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In-depth analysis shows Caspian oil's potential
World Oil
Monday, March 1, 2004
Volume 225; Issue 3
ISSN: 0043-8790
An in-depth analysis shows Caspian oil's potential: whether one talks
about exploration, field projects or pipeline construction, the
Caspian Sea region is destined to influence global energy and
geopolitics for years to come.
(Supply And Demand)
By Collum, Randall, Jr., Gregorek, Adrian J., Sondhi, Amit, and
Economides, Michael J.
As new sources of hydrocarbons, particularly from non-OPEC countries,
become increasingly important to the world, the Caspian Sea region has
the potential to become one of the major oil- and gas-producing
areas. The region is thought to hold the world's third-largest oil and
gas reserves behind the Middle East and Russia. New oil discoveries in
the northern Caspian Sea have underlined the region's
importance. Kashagan field, off the northern shore of the Caspian Sea,
is expected to be the second-largest petroleum deposit in the world,
following Saudi Arabia's Ghawar field. It is the largest new oil field
found over the last 30 years. By 2010, the Caspian region is expected
to produce 3 million bopd, doubling current output of about 1.5
million bopd.
Most of the Caspian discoveries are in Kazakhstan, although by 2010 a
significant amount of oil should come from Azerbaijan, predicted to
account for almost one-third of the region.
In December 2003, Kazakhstan President Nursultan Nazarbaev stated,
"Global experts consider the nervousness of Arab countries and all of
OPEC's (members) comes not only from the massiveness of the Caspian
reserves, but also because the region's states do not enter OPEC." He
further suggested that the countries surrounding the Caspian should
create an OPEC-like oil cartel, to support oil prices and reassure
OPEC, itself.
Until recently, Russia controlled oil exports from the area, with the
main export pipelines for Caspian oil passing through its
territory. The US government supports alternative routes that bypass
Russia, which is not pleased that the new pipelines will give the West
access to Caspian oil and gas, without Russian control.
The geopolitics associated with the region have been a major influence
on the Caspian petroleum industry. The US has blatantly thrown its
clout behind the American petroleum companies involved.
Transportation of Caspian oil and gas does not only involve
Russia. Conflicts over land ownership and the US' bad relationship
with Iran have played important roles in establishing potential
pipeline routes. Also, the division of reserves located in the Caspian
Sea has been an ongoing dispute, with Iran and Turkmenistan in
disagreement with Kazakhstan, Azerbaijan and Russia on how the Caspian
Sea should be divided.
An example of hostility that surrounds this issue is what happened to
BP in 2001. While a BP research vessel was in a presumably Azerbaijani
sector of the Caspian Sea disputed by Iran, an Iranian gunboat chased
it out of those waters. This event prompted BP to suspend its work in
that Caspian oil field for a period of time.
The US has played an important role in influencing the Caspian
pipeline situation by endorsing five pipelines in the region, three of
which originate in Baku. (1) These three pipelines consist of the two
already exporting oil, plus the Baku-Tbilisi-Ceyhan (BTC) pipeline
that is under construction. Construction associated with the BTC
pipeline is shown in Fig. 1. (2)
[FIGURE 1 OMITTED]
For now, the pipeline routes seem to be accepted by most
countries. Russia has accepted construction of the BTC pipeline, and
there are questions as to whether Iran would have transported
Azerbaijan's oil through its territory. The route to ship oil through
Iran would have been the cheapest, by far.
AZERBAIJAN
Of the estimated 3 million bopd to be produced from the Caspian by
2010, about one third would come from Azerbaijan. (3,4) In 2002,
Azerbaijan's oil production was 22% of total Caspian Sea output. If
Azerbaijan's political situation continues to favor investment by
foreign companies, and the geopolitical state of affairs can be
resolved between the Caspian Sea's surrounding countries, then
Azerbaijan's potential is even greater.
