TED Case Studies

Kazakhstan and Oil




CASE NAME: Kazakhstan and Oil


1. The Issue

According to petroleum scientists, the Caspian Sea region

contains the third largest reserve of oil and natural gas in the

world, behind the Gulf region and Siberia (see map on preceding

page). Drilling for oil in the region is not new. Oil derricks

dotted the landscape during the latter decades of the nineteenth

century. Oil was a major source of hard currency for the former

Soviet Union, but drilling methods were technologically inferior

compared with western firms when it came to large-scale oil

exploration. This inhibited Soviet exploration in the Caspian

region. Western firms for decades had longed to be given the

opportunity to exploit the former Soviet empire's massive oil

reserves, but the Cold War relationship did not allow this option.

When the Soviet Union implemented perestroika and glasnost in the

mid 1980s, its oil exploration sector was poised to reap benefits

from the west. The breakup of the Soviet Union, however, put a

hold on these plans, as several nations emerged in the former

Soviet lands around the Caspian Sea. There are environmental

concerns associated with drilling for oil in the Caspian region, in

addition to the already well articulated effects from drilling

itself. The major issue regarding oil exploration in the region is

a question of how best to deliver the oil to world markets. The

Caspian Sea area is landlocked, thus the only way to efficiently

transport the oil to world markets is via pipeline. The exact

route of such a pipeline is as of yet undecided, and may prove to

be the single most important factor in determining the ultimate

success of oil exploration in the region.

2. Description

Oil exploration in the region predates the travels of Marco

Polo. Legend has it that the "eternal flame" of the Zoroastrian

religion was fueled by natural gas around Baku, the present capital

of Azerbaijan, before the eight century. Serious exploration and

exploitation began in earnest in the 1850s, and by the 1890s, this

exploration instigated rapid development in the Baku region. By

the outset of World War I, Azerbaijan commanded 10% of the world's

exports of oil and kerosene. This was down from the 30% figure

during the 1890s. It was only in the 1980s that modern technology

entertained the notion that the deeper fields (where the most of

oil reserves are) were more accessible.

The area around Azerbaijan, on the southwestern shores of the

Caspian Sea, is not the only portion of the region to have oil

reserves. One of the world's largest oil fields, the Tengiz in

western Kazakhstan, was discovered in 1979. The Soviets had been

drilling in the Tengiz region, in the northeastern section of the

Caspian Sea, for many years. The Tengiz discovery dramatically

altered oil exploration potential for the region as a whole.

By most accounts the reserves in the region are very large.

When the region was still part of the former Soviet Union, western

oil companies were aware of the vast potential, but were not able

to gain access to the deposits. The Soviets wanted to develop the

area on its own, however, and focused more on the Siberian region

instead. When the Soviet Union splintered into several nations,

western companies began negotiations with the new entities.

Contracts have since been signed, but there are still many

obstacles, notwithstanding the negotiating hurdles. First, the

region is basically desert terrain, with dramatic seasonal


Second, there are extreme mountains in the northeast into

Russia. According to the Oil and Gas Journal, there is deep

sediment covering most of the predicted deposits. There is also a

phenomenon called salt tectonics which could effect the quality of

the product. These factors may prove burdensome to most companies,

but they should not render exploration futile. Modern technology

can overcome some geologic impediments. If the oil can be

reached, petroleum engineers believe it to be of high quality.

Because of the aforementioned deep sediment cover (up to 24 km)

and the fact that the Tengiz field is the biggest of the super

giants, some journals believe the project marks a new stage in oil


The intricate political climate in the region is the factor

which will ultimately determine how oil can be delivered to world

markets. Kazakhstan is in the best position to profit from the oil

reserves. When the Soviet Union collapsed, the Kazakh government,

recognizing the importance of foreign investment, implemented the

most protracted effort to elicit foreign investment as a

cornerstone for development.

Chevron, the largest and to date the most successful oil

company in the region, initiated negotiations with the Soviets over

the Tengiz oil field in the latter 1980s. After the Soviet Union

imploded--and after a brief lull in activity--Chevron continued

negotiations with the Kazakhs. The investment is worth roughly $40

billion over approximately 40 years.

