six separate hydrocarbon basins.

Most of the oil and gas reserves in the Caspian Sea region have not been developed, and many areas of the Caspian region remain unexplored. Most of Azerbaijan's oil resources (proven as well as possible reserves) are located offshore, and perhaps 30%-40% of the total oil resources of Kazakhstan and Turkmenistan are offshore as well. Proven oil reserves for the entire Caspian Sea region (total country reserves, not just for the Caspian Sea itself) are estimated at 18 - 35 billion barrels, comparable to those in the United States (22 billion barrels) and the North Sea (17 billion barrels). Natural gas reserves are even larger, accounting for almost two-thirds of the hydrocarbon reserves (proved plus possible) in the Caspian Sea region. Based upon proven reserves, Kazakhstan, Turkmenistan, and Uzbekistan each rank among the world's 20 largest natural gas countries. Proven gas reserves in the Caspian region are estimated at 236 - 337 trillion cubic feet (Tcf), comparable to North American reserves of 300 Tcf.

The prospect of potentially enormous hydrocarbon reserves is part of the allure of the Caspian region. Besides the 18-35 billion barrels currently proven, the region's possible oil reserves could yield another 235 billion barrels of oil if proven. This is roughly equivalent to a quarter of the Middle East's total proven reserves (however, the Middle East also has its own vast possible reserves). Possible gas reserves are as large as the Caspian's proven gas reserves, and could yield another 328 Tcf if proven. However, these reserves are located far from potential markets in relatively remote Turkmenistan, Kazakhstan, and Uzbekistan. The distance from potential markets and the relative lack of infrastructure to export this gas have tempered interest in the region's gas potential. The alternatives to exporting gas through the Russian pipeline system are exporting through war-torn Afghanistan, through Iran (where investment is limited by sanctions), or by building some of the world's longest pipelines to markets in China and Europe.

Key issues in this region include: 1) legal issues concerning ownership and development rights in the Caspian Sea; 2) regional instability; 3) development of transnational export routes to take oil and gas from the landlocked Caspian Sea region to world markets; 4) the related issue of energy exports through the Bosporus and into the Black Sea; and 5) Iranian sanctions and the role of Iran.

Export Route Issues

New transportation routes will be necessary to carry Caspian oil and gas to world markets. The pipelines in the Caspian Sea region that were completed prior to 1997 were designed to link the Soviet Union internally, and were routed through Russia. Most of the existing Russian oil export pipelines terminate at the Russian Black Sea port of Novorosiisk, requiring tankers to transit the crowded and ecologically and politically sensitive Bosporus in order to gain access to the Mediterranean and world markets. Furthermore, there is some question as to whether the Mediterranean is the right place to send all of the forthcoming oil and gas from the Caspian, as oil demand over the next 10-15 years in Europe is expected to grow by little more than 1 million barrels per day (bbl/d). Oil exports eastward, on the other hand, could serve Asian markets, where demand for oil is expected to grow by 10 million bbl/d over the next 10-15 years. Finally, there are political and security questions as to whether the newly independent states of the former Soviet Union should rely on Russia or any other country as their sole export outlet. As a result, multiple routes for Caspian oil and gas exports have been proposed. Russia itself has proposed multiple pipeline routes that utilize Russian export pipelines that transport oil to new export outlets being developed on the Baltic and Mediterranean Seas.

President Shevardnadze of Georgia first proposed the idea of a transport corridor in 1993 to address some of these issues. The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a European Union (EU) conference later that year. The EU conference brought together trade and transport ministers from the Central Asian and Caucasian republics to initiate a transport corridor on an West-East axis from Europe, across the Black Sea, through the Caucasus and the Caspian Sea to Central Asia. In September 1998, twelve nations (including Azerbaijan, Bulgaria, Kazakhstan, Romania, Turkey, and Uzbekistan) signed a multilateral agreement known as the Baku Declaration to develop the transport corridor through closer economic integration of member countries, rehabilitation and development of new transportation infrastructure, and by fostering stability and trust in the region. In addition, the EU has sponsored the INOGATE program, which appraises oil and gas exports routes from Central Asia and the Caspian, and routes for shipping energy to Europe. INOGATE is run through the EU's TACIS program.

How Much Oil Could be Exported from the Caspian Sea Region? Oil production in the Caspian Sea region is projected to reach 1.3 million bbl/d in 2000, of which about 800,000 bbl/d, mostly from Kazakhstan, will be exported. However, only about 300,000 bbl/d will be exported outside the former Soviet Union.