Azerbaijan has been an oil-producing province for a long
time. According to some historians, it is supposed to be the site of
the first purpose-drilled oil well in the world, drilled in 1848-1849,
just south of Baku. Oil field exploitation began in the 1870s and
continued until World War I. Azerbaijan became an independent republic
after the demise of the Russian Empire in 1918 and was recognized as
an independent country by Western nations in January 1920. Three
months following this recognition (April 1920), the Russian Red Army
took over this country, and it became part of the emerging Soviet
Union (USSR).
Azerbaijan's production peaked at over 500,000 bopd during World War
II, but it has yet to reach that production level again. It was a
strategic, potential oil supply that Nazi Germany targeted in World
War II but was never able to acquire. Had the Germans achieved this,
the balance of the war could have shifted from the Allies to the
Germans. Azerbaijan stayed as a member of the USSR for most of the
Twentieth Century, until it became an independent country for the
second time in history, in August 1991.
Azerbaijan's current promise of hydrocarbons lies in the Caspian Sea,
to the country's east. In 2002, Azerbaijan's oil production was a
little over 300,000 bpd. (5) Given the current development projects in
the Caspian Sea, the country should surpass its historical oil
production peak in the near future.
From 1987 through 1995, Azerbaijan's oil production declined at a
rate of 5.4%. (5) Thanks to the "Contract of the Century," this
decline has ended. The contract, signed in 1994 between Azerbaijan and
11 international companies, involves the development of Caspian Sea
reserves in the Azeri, Chirag and
Gunashli (ACG) fields. Through this contract, Azerbaijan International
Oil Co. (AIOC) was created. Members include state oil company SOCAR
and 11 international firms.
After the contract was signed, oil production stabilized between 1995
and 1997. It has been increasing at an average 10.2% since 1997. (5)
If this rate (considered conservative, given the number of new
projects slated) continues, Azerbaijan will surpass 500,000 bopd in
2007. First oil from the BP-operated ACG fields was in 1997, and this
has been the main reason for the country's production increase. In
early 2004, the area produced 130,000 bopd. It is expected to produce
400,000 bopd by 2005 and peak at 1 million bopd. (6) Production,
consumption and exports of Azerbaijani oil since 1985 are shown in
Fig. 2. (5)
[FIGURE 2 OMITTED]
The Contract of the Century paved the way for many more production
sharing agreements. So far, these pacts have committed a total
investment of more than $60 billion in Azerbaijan's oil
development. (7) The prize that the international operators are
chasing is proven oil reserves of between 7 billion bbl and 12.5
billion bbl, with a potential for an additional 32 billion bbl.
Proven natural gas reserves also total 30 Tcf. Potential exists for
an additional 35 Tcf. (4) Although Azerbaijan has fewer reserves than
Kazakhstan, the country's ability to cooperate with, and openness to,
international investment has enticed such companies as BP, ExxonMobil,
Statoil and others to invest heavily.
Azerbaijan's economy. Azerbaijan's future economy depends greatly on
the proper utilization of hydrocarbon revenues. The country is
low-income, with a per capita income in 2002 of only $710. (8)
Nonetheless, Azerbaijan's income has quadrupled since 1995, much of it
due to the Contract of the Century. This increase compares to a GDP
that decreased by 18.5% in 1995. (8) The projected GDP growth in 2004
is 9.1%. (9) The economy is growing at a fast pace.
With 64% of the population below the poverty line, the country is in a
transitional economy. While the oil sector accounted for 90% of
Azerbaijan's exports, it generated only 1% of all jobs. (10) The
projected $60 billion of international investment in oilfield
development should add plenty of employment.
One sign that the government is attempting to diversify its economy
and keep it growing far into the future is the creation of the State
Oil Fund of the Republic of Azerbaijan (SOFAZ). SOFAZ was established
in 1999 and created to put aside some of the country's oil-related
revenue and manage it for future use. (11)
Becoming a major player. Azerbaijan faces many of the problems common
to other Caspian Sea nations in its quest to become a major player in
hydrocarbon exports.