As mentioned previously, the oil in the region still ranks

behind reserves in the Gulf and Siberia regions. But companies are

looking more favorably to the Caspian region because of the

difficulties in the Russian system and harsh climactic factors in

Siberia. Another important reason why firms favor the region over

Siberia is the greater ease of dealing with the government.

Kazakhstan coddled western companies and facilitated a fairly

standard and efficient contract review process. Additionally, the

president took a personal interest in negotiations.

The region, however, is not without its own political turmoil.

Developing oil fields in Kazakhstan and Azerbaijan present unique

difficulties and extricating the oil from the region will be even

more tenuous. According to Chevron and oil analysts, a pipeline is

imperative to justify an increase in production. In the short-

term, production capacity is approximately 200,000 barrels a day.

Existing production can be transshipped by rail or road. But an

increase in output would be economically irrational unless there is

a more efficient method of transport. The route that the proposed

pipeline would traverse is probably the most difficult aspect of

the whole issue because there are several political "hot spots" in

the region that make a pipeline a difficult proposition.

Additionally, there is the realization that the nation which

controls the pipeline will be able to exert a substantial amount of

control over most aspects of oil exploration as well. Thus

several nations are jockeying for the pipeline in their territory.

The conflict between Armenia and Azerbaijan threatens to

disrupt not only the oil production slated off Baku's shores, but

the proposed pipeline route through the region. Additionally, the

Azeri power struggle may end Turkey's influence in the region,

which the western nations have been counting on as the moderating

influence. Because it is questionable who will even rule

Azerbaijan, any negotiations are less than definitive. Russia has

been adamant regarding its desire to have the pipeline be routed

through its southern territory to its Black Sea port of


Perhaps strategically, Russia has ties to some of the

competing factions in the Azeri power struggle. But there are two

problems with a pipeline through Russia. Russia has been embroiled

in a bloody conflict in Chechenya and the rest of the region is not

very stable. Secondly, Turkey is against such a route. Their

official reason is that the Dardanelles Straits (a thin waterway

connecting the Black Sea to the Mediterranean) cannot handle the

excess tanker traffic. Such a route would place extreme pressure

on ecological efforts to protect the region. More importantly,

however, is the Turk's desire to increased their sphere of

influence in the region by having the pipeline go to their ports on

the Mediterranean. The problem with this is that it would have to

go through the Azeri-Aremenian corridor or Iran. The latter route

is not popular with the west, especially the United States.

There have sporadic media reports of late that point to a pipeline

going through Russia and Turkey. It remains to be seen when a

definitive solution will concocted.

Heavy tanker traffic thorough the Mediterranean, Red Sea and

Persian Gulf have already alerted states to the polluting effects

of such activities. Increased production in the Caspian region

will increase the above effects, no matter which pipeline route is

eventually chosen. Unique to the Caspian region however, is the

fact that the Caspian Sea is rising. It could rise possibly three

meters in the next twenty-five years. Resultant environmental

damage would be immense. In the last decade, the sea has risen

one meter, inundating some parts of Baku already. Some of Iran's

most productive fields lie on the southern shores of the sea and

would be submerged if it were to rise.

More damaging to the environment, however, is the potential

flooding of refineries on the coastal plains of the region. These

regions are some of the most polluted areas in the former Soviet

Union, according to US Embassy reports. This trend might be

cyclical however. The Caspian sea was falling, much like the Aral

Sea to the east. Old photographs of Baku show the shoreline much

closer to the center of the city. But the sea is definitely rising

now. Russian archeologists claim to have found the ruins from the

1,000 year old Khazar empire at the bottom of the sea. Geologists

believe that the sea bed might actually be rising, giving way to

springs of water.

Existing oil drilling in the sea is a major cause of

pollution. The US Embassy in Baku reports that one can see oily

film on the sea's surface. Another problem is the flaring of

natural gas; about 4.5 million cubic meter a day. Natural gas

flares, however, can be contained with the appropriate western

technology. While the sea is less polluted than the Black Sea,

much needs to be done to lessen the harmful environmental effects

of oil drilling, and the potential disastrous effects of the rising

Caspian Sea.