Production in the region is projected to increase severalfold, led by three major projects currently under development in Azerbaijan and Kazakhstan. In April 1993, Chevron concluded a historic $20 billion, 50/50 joint venture deal with Kazakhstan to create the Tengizchevroil joint venture to develop the Tengiz oil field, estimated to contain recoverable oil reserves of 6-9 billion barrels with a peak production of 750,000 bbl/d by 2010. In what was described as "the deal of the century," the Azerbaijan International Oil Consortium (AIOC ) signed an $8 billion, 30-year contract in September 1994 to develop three Caspian Sea fields -- Azeri, Chirag, and Guneshli -- with proven reserves estimated at 3-5 billion barrels. Oil production is expected to reach 800,000 bbl/d by the end of the decade. Although signed with less fanfare in 1997, the offshore Kashagan block being developed by the Offshore Kazakhstan International Operating Company (OKIOC) has been reported as having oil reserves of greater than 8 billion barrels.

These projects, along with others currently underway, could help boost Caspian Sea region production to almost 4 million bbl/d, and could increase Caspian Sea region oil exports to over 3 million bbl/d by the end of the decade. By 2020, production and exports could increase by another 2 million bbl/d. Although not another Middle East, as some have claimed, the Caspian Sea region is comparable to the North Sea in its hydrocarbon potential.

How Many Oil Pipelines Will be Needed? Prior to 1997, exporters of Caspian oil had only one major pipeline option available to them, the 210,000 bbl/d Atyrau-Samara pipeline from Kazakhstan to Russia. In addition, smaller amounts of oil were shipped by rail and barge through Russia, as well as by a second, small pipeline from Kazakhstan to Russia.

With the development of the AIOC and Tengiz oil projects, new pipelines were needed to transport oil to world markets. The first new pipeline route to be developed were the two early oil pipelines built to carry initial volumes of AIOC oil to world markets. AIOC Exports began in late 1997 along a northern route from Baku to Novorosiisk, and exports increased with the completion of the western route for early oil from Baku to the Georgian Black Sea port of Supsa in April 1999. These two routes had a combined initial design capacity of about 235,000 bbl/d. Disputes and instability in the Chechnya region along the Northern Route led to the completion of a Chechen bypass in 2000. The completion of this bypass (including a rail bypass) and a link to the Russian Caspian Sea port of Mahachkala raised total capacity of these alternative pipeline routes to 375,000 bbl/d.

In addition, a new pipeline is being built to meet the projected peak volumes from the Tengiz field and other Kazakh projects. The Caspian Pipeline Consortium (CPC) is constructing a 1.34 million-bbl/d oil export pipeline that will bring Tengiz oil to the Russian Black Sea port of Novorosiisk. CPC members include Russia (24%), Kazakhstan (19%), Chevron (15%), LukArco (12.5%, Russia/United States), Mobil (7.5%), Rosneft-Shell (7.5%, Russia-U.K./Netherlands), Oman (7%), BG (2%, U.K.), Agip (2%, Italy), Kazakhstan Pipeline Ventures (1.75%, Kazakhstan), and Oryx (1.75%, United States). Phase I of the CPC pipeline will be completed in June 2001 with a capacity of 564,000 bbl/d.

In addition, the Tengizchevroil joint venture has been developing additional routes for getting Tengiz oil to world markets, including shipping oil by barge across the Caspian to ports in Azerbaijan for further trans-shipment westward by rail and pipeline to the Black Sea. Tengizchevroil plans to ship oil to the port of Dubendi in Azerbaijan, and will use rail and a renovated Khasuri-Batumi oil pipeline (separate from the AIOC pipelines) to transport another 70,000 bbl/d of oil westward to Georgian ports. In addition, small amounts of oil are being exported from Kazakhstan via rail through Russia and to China.

By the end of 2001, the new export routes will have increased total export capacity from the Caspian Sea region to 1.3 million bbl/d. These pipelines are insufficient to carry the large oil flows expected from the AIOC and other projects. A 1 million bbl/d pipeline has been proposed for a Main Export Pipeline (MEP) to transports oil from the AIOC and other Caspian Sea oil projects. On October 29, 1998, support for the Baku-Ceyhan route for the MEP was affirmed with the signing of the Ankara Declaration by the governments of Azerbaijan, Georgia, Kazakhstan, Turkey, and Uzbekistan, with Turkemenistan abstaining. The Istanbul Declaration, signed by Azerbaijan, Georgia, Turkey, Turkmenistan, and the United States on November 18, 1999, reaffirmed the route by making a formal agreement between the governments of Azerbaijan, Georgia, and Turkey for the construction of the pipeline along this route, and all three governments have ratified this agreement. In May 2000, representatives of these countries met with potential investors to pave the way for the creation of a Main Export Pipeline Company, or MEPCO.