While oil companies have lined tip to take part in Azerbaijan's
hydrocarbon development, issues still stand in the way of delivering
commercially viable hydrocarbons. Azerbaijan sits on the western coast
of the Caspian Sea, and its neighbors include Iran to the south,
Georgia and Armenia to the west, and Russia to the north.
"Transportation of Azerbaijan's abundant reserves is a major
problem. There is not enough pipeline capacity to export the amount of
oil that can be produced. Also, as Azerbaijan in the past has been a
gas importer, there are no export pipelines available for its
potential gas output. New lines will be necessary for fields that will
be coming onstream, such as Shah Deniz. As one of the largest
gas/condensate fields in the world, it will begin exporting gas in
2006.
Pipelines are the only feasible way to transport oil and gas out of
the Caspian Sea, where most of Azerbaijan's reserves are located.
With the Caspian landlocked, there is no possibility of using tankers
to ship oil to other locations. Therefore, new pipelines are being
built, and more are contemplated for the future. With some of the
future pipelines still under consideration, Azerbaijan's location and
Western geopolitics are playing an important role in the location of
these lines.
With current and planned pipelines, Azerbaijan seems to be in
reasonable shape regarding future capacity. Currently, Azerbaijan has
two export pipelines. The "northern route" is the 100,000-bpd
Baku-Novorossiysk pipeline, which sends oil to the Russian Black Sea
coast. h began exporting oil in 1997. Under present plans, this
pipeline's capacity will be upgraded to 300,000 bopd. (2) The "western
route" is the 115,000-bpd Baku-Supsa pipeline, which sends oil to
Georgia's Black Sea coast. It began exporting oil in 1999.
Under construction since early 2003, the Baku-Tbilisi-Ceyhan (BTC)
pipeline is expected to increase export capacity five-fold with its
1-million-bopd capacity. This new pipeline is scheduled to begin
exporting oil in early 2005, and it will cover 1,040 mi through
Georgia and Turkey, bypassing the progressively busier Bosporus
Straits. Another new pipeline will be built parallel to this, to
transport natural gas. It will be called the Baku-Tbilisi- Erzurum
pipeline and will handle 233 Bcf of natural gas per year. It should be
finished in 2006, in time for Shah Deniz's first contracted gas
exports. The locations of the existing, under construction and/or
proposed pipelines in the region are shown in Fig. 3. (12)
[FIGURE 3 OMITTED]
Azerbaijan fully intends to become a major player and has tried to
alleviate the region's geopolitical tensions. The one conflict that
needs to be resolved is a dispute with Turkmenistan and Iran with
regard to overlapping fields. Hopefully, this can be resolved
peacefully.
One troubling event to international observers is the recent election
of Ilham Aliyev as president in October 2003. He is the previous
president's son, and he won in a landslide election described as
"falling short of international standards."
GEORGIA
Georgia is strategically located between the Black Sea and the
oil-rich Caspian, and it has been a focus of potential conflict
between the US, other Western nations and Russia, Fig. 4. (13,14)
Although Georgia has limited hydrocarbon resources, it controls much
of the Caucasus Mountains and the potential pipeline routes through
them. Thus, it is emerging as a key transit country. (15,16,17)
[FIGURE 4 OMITTED]
Georgia was absorbed into the Russian Empire in the 19th
century. Independent for three years (1918-1921) following the Russian
revolution, it was forcibly incorporated into the USSR until the
Soviet Union's collapse in 1991. Ethnic separation in Abkhazia (18)
and South Ossetia, plus poor governance and Russian military bases,
deny the government effective control over all of the state's
internationally recognized territory. There has been a discernible
effort by Georgia to approach the West, often at the consternation and
mistrust of Russia. (19)
Widespread corruption in Georgia led to the storming of parliament in
December 2003. Mikhail Saakashvili, a 35-year-old American-trained
lawyer, organized and headed up the nearly month-long street
demonstrations that led to President Eduard Shevardnadze's
resignation. Georgian parliamentary and presidential elections were
planned for January 2004.