3. Related Cases


AZERI case




Keyword Clusters

(1): Product = OIL

(2): Bio-geography = DRY

(3): Environmental Problem = Pollution Sea [POLS]

4. Draft Author: Vincent P. Bonner


5. Discourse and Status: Disagreement and incomplete

The major disagreement is over the pipeline route. The

countries involved primarily include Russian, Azerbaijan, Armenia,

Turkey, Iran, Georgia, Turkmenistan, and the United States. There

is no agreement on an international framework that governs the

development of the region. Indeed, there is considerable

disagreement in this regard. Some western firms have signed

contracts to develop the fields, but these agreements are

ineffectual if regional conflicts proliferate. Current regional

conflicts already make extraction of oil from the region very


6. Forum and Scope: Kazahkstan and Regional

At this point there is no deliberative body that can step in

and "take charge." The United Nations would hardly be appropriate,

if not effective in the first place. Russia claims the region

within their "sphere of influence," a dubious distinction indeed,

since Turkey and Iran claim this also. Because Kazahkstan

surrounds the largest reserve in the region, considering monetary

reasons alone, it probably exerts the most influence with regard to

oil exploration. The fact that it is further along oil development

than the others bolsters this contention somewhat. If and when

conflicts ease in the region, only then could some sort of

organized entity figure the best way to develop and extract the

resources to markets.

7. Decision Breadth: 5

It may not be exaggeration to state that whatever is

eventually decided would have affects resounding beyond the Caspian

region, for the nations involved directly in the extraction and

those that are potential customers (please see appendices). The

existence of another oil area beyond the Gulf region would be very

welcome by many nations. Prices of oil would inevitably be

altered, depending on the amount and various other factors. Still,

analysts believe that Kazakhstan could become "another Kuwait" in

that oil development would spur development of the nation. This is

not a forsworn conclusion of course, but the other nations in the

region are anxious for the fruits of providing the world with oil.

8. Legal Standing: Kazakh Law


9. Geographic Locations

a. Domain: Asia

b. Site: West Asia

c. Impact: Kazakhstan

10. Sub-National Factors: No

11. Type of Habitat: TEMPerate


12. Type of Measure: REGSTD

Once developed, the trade restriction would probably be export

restrictions to manipulate the price of oil in the market, not

unlike the operations of the OPEC oil cartel. It is feared

however, that the increase of oil on the world market, if not

regulated, could depress prices. Prices that are too low would be

anathema to the Caspian region because of their initial dependence

on consistent prices to boost export earnings. Inadequate earnings

from such an ambitious endeavor would be disastrous for the


13. Direct vs. Indirect Impact: Indirect

14. Relation of Trade Measures to Resource Impact:

a. Directly related: Yes Oil

b. Indirectly related: Yes Fish

c. Not related: No

d. Process related: Yes Sea Pollution [POLS]

15. Trade Product Identification: OIL

The product at issue is oil, refined for export and usage in

international markets. Oil is often called the "blood of the

economy" and therefore is extremely important to all nations, with

little difference to the various stages of development (please see

appendices). The oil shocks in the 1970s proved the vulnerability

of nations reliant on oil imports. The shocks instigated inflation

and recession in many industrialized nations and is frequently

mentioned as a catalyst for the debt crisis that emerged in the

early 1980s. Thus the importance of stability in the world's oil

markets cannot be overstated. Oil from the Caspian region can have

dramatic effects on the world market. OPEC levels are near full

utilization and their share of world markets are growing (please

see appendices). Another major source beyond the Gulf region may

allow a "safety" if instability engulfs the Arabian region. For

example, succession is not clear in Saudi Arabia (the king is 75

years old), and Iraq and Iran continue to threaten stability in the


16. Economic Data

According to NatWest Securities, an oil consulting firm, world

demand for oil is roughly 70 million barrels a day (see

appendices). Thus, this is no small business. OPEC has already

demonstrated its ability to manipulate demand by alternating

supply. Existing oil exporters are not operating at capacity to

supply world demand. What the future holds is far from certain.

A conflict that breaks out in the Gulf can have dramatic affects

immediately on the supply and price of oil. The United States is

the largest consumer of imported oil.

