Cutting up the Caspian

The Caspian Sea has some of the world’s biggest unexploited reserves of oil, but to whom does it belong? Conflicts in the region have claimed many lives; an oil war would be much worse. A new proposal offers a neat division of the disputed waters and clears the lines for export pumping to increase.

The World Today Updated 7 December 2018 Published 1 March 1998 5 minute READ

There has been much debate = about the status of the Caspian Sea and its abundant energy resources. As large oil deposits were revealed, and foreign investment interest increased, the question arose: Is it a sea or a lake? The newly independent states, fiercely competitive amongst themselves, saw a Russian attempt to classify it as an enclosed body of water – a lake in international law – resulting in the sharing of resources among the five littoral states. In Soviet days it was split with Iran in separate treaties in 1921 and 1940. The division was not of much concern; both countries were preoccupied with fishing rather than oil.

Despite developments in the Caspian, like the landmark $8 billion deal with the Azerbaijan International Oil Corporation (AIOC) in September, 1994, there is still some concern about its long term status. By 2150, oil and gas reserves will be significantly reduced, and the Caspian Sea might be the last great oil find before renewable energy becomes more of a reality.

The potential for conflict in this region is extremely high. Unresolved disputes in Chechnya, Nagorno-Karabakh, South Ossetia, Abkhazia, Tajikistan and Afghanistan, make development rather like walking in a mine field. If the status of the Caspian could be decided sometime this year, increased foreign investment would provide significant benefits and contribute to the region’s peaceful development.

A Caspian plan

Is it a sea or a lake and how should it be divided? As with all very complex questions, the answer is both. Despite this, national sectors should continue to be the overriding principle for division. Indeed, this proposal argues that no portion of the Caspian should be shared by more than one state, much less all fiv e .

For this reason, the Caspian should be divided into three distinct regions: upper, middle and lower. The upper portion would closely resemble the present situation where Russia and Kazakhstan split the area. The border between the two countries in the Sea would not change. Instead there would be a borderline between the upper and middle portions of the Caspian. This would extend from the Kazakhstani - Turkmen border directly across the Caspian to the Azerbaijan-Russian border.

The middle portion of the Caspian would be split between Azerbaijan and Turkmenistan. There is tension between these two states as several fields are claimed by both. These include Azeri and Chirag, which are two of three fields which are being developed by the AIOC consortium – led by BP, Amoco and Unocal – and at least one other field, Kyapaz (Serder in Turkmen).

Some agreement is possible given the bilateral context of the Azerbaijani - Turkmen commission recently formed to resolve the disputes. For example, fifty per cent of the Kyapaz field, is scheduled to be developed by the Azeribaijani state oil company SOCAR. It would be wise to offer half of that portion to Turkmenistan. This would enable co-operation between the two states and also unite them against any Russian company domination in the Caspian basin. In the worse case, Azerbaijan should pay a rent – a portion of the profits – over the field’s lifetime. The border between the two should be equidistant from each country’s shore.

The lower part of the Caspian, which belongs to Iran, should remain unchanged along a line from the Iranian-Azerbaijani border to the Iranian-Turkmen border.

Ownership should only be reconsidered when a field lies in two or more national sectors. The blocks which are put up for tender vary in size from several kilometres to the enormous 8,000 square kilometres which Russia offered late last year. It is so large that Kazakhstan claims that it lies in its part of the Caspian.

For such cases, the countries involved should set up an independent international commission to quantify the amount of energy in a state’s territory. A UN Commission of independent neutral experts, would be the best vehicle to address potential grievances.

While this proposal includes a legal dimension, it takes into account the regional political considerations as well.

Russia and Iran have been the most outspoken about the legal status of the Caspian. In 1993-94 Russia strongly criticised Azerbaijan’s aggressive offering of offshore deposits. Since the creation of AIOC, the first foreign consortium, a flurry of contracts have been signed, notably three last August between SOCAR and major US oil companies.

A Russian Government commission in December gave LUKOIL the tender to allow it to develop the 8,000 square km block. Despite the protest from Yukos, another bidder, at the way that the tender was handled, it is not likely to be overturned.

Russian oil companies are increasingly present in the Caspian, particularly LUKOIL, which is involved in three Azerbaijani offshore contracts: AIOC (10%), Caspian International Petroleum Company (12.5% solely, 45% LukAgip, joint venture) and Shak Deniz (10%). Although the tender for Kyapaz was annulled (LUKOIL had a 30% stake), it was awarded the $2.5 billion one for the Yalama oilfield, giving it a role in at least four consortia.

Moscow’s hesitation about the status of the Caspian will diminish if its companies are awarded more tenders. In the post-Soviet era, Russia has realised that company presence can be a substitute for outright ownership.

Russia did offer its own proposal on the Sea’s status, with a mix of national sectors and common acreage. The plan proposed that each State would have a 45 mile zone as its national sector. The water outside this would be shared between the five littoral states. This proposal is impractical because it flies in the face of many existing agreements, notably between Kazakhstan and Azerbaijan. In addition, the recent tender awarded to LUKOIL continues so far beyond the 45 mile zone that it encroaches on Kazakhstani territory. Russia has therefore apparently undermined the legitimacy of its own proposal and de factoaccepted the current situation.

The Caspian could be treated as an inland sea as defined in UN’s Convention on the Law of the Sea of 1982, Part X. But with this interpretation, Russia’s Volga-Don and Volga-Baltic channels would be considered international waterways. If that were the case, littoral states would be entitled to f re e transit on their way to international markets. Based on this possible interpretation alone, Russia should accept the status more or less as it is.

Kazakhstan should agree with most of this plan; the only problem might be the bloc which Russia is exploiting. This is where an independent commission could address grievances on a bilateral basis. There is general agreement on the demarcation of the border between Kazakhstan and Azerbaijan. This is based on the declaration which was signed by President Nursultan Nazarbayev of Kazakhstan and President Heydar Aliyev in November 1996, which stressed national sectors.

Azerbaijan would agree with the proposal; however it has to present its case to Russia and Iran. Russian companies give Moscow a large say in developments off Azerbaijan’s coast. If Azerbaijan continues to award tenders to Russia then it can be won over to this proposal. President Aliyev could offer tenders to Russia in return for Moscow decreasing ties with Armenia, with which it recently concluded a military co-operation agreement.

As far as Iran is concerned, President Aliyev has to convince Tehran to support the status of the Caspian for exports. If Tehran accepted this, negotiations could start on a route for the export of the oil through Iran.

The last problem lies with Turkmenistan, where there is disagreement about the ownership of the fields currently being offered by Azerbaijan. The proposed independent commission should discuss such bilateral disputes, attempting to quantify the assets involved. It might be better to split the ownership of a field or provide a lifetime rent.

Turkmenistan President Saparmurad Niyazov’s claim to the Kyapaz field, among others, is not irrevocable: the commission set up at the recent Org a n ization of the Islamic Conference in Teheran is a step towards its resolution. What is important is that the agreement is concluded bilaterally, without Russian input.

Iran’s presence in the Caspian Sea region is relatively weak. Tehran suggested that the sea be divided into 12 national bands with an area of common territory.5 While this might be an admirable attempt, it is reminiscent of the failed Vance-Owen 10 canton plan for Bosnia. It is simply too complex and not realistic.

Iran’s oil and gas reserves should prompt it to concentrate on the export of the region’s oil. No less than ten options exist ranging from the feasibly improbable to the politically impossible. The most attractive route for long term oil exports is that which would go first to Georgia and then south to the Turkish Mediterranean port of Ceyhan. Tension does exist though between Turkey and Iran because they are competing to lead on oil exports, but Iran might start pushing for a route through its territory.

According to President Aliyev, there have been no discussions with Tehran about a Central Asian export line through Iran. However, with the recent indications of openness from President Mohammad Khatami in Teheran, it would benefit the Iranian leadership to co-operate with Azerbaijan. The United States is trying to find a legitimate way to increase ties with Iran, without admitting policy failure.

President Aliyev was in Washington last summer to sign three contracts with major American oil companies. If Iran increases civil and political freedoms and discourages terrorism, then Azerbaijan will be able offer full cooperation, with Washington’s approval.

In addition, Iran has a significant infrastructure which, with a relatively small number of additions, would allow it to rule the export pipes. If Iran could build a pipeline extension from Teheran to Gilan or Mazandaron on the Caspian southern coast, it would become the centre of nearly all pipeline exports. With the pipelines reconfigured north-south, most of the oil could go from the Caspian to the Gulf and on to Asian markets, those which need it most.

Too complex

Any proposal for a common area for development would attract few foreign investors. Dealing with one country can be difficult enough as oil and gas companies have to go through several agencies to accomplish their business.

For example, in Kazakhstan until recently, a foreign company had to cope with a myriad of agencies. The Ministry of Energy and National Resources handled licenses, preparing contract terms and the signing of contracts, while the Ministry of Finance dealt with taxrelated issues and local authorities looked after the assessment of project sites. Russia had a similar situation.

Explosive mixture

More problems are being resolved bilaterally, and this is the key to the Caspian Sea’s status. This should lead to a treaty by the end of the year. While some fields might change hands if this proposal were used – especially those claimed by Azerbaijan – it would be a small price to pay for stability and long-term development.

More often than not, coalitions between countries, whether it is Iran and Russia, or Azerbaijan and Kazakhstan, only aggravate the problem. These states want a fair agreement which will contribute to peace and economic development.

Regional conflicts on the southern rim of the former Soviet Union, have resulted in thousands of deaths, refugees and internally displaced people. If not settled peacefully, claims on oil fields and the export of oil, mixed with minority issues and religious factors, have the potential for much wider conflict.

In the last couple of years, a few countries – particularly Kazakhstan and Azerbaijan – have realised that it is in their long term best interest to have multiple pipelines to appease all relevant littoral states and their transit neighbours. If the trend towards reason continues, the status of the Caspian can also be negotiated.

There has been much talk about how to resolve the Sea’s status, but no tangible solution has been put forward. This proposal is simple, taking into account legal,= political and strategic factors which are all integral parts of any durable solution.