Georgian economy. The dissolution of the USSR precipitated a
significant fall in the overall size of Georgia's economy. This was
made worse by hyperinflation, and accompanied by an associated fall in
standards of living. The Georgian economy reached a record low in
1992-1994, although the country still enjoys a considerably higher
per-capita GDP than Azerbaijan, at about $5,500. However, recent
statistics suggest that more than half of Georgians are unemployed.
The country risks financial collapse without immediate Western
aid. The economy is in worse shape than is publicly known. Georgia's
interim leaders are seeking help, not only in financing the new
elections, but even more important, in rebuilding Georgia's
dilapidated public infrastructure.
Georgia vs. Russia. Russian President Vladimir Putin has expressed
readiness for radical improvement of Russian-Georgian relations. Yet
Georgia accuses Russia of being "barbaric" at the same time that it
wants to improve relations. This is important, as the Georgian
economy and energy needs depend so much on Russia.
One of the main issues of conflict with Russia is the Georgian army's
inability to deal with Chechen rebels, who have been embroiled in
militant activities in Russia. The would-be, breakaway Russian
republic of Chechnya is crucial for control of the rich oil supplies
of the Caucuses. Georgia and Russia conflicted recently over the
"Pankisi Gorge" on the border with Chechnya, after Tbilisi accused
Moscow of aggression. Russia strongly denies the accusations and in
turn, claims that Georgia has failed to act against Chechen rebels,
who Moscow believes use the gorge as a shelter. Russian politicians
are also angry at US support of the Georgian version of events. (20,
21)
Russia is very much interested in Georgia's political stability,
because an unstable Georgia can mean hundreds of thousands of refugees
crossing into Russian territory. Also, Georgia's territory could be
taken by international terrorists, who might launch attacks on Russia
from that site. Russia has long considered Georgia part of its sphere
of influence and is uneasy seeing US troops deployed there.
Georgia and the US. The relationship between Georgia and the US is
growing stronger. The American influence and its role in the recent
political drama is the most vivid example. Shortly after Eduard
Shevardnadze resigned as president, his US-backed successors joined
with US Secretary of State Colin Powell to publicly criticize Russia,
and demand that it remove its troops from Georgia and another former
Soviet republic, Moldova. US Secretary of Defense Donald Rumsfeld's
visit in December 2003 was an additional show of US support. In
return, Georgia has provided coalition troops in Iraq.
Energy in Georgia. Shortages abound in the energy industry, which is
the most corrupt sector in Georgia and has been for 10 years. Since
1991, Georgia has faced an acute energy crisis. Russia and
Turkmenistan (main exporters to Georgia) dramatically increased the
prices of their energy supplies, and this caused a severe decline in
Georgia's economy. The situation worsened with destruction of a
stretch of the gas pipeline between southern Russia and Georgia in
1992. It was exacerbated in 1994 by Georgia's inability to pay for gas
imports. Currently, Georgia imports oil from Iran and continues to
import electricity from Russia and Turkey.
Georgia is important, because it is positioned to become an important
corridor for oil and gas transportation between the Caspian Sea and
Western markets. At least four pipelines are either operational or
planned/under construction: (15,16,17)
* Baku-Supsa Oil Pipeline. In 1999, the Baku-Supsa early oil pipeline
was inaugurated at the Supsa terminal on the Black Sea coast,
beginning the flow of Azeri oil across the Caucasus to market. The
pipeline's 115,000-bopd capacity can be doubled with additional
pipeline upgrades and facilities. The pipeline is owned by the AIOC
consortium of" Western energy companies.
* Kashuri-Batumi Pipeline. ChevronTexaco has been granted rights to
utilize an existing, yet aging, pipeline from Kashuri (near Tbilisi)
to Batumi (on the Black Sea coast).