For this pipeline to move forward, significant flows will be needed to justify the expense. Azerbaijan could supply about half of the oil required, but the other half will need to come from sources other than Azerbaijan. Nurlan Balgimbayev, president of Kazakhoil, has stated that the Baku-Tbilisi-Ceyhan pipeline will not exist without Kazakh oil. Kazakhstan has indicated that it could supply 400,000 bbl/d through this line, although with the completion of the CPC line and the expansion of the Atyrau-Samara pipeline to Russia Kazakhstan will have limited amounts to export via this pipeline in the near future until additional Kazakh production from the OKIOC or other projects comes online. Differences in crude oil quality between Kazakh oil and oil from the AIOC project will also need to be accounted for Alternatives to building the MEP include expanding the early oil pipelines until oil flows from Azerbaijan become significantly larger.

Completion of the MEP pipeline and further planned expansion of the other pipelines would add slightly more than 2 million bbl/d of capacity, which will be sufficient to meet 2010 projected exports from the Caspian region of 3 million bbl/d. However, Iran has been promoting oil swaps via its proposed 370,000 bbl/d pipeline from its Caspian Sea port of Neka, and if all of these options are developed excess export capacity could develop within the decade. If export levels increase to over 5 million bbl/d by 2020 as projected, new export routes and line expansions will need to be developed, with possibilities including the construction of 1-2 new export pipelines or fewer pipelines and further expansion of existing options.

How Much Natural Gas Could be Exported from the Caspian Region? Natural gas production in the Caspian Sea region is projected to reach 4.3 Tcf in 2000, of which 1.3 Tcf will be exported, mostly from Turkmenistan. Projects currently underway could help boost Caspian Sea region production to over 8 Tcf by 2010, and could increase natural gas exports to over 4 Tcf - mostly from Turkmenistan. By 2020, Caspian Sea region natural gas exports could increase by another 2-3 Tcf.

Unlike with oil, the Caspian's gas resources were extensively developed under the Soviet Union, and Caspian region production in 1990 was 5.4 Tcf. The collapse of the Soviet Union led to downturns in both production and exports. The new republics that had been customers for Caspian gas have been unable to pay for these supplies, reducing the markets for Caspian gas. In addition, exports had been limited because virtually all current export pipelines pass through Russia and require agreements with Gazprom, the Russian gas company which owns the pipelines and which has been a competitor with Caspian gas in the past. However, recent changes in policy have resulted in new agreements between Gazprom and countries such as Turkmenistan to further use Russian pipelines and to increase natural gas sales to Gazprom.

How Many Natural Gas Pipelines Will be Needed? Exporters of gas currently in the Caspian Sea region have two options available to them. Exporting through the Russian gas pipeline system was the only option available for Caspian gas until 1997. Although over 2 Tcf of Caspian Sea Region gas had been exported via this system in 1990, exports fell to 0.3 Tcf in 1997 because of disputes between Turkmenistan and the Russian gas company Gazprom, a competitor with Turkmenistan, which owned the pipelines. This dispute has been settled, and exports are expected to be 1 Tcf higher in 2000. Turkmenistan and Gazprom have agreed to increase shipments of Turkmen gas via Russia to 1.8 - 2.1 Tcf per year by 2005-2006, with total capacity on this line as much as 3.5 Tcf per year. Turkmenistan developed the region's only alternative export route by building a new pipeline from Ekarem (Turkmenistan) to the Iranian border. Limited exports began in 1997, with a current capacity along this route of 350 billion cubic feet (bcf) per year, and proposals have been made to increase capacity to over 1 Tcf.

Neither of these pipelines will allow Caspian Sea Region natural gas to compete for a share of the Turkish gas market unless Gazprom re-exports the Turkmen gas to Turkey. Demand for natural gas in Turkey is projected to quintuple within 10 years to almost two Tcf. In addition, there are no export options available to supply gas to the Asian market, where energy demand is expected to grow more rapidly than in any other part of the world.

For natural gas exports to reach these new markets, and for exports to realize their annual potential of over 4 Tcf by 2010 and 7 Tcf within 20 years, several new pipelines will need to be built. Most of the proposals call for pipelines with a capacity of 0.5 - 1 Tcf each, so that 1-2 pipelines could be built by 2010 and three or more pipelines could be built by 2020, depending upon the extent to which the existing Russian system will be used to supply gas to Turkish and European markets. Of the proposed new pipelines, the ones that are in the most advanced planning stages are the ones to bring gas to Turkey, such as the 1 Tcf capacity Trans-Caspian pipeline and the 0.5 Tcf capacity Baku-Tbilisi-Erzurum pipeline.