[Note: This article was written after Turkmenistan had agreed to resolve a territorial dispute, before it subsequently reversed that decision.]
The territorial dispute over the Kyapaz/Serdar offshore oilfield that was a major stumbling block to the Baku-Ceyhan Pipeline agreement, no longer is an impediment to Caspian energy development or a barrier to cooperation between Azerbaijan and Turkmenistan. Now, however, a more important question confronts the region. Will Azerbaijan be permitted to put natural gas from its newly proven Shah-Deniz gas-and-condensate field into the Trans-Caspian Gas Pipeline (TCGP) that is planned to bring Turkmenistani gas to Turkey via Azerbaijan and Georgia? This crucial issue may well influence whether, when and how the Baku-Ceyhan Main Export Pipeline (MEP) for Azerbaijani oil is built. In the new scenario, it is possible that negotiations over TCGP implementation will set the logistical precedents for the MEP to follow.
In early July 1997, the State Oil Company of the Azerbaijan Republic (SOCAR) and the two Russian oil companies LUKOil and Rosneft signed an agreement with the Azerbaijan government to develop its offshore Kyapaz field that has estimated reserves of 500 million barrels. Previously, Russia had made international legal claims that no littoral state could exert control over seabed resources or take unilateral action without the agreement of all such states. This Kyapaz agreement, however, contradicted the Russian Foreign Ministry's insistence that the Caspian Sea should be considered an "inland lake" under international law.
The Russian oil company Rosneft, later that month, pulled out of the agreement because Turkmenistan made a challenge to Azerbaijan's ownership of Kyapaz. Turkmenistan also claimed ownership of this field, which it calls the Serdar oil field. In September 1997, Turkmenistan announced tenders for the field's development. But the Azeri firm SOCAR made it clear to all concerned that in its view Turkmenistan had no legal basis or right to the contested field. Turkmenistan had originally sought to include the Azerbaijan International Operating Company (AIOC) consortium's two oil fields, called Azeri and Chirag, in a broader claim but in the end focused on the Kyapaz/Serdar field. By the spring of 1999, this conflict had become the main outstanding issue in relations between Azerbaijan and Turkmenistan. Almost since the beginning of the dispute, Washington offered and tried to mediate to promote a settlement.
Because the United States insisted that AIOC's Azeri and Chirag oil fields were indisputably Azerbaijan's, Turkmenistan showed little interest in helping Washington gain a regional agreement on the Baku-Ceyhan Main Export Pipeline (MEP). Turkmenistan's position changed in September, when Azerbaijan threatened to insist on delimiting national sectors in the Caspian before helping to build the Trans-Caspian Pipeline (TCGP). Coincidence or not, one result of the OSCE summit in Istanbul, where documents for both the TCGP and MEP were signed, was that Azerbaijan and Turkmenistan agreed not to allow the Kyapaz/Serdar disagreement to stand in the way of TCGP cooperation.
Turkmenistan's agreement on the TCGP with Azerbaijan not to let the Kyapaz/Serdar disagreement stand in the way means that after self-contradictory wavering over the years, Turkmenistan definitively accepts that there should be no "common" sectors of the Caspian Sea. Russia embraced this national-sector position over the last few years. Over the course of bilateral negotiations with Kazakhstan, Russia slowly abandoned its earlier insistence on attributing the status of "inland lake" to the Caspian Sea under international law. This is in fact Iran's current position. But the acceptance by Turkmenistan and Russia of the national-sector principle has left Iran isolated.
The relative calm in relations between Azerbaijan and Turkmenistan erupted once again in mid-1999, with Azerbaijan's discovery of a large gas-and-condensate field in the Shah Deniz block of Azerbaijan's sector of the Caspian, a block expected to produce only oil. These gas resources at first glance seemed to compete directly with Turkmenistan's gas, thus placing the Trans-Caspian Pipeline in jeopardy. How much jeopardy now depends on the volume of Azerbaijan's gas that is fed into the pipeline. Now, Turkey is refusing to accept Azerbaijan's gas in the TCGP unless Turkmenistan's gas is part of the mix. In fact, adding some of Azerbaijan's gas to the mix helps to guarantee the pipeline's economic feasibility by increasing volume.
The Shah Deniz find was one of the major reasons why BP-Amoco changed its stance towards the MEP in the run-up to the Istanbul summit. BP-Amoco is the lead and operating company that is exploiting the Shah Deniz field. Since it is probable that condensate from Shah Deniz can be added to the MEP to increase volume and improve quality, BP-Amoco started to view the MEP very positively. If an oil rim underlies the gas-and-condensate field, then the MEP's feasibility and desirability rises dramatically in BP-Amoco's eyes. The Shah Deniz find could also help to satisfy Georgia's demand, as a transit country, to be allowed to consume some of the TCGP energy that transits the country. Georgia has also demanded a cut of the oil from the MEP transiting its territory.
The Caspian Sea has been de facto divided into national sectors even if the lines are not authoritatively drawn. The dispute between Azerbaijan and Turkmenistan over the Kyapaz/Serdar field will eventually be resolved by a bi-national committee responsible for deciding which of the standard hydrological techniques is best suited for dividing the field. However, the Russian-Kazakhstani dispute over demarcation of the north Caspian shelf shows that idiosyncratic political factors come easily into play during such negotiations.
The new find at Shah Deniz that caused BP-Amoco to change its mind about the Baku-Ceyhan MEP, conforms to the rule of energy development: estimated reserves tend to increase over time. More major structures in the region remain to be test-drilled. Many of these structures are offshore while others are in the South Caucasus itself along the route of the Baku-Supsa pipeline, projected to become part of the MEP, that carries "early oil" to the Black Sea coast. Until recently, the momentum for the TCGP has piggy-backed on the MEP but now the situation is reversed. The TCGP is now more strongly under way and its consortium is organizationally much more simple than both the AIOC and the MEP consortia. In the new situation, negotiations over Trans-Caspian Pipeline (TCGP) implementation may well set the logistical precedents for the Baku-Ceyhan Main Export Pipeline (MEP) to follow.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in Central Asia – Caucasus Analyst 2, no. 2 (19 January 2000): 5–6.