Because of the uncertainties surrounding the exploration and

extraction of oil from Kazakhstan, it is difficult to place a

dollar figure on its potential earnings. Most analysts place the

figure to be billions annually.

17. Impact of Trade Restriction: HIGH

Any major increase in the amount of petroleum on the world

market will instigate price fluctuations unless some sort of

agreement is reached among oil-exporting members. It remains to be

seen whether or not oil exporting nations in the Caspian region

will form an agreement or partnership with Gulf members and other

oil exporting nations. Pure competition can be detrimental to all

nations in the long run. A massive drop in prices can have regime-

destabilizing affects on the member nations because these nations

rely heavily on oil revenues. Thus an arrangement, given the

potential instability due to pure competition, would be beneficial

to oil-exporting nations. It is imperative for the region, which

will rely on stable prices to a greater extent than the already

established oil exporting nations.

18. Industry Sector: OIL

19. Exporters and Importers: KAZAKHstan and MANY

The exporters in question are primarily Kazakhstan and

Azerbaijan. Every nation in the world will have a need for oil.

The exporters will in the longer term probably evolve into state

enterprises, after western assistance is completed. In the

interim, western drilling firms will share in the profits and

engage in exporting, with the nation taking credit in international

financial statistics.


20. Environmental Problem Type: Pollution Sea [POLS]

21. Species Information

Name: MANY

Type: MANY

Diversity: ?

22. Impact and Effect: HIGH and REGULatory

The extraction of oil from the region can have major

consequences of the ecology of the region. This is due to the man-

made effects of such development, perhaps further exacerbated by

the rising of the seabed.

23. Urgency and Lifetime: LOW and long term

Because of the high demand and importance of oil, the

potential effects of environment damage to the region will be

probably be understated although the rising of the seabed may grab

more attention and demand more scrutiny of ensuing actions. The

regions populace, however, is starving for development and

prosperity. It is likely for this reason alone that environmental

concerns are downgraded in importance.

24. Substitutes: ALTERnative Energy

Alternative fuels are technically another option to oil, but

because of their price they are not realistic in the short term.

Conservation is always an option, but price determines the severity

of such movements. If oil prices dramatically increase, there will

inevitably be some conservation. For example, citizens may not

drive their autos as much.


25. Culture: YES

Culture is a factor only in the sense that such differences

seem to instigate regional conflicts, which as already stated, will

ultimately determine how the oil gets to the market.

26. Human Rights: NO

27. Trans-Boundary Issues: YES

28. Relevant Literature:

Business Week, "Fields of Dreams: The West Gets a Crack at Soviet

Oil," Business Week, 11 June, 1990, pp. 36-37.

Business Week, "The Scramble For Oil's Last Frontier," Business

Week, 11 January 1993, pp. 42-44.

Business Week, "Azerbaijan's Squabbles are Spooking Big Oil,"

Business Week, 5 July 1993, p. 67.

Economist, "Tomorrow's Gusher," Economist, Vol. 324 No. 7769, p.


Economist, "The Bear Pauses," Economist, V. 329, No. 7841, 11

December, 1993, p. 62.

Knott, David, "Lenin's policy works for Azerbaijan," Oil and Gas

Journal, V. 92, p. 29.

Hyman, Anthony, "Kuwait by the Caspian," Middle East, No.238, Oct

1992, p. 32.

Middle East, "Lessons from Central Asia," Middle East, No. 236,

July/August 1994 p. 30.

Nijenhuis, Hans, "Azerbaijan: Kuwait of the Caucuses..." World

Press Review, January 1995, v. 42, p.34.

Oil and Gas Journal, "Kazakhstan aims to tap Caspian oil and gas,"

Oil and Gas Journal, V. 91, 10 May 1993, pp. 32-33.

Lisovsky, Nickolie N., Gognenkov, G.N., Petzoukha, Yuri A., "Soviet

Union's Tengiz Field: a Pre-Caspian depression giant oil, gas

accumulation," Oil and Gas Journal, V. 88, 17 September, 1990, pp.


US Central Intelligence Agency, World Factbook, 1994.

US Department of Commerce, Country Commercial Guide for Azerbaijan,



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