* Main Export Pipeline, the Baku-Tbilisi-Ceyhan (BTC)
pipeline. Georgia is set to be the transit country for the Baku-Ceyhan
main export pipeline. When completed, the project should deliver up to
1.0 million bopd at its peak. This project is of regional
significance, as it represents the first direct transportation link
between the Caspian and the Mediterranean, thus avoiding the Bosporus
Straits.
The BTC pipeline should be completed by 2005. The Georgian section of
the pipeline is 248 kin (154 mi) long and will generate substantial
revenues for Georgia. Although BP owns 38% of the venture and ENI
recently took a 5% share, all nine members must make final commitments
to the 1,730-km (1,075 mi) project. Construction of the Georgian
section began in April 2003.
* Trans-Caspian Gas Pipeline Project: Georgia is set to be one of the
transit countries in the Trans-Caspian Pipeline (TCP) project between
Turkmenistan and Turkey. The line's capacity is expected to be 1.0 Tcf
of gas per year, with about half consumed in Turkey and the remainder
re-exported to Europe.
KAZAKHSTAN
Situated in central Asia, on the edge of the European and Asian
continents, is the world's largest landlocked country Kazakhstan. It
is four times the size of Texas and holds the largest recoverable
crude oil reserves in the Caspian Sea region. Kazakhstan produces
roughly 1.0 million bopd, or about two-thirds of the region's total
production. (5)
It is easy to see why, as foreign investment pours into the country's
oil and gas sectors, that Kazakhstan is beginning to realize its
enormous production potential. Such companies as ChevronTexaco (the
first major Western oil company to enter the region in 1993) have made
Kazakhstan their place to develop some of the world's largest oil
fields. (22)
In 2003, ChevronTexaco announced plans to invest $4 billion in
Kazakhstan over the subsequent four to five years. (23) The funds will
further develop the company's three regional projects, TengizChevroil,
the Caspian Pipeline Consortium and the Karachaganak Integrated
Organization. (24)
Russia's LUKoil also made a similar announcement last December about
investing $3 billion in the Dostyk Block. Comprising two fields, the
block's reserves are estimated at "several hundreds of millions of
tons of oil." (24) With sufficient export options in the near future,
and with much infrastructure presently under development, these
announcements, alone, would make Kazakhstan a major producer and
exporter over the next decade.
Kazakhstan consists of three ethnic groups; it is primarily Kazakh, at
almost half of the population, followed by Russian and Ukrainian. The
population is split almost evenly between the Muslim and Russian
Orthodox religions. Although Kazakh is the official language, Russian
is also spoken rather widely, primarily in business.
After the USSR's demise, the newly created, independent Republic of
Kazakhstan opened its doors to foreign business in 1991. Its economic
growth in recent years has been driven not only by petroleum, but also
by changes in its governing system. Its President, Nursultan
Nazarbaev, a former leader of the Soviet Kazakhstan Communist Party
since 1977, became the new republic's first interim president. He was
then elected president in the country's first national elections in
December 1991. Due to a 1995 referendum that extended his term,
President Nazarbaev was re-elected in 1999. He will be up for
re-election again in 2006. (25)
Kazakhstan's economy. Kazakhstan holds Central Asia's largest
economy. Because of its booming energy sector, economic 2reforms and
foreign investment, Kazakhstan's GDP grew 9.5% in 2002 to an estimated
$120 billion. This resulted in an estimated per-capita GDP of about
$7,200. (25) This marked the first time that significant economic
growth was observed over three consecutive years since Kazakhstan's
independence in 1991.
More than 55% of the country's revenue is dependent on oil and
gas. The country's other exports include zinc, copper, titanium, gold,
silver, machinery, coal and meat. Kazakhstan's industrial sector
depends heavily on the recovery and processing of these natural
resources, as well as on its growing machine fabrication sector that
focuses on construction equipment, tractors, agricultural machinery
and armaments.
Kazakhstan's economy experienced a decline in the mid-1990s, as a
direct result of the breakup of the USSR and the fall in demand for
Kazakhstan's traditional heavy industry. The steepest annual decline
was observed in 1994.
Shortly following the decline, the pace of the governmental program of
economic reform and privatization quickened, resulting in a
significant shift of assets away from the state into the private
sector. The 2001 opening of the Caspian Consortium pipeline, from
Tengiz field to the Black Sea, has significantly raised export
capacity while allowing for economic growth. However, despite the
large petroleum sector, Kazakhstan has adopted an industrial policy
designed to diversify the economy away from over-dependence on oil and
gas by developing light industry. (25)
Kazakhstan's energy sources. Kazakhstan controls a large portion of
Caspian coastline and possesses this freshwater lake's largest known
oil field (Kashagan). According, the country has absorbed $20 billion
of foreign petroleum investment since the fall of communism. (26)
Combined onshore and offshore proven reserves are estimated to be
between 9.0 billion bbl and 18 billion bbl. This is comparable to the
reserves of Algeria or Qatar. (4) Kazakhstan's 2002 oil production was
just shy of 1 million bpd, of which about 130,000 bpd were consumed
inside the country. (5) Kazakhstan's historical oil
production/consumption trend is charted in Fig. 5. Although still a
relatively minor oil exporter, Kazakhstan is on its way to becoming a
significant player in the next 10 years. The country's proven natural
gas reserves total 65 Tcf; mostly in western Kazakhstan's Karachaganak
field. (4) These gas reserves rank roughly 20th in the world.
However, despite the large gas reserves, Kazakhstan has only recently
begun to produce more than it consumes, with current output around 0.4
Tcf(1.1 Bcfd). (5)
[FIGURE 5 OMITTED]
Kazakhstan's oil production grew an average 16% annually between 1999
and 2002, and output has nearly doubled since its independence in
1991. In June 2003, the government announced a new offshore
development program. Through this program, new offshore blocks will be
auctioned off, starting as early as 2004. Kazakh officials hope that
this effort will boost the country's production to approximately 2.4
million bopd by 2010 and 3.6 million bopd by 2015. (27) This output is
expected to come from the country's three largest fields--Tengiz,
Karachaganak and Kashagan.
Located onshore, just inland from the shores of the Caspian, Tengiz is
considered to be the world's deepest super-giant oil field. (22)
According to operator ChevronTexaco, its discovery in 1979 generated
estimated reserves of 6 billion bbl to 9 billion bbl. The field has
been developed by the Tengizchevroil (TCO) joint venture between
ChevronTexaco, ExxonMobil, Kazmunaigaz and Luk-Arco. Tengiz produces
about 285,000 bopd, or approximately one-third of national
production. A new agreement between Kazakhstan and TCO has initiated a
$3-billion expansion project that will increase the field's capacity
to 450,000 bopd by 2006. (27)
In northern Kazakhstan is Karachaganak onshore oil and gas/condensate
field. It holds reserves comprising more than 2.3 billion bbl of oil
and 16 Tcf of gas. It has a projected 40-year life span at the
current output rate of about 100,000 bopd, with plans for
expansion. (28)
Kashagan field, although still being appraised, is expected to produce
its first oil in 2005, at an initial rate of 100,000 bopd. (27) As
stated earlier, the field is expected to be the second, most prolific
deposit in the world, following Saudi Arabia's Ghawar Field. (29)
Future production potential is very significant, but current
difficulties that need to be resolved include Caspian ownership,
export routes and infrastructure.
Petroleum transportation. Kazakh oil is exported in three general
directions-- westward, northward and southward. Oil heading west is
transported via the Caspian Pipeline Consortium. Additional excess
capacity is shipped on a barge through the Caspian Sea to Azerbaijan.
Oil transported north to Russia is shipped via a pipeline system or
carried on the existing rail network. Finally, the oil shipped south
is typically swapped with Iran. Because of its geographical location
and access to ports on both the Black Sea and Persian Gulf; Kazakhstan
is able to trade some of its oil on the world market. Because of the
expected rapid growth of Kazakhstan's exports, many efforts are
underway to expand infrastructure to allow a higher export capacity.
One such project, which adds extra export capabilities and connects
the area's oil deposits with Russia's Black Sea ports, is the Caspian
Pipeline Consortium (CPC), overseen by the Russian, Kazakh and Omani
governments in conjunction with various international companies. The
pipeline opened in November 2001 at an initial capacity of" 560,000
bopd. (27) CPC recently announced plans to more than double its annual
capacity to 67 million t, or approximately 1.3 million bopd. (30)
Prior to completion of the CPC, nearly all of Kazakhstan's oil exports
were distributed though the Atyrau-Samara line, a northbound pipeline
linking up to the Russian system.
Many other pipelines have been reported under active or theoretical
consideration. They include a highly ambitious, controversial pipeline
heading eastward to what will be an ever more oil-demanding China, as
well as a subsea pipeline across the Caspian Sea connecting to the
Baku-Tbilisi-Ceyhan project.
Several natural gas pipeline projects are also under consideration or
already in development. Although they are in their infancy, these
lines have the potential to open up markets for Kazakh natural gas.
Further, Kazakhstan could play an important regional role, given that
it serves as a gas transit center for Turkmen and Uzbek gas piped to
Russia and beyond, Fig. 6.
[FIGURE 6 OMITTED]
Kazakhstan-China connection. On its east, Kazakhstan borders China for
approximately 1,000 mi. (25) As the Chinese demand for oil and gas
increases, China has begun exploring options with its neighbor by
making major investments within the Kazakh oil and gas sector. China's
CNPC recently Joined the Kashagan field consortium. and the firm in
1997 bought 60% of Kazakh oil company Aktobemunaigaz. (31,32) A
pipeline is essential to export oil from Kazakhstan into
China. Feasibility studies for route options are underway and should
be completed by the fall of 2004. (32,33)
Last October, Kazakhstan announced that work would begin in 2004 on
this project, one of the world's longest pipelines. (34) Building the
pipeline, however, will be a formidable task, with many physical and
political problems looming. Many observers have warned that the
Kazakhstan-China route could be very problematic, due to numerous
obstacles associated with its 3,200-km length. One of the most
important project issues is that China has asked Kazakhstan to deliver
50 million t of oil annually via this pipeline. This is more than
Kazakhstan's current, total production of 47 million t. The likelihood
of Kazakhstan selling all of its oil to one customer is zero, given
the country's ambitions for a world role. Initial hopes from several
years ago to complete the entire Kazakhstan-China pipeline by 2005 are
now unattainable.
LITERATURE CITED
(1) "Caspian sea oil and gas exploration update and hearing summary,"
hearing testimony, 106th US Congress, May 16, 2000.
(2) BTC website; BP plc, www.caspiandevelop-metuandexport.com.
(3) Koerner, B., "What if the Caspian region was a major oil
supplier," Worldlink magazine, World Economic Forum, January/February
2002.
(4) US Energy Information Administration (EIA), Caspian &a Region."
Key Oil and Gas Statistics, August 2003.
(5) BP Statistical Review of World Energy, June 2003.
(6) BTC website, BP pie. www.casplandevelop-mentandexport.com,
Azeri-Chirag- Gunashli fact sheet.
(7) The World Factbook, Central Intelligence Agency, December 2003.
(8) Azerbaijan fact sheet, Development Data Group, World Bank.
(9) Azerbaijan Country Analysis Brief, Energy Information
Administration, June 2003.
(10) United Nations Resident Coordinator's Annual Report for
Azerbaijan, 2002.
(11) "About the fun&" State Oil Fund of Azerbaijan website,
http://www. oilfund.az.
(12) An energy overview of the Republic of Azerbaijan," US Dep't. of
Energy, www.fe.doe.gov.
(13) "Georgia's rose revolution: A made-in-America coup,"
www.khila-fah.com, December 7, 2003.
(14) Caspian development map and pipelines, BTC website, BP pie,
www.caspiandevelopment-andexport