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Southwest Asia and the Caspian Region

Iran, Iraq, and Turkey continue to dominate energy developments in Southwest Asia. Current events make it imperative to assess the state of play in the region as a whole. This week's column analyzes the significance of recent developments for the former Soviet area.

1. Iran and Iraq

Last year the Clinton administration, citing EU cooperation on limiting Iran's weapons-producing capability, invoked the "national interest" to waive sanctions against a consortium led by Total for a two-billion dollar deal in the South Pars gas field in Iran. It now appears that Washington will not penalize either Elf or Agip for signing a new one-billion dollar contract with Iran. U.S.-based companies do not anticipate further sanctions on foreign competitors for such deals.

It is therefore no surprise that President Khatami's current trip to Italy will be dominated by questions of oil and industrial cooperation, with further projects under discussion with the Italian company ENI, which owns Agip. Iran will still not have an easy time of it. The country's oil fields are aging and its production capacity is falling. Iran will need between $70 billion to $80 billion to upgrade its energy sector, but lacks both capital and technology.

Moreover, it has high and highly-subsidized domestic energy consumption, and is in a severe cash crunch. Yet Iran's constitution prohibits bars offering concessions to foreign investors. Constitutional reform will be impossible until after the parliamentary elections in 2000, so Tehran offers buyback formulas. These offer competitive return but expose the contractor to excessive risk, such as assuming full liability for cost overruns. They also inhibit the development of long-term relationships and strategic partnerships that the contemporary world energy market has shown to be essential.

Beyond economic and legal risks and technical challenges, investment possibilities in both Iran and Iraq have significant political and security risks that cannot be ignored. For example, international investors continue to eye Iraq with a view to the ending of U.N. sanctions against the country. However, economic and technical considerations remain secondary in Baghdad's view.

Commercial negotiations with Iraq are driven precisely by the political considerations that the international consortia are trying to avoid in decisions about a main export pipeline westward from the Caspian. Nor is investment capital scarcity out of the question. Even in a post-sanctions period, Iraq would need over $30 billion over ten years in upstream investment alone to get up to speed, and would have to compete with Iran on international capital markets for the amount.

2. Turkey

Even Turkey has constitutional obstacles. These are on the road to being overcome, although the necessary changes will be slow and take the better part of a year (or more). In Turkey, the problem is obtaining legal clearances and financing for new private-sector power plans built and partly owned by foreign investors. Indeed, many of Turkish plans for gas imports depend on the construction of Turkish power stations to convert it to electricity.

Turkey's energy consumption is projected to more than double, to 180 million tons of oil equivalent, by 2010. Most of this increase will come from power stations fired by natural gas. At present the main supplier is Russia, but there are plans for pipelines from Turkmenistan, Iran, Iraq, and Egypt, as well as a new Russian line under the Black Sea, and projects to bring liquefied natural gas from Algeria, Nigeria, and Qatar.

In 1996 Turkey signed an agreement with Iran for a quarter-century gas supply and pipeline project, with the first gas expected to arrive in late 2000. However, there have been delays in construction of the pipeline that could easily set the date back to 2001.

Meanwhile, Washington has put the onus on Turkey to offer the necessary incentives for the Baku-Ceyhan oil pipeline, such as a right-of-way financing, a guaranteed tariff, and the assumption of any overruns in projected construction costs. It is also not out of the question that such conditions could vary over time with the world market price of oil.

3. What It All Means

In the Caucasus another petroleum consortium has closed up shop in Azerbaijan while talk swirls over the possibility of Aliev's son eventually succeeding to his father's mantle, as the latter's health becomes of concern. For the medium-term future, economic development in the Caucasus may well be more dependent upon moving energy from (and through) the region rather than upon finding new energy sources.

In Central Asia, however, offshore Turkmenistani gas and Kazakhstani oil deposits will continue to be surveyed and assessed. In Kazakhstan in particular, the Chinese are trying to make inroads into the western part of the country and have sent large numbers of technical personnel to execute feasibility studies. Aside from the geopolitical designs for projecting influence into Central Asia, China needs large imports of energy in the new century as its domestic requirements, especially for transportation, begin to take off.

Not counting the leading political circles in Washington, most of the people in a hurry to get the energy out of the Caucasus and Central Asia are now the political leaders in the region itself. The one exception is Turkmenistan's natural gas for Turkey, which the latter will need more and more as time goes on and of which, according to President Demirel, it will take as much as it can get.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/1999/03/southwest_asia_and_the_caspian.html
First published in FSU Oil & Gas Monitor, No. 22 (9 March 1999): 7–8.

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This page contains a single entry from the blog posted on March 9, 1999 12:06 AM.

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