A prospective loosening of investment controls by the OPEC states, formerly most concerned to constrain foreign direct investment, makes it likely that at least some attention will be diverted from the Caspian region to the Arabian peninsula. Both Saudi Arabia and Kuwait have publicized their intentions of allowing international energy companies to acquire equity stakes in developing prospective new fields on the peninsula. However, this does not necessarily mean that the international energy companies will cease operations in the Caspian.
Even if Baku's hotels now have some vacancies as foreign oilmen receive orders to leave the country, they can return just as fast if need be. The agreements signed with countries in the region are, after all, very long-term.
The new skepticism regarding Caspian energy development may in the long run be misplaced. New Russian projections for 1999 raise the specter of continued production declines that would make the country a net petroleum importer. If production declines deepen in subsequent years, then Russia may become a non-negligible market for Caspian oil from the newly independent states. That in turn may further stimulate implementation of the Caspian Pipeline Consortium (CPC) project. This pipeline across southern Russia has better chances now than ever to be built, due to increased cooperation by the affected federal units in Russia, but still not a single kilometer of pipe has been laid.
The new Saudi fields appear for now to be concentrated much more in the natural gas than the petroleum sector. That makes sense, because Turkey's gas market will be the most dynamic domestic energy market in the region for the next 20 years, as the country's industrial plant continues to grow. The new Saudi fields would then compete with gas from Turkmenistan that, according to a recent decision, is now set to reach Turkey via an undersea pipeline transiting Azerbaijan. Indeed, Turkmenistan has quickly signed contracts with U.S.-based companies to implement that decision, which it took in preference to the overland route through Iran to Turkey.
One of the unknowns is the level of tariff that Azerbaijan may seek to extract from these transit rights.
Transit tariffs, never a trivial matter, therefore look like becoming a key determinant of where the final pieces of the Caspian pipeline puzzle will fall. Always important, these acquire heightened significance in times of low profit margins, often determining the market feasibility of putting new fields into production. Just this month, for example, Kazakhstan cut off transshipments of its Tengiz oil through Azerbaijan (which goes by train to Georgia's Black Sea coast) in protest over Baku's failure to implement a planned tariff reduction. Since Kazakhstan's oil is the source that makes the Baku-Ceyhan pipeline workable, this disagreement holds greater dangers for Azerbaijan and also for Turkey.
The level of Turkey's tariffs for transport of oil along the proposed Baku-Ceyhan pipeline has been one of the sticking-points preventing the conclusion of economic framework talks between Azerbaijan and Turkey that are designed to establish a treaty basis for the pipeline's development. Moreover, as is well known, for well over a year until just recently, Turkmenistan had chosen to export no gas at all through Russia to its commercial partners, rather than to pay what it judged to be excessive transport tariffs.
Pipelines in the Caspian region will never be big money-makers for the countries holding transit rights. From the standpoint of the international consortia, pipelines are merely costs of getting the oil to market, and they should be as economical as possible. Countries in the region have to recognize this, or the consortia will fall dormant as their constituent corporate backers seek better deals outside the Caspian region. Several of the smaller international consortia have recently disbanded, but this has been more a result of negative test drillings than of prohibitive transport costs.
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First published in FSU Oil & Gas Monitor, No. 20 (23 February 1999): 2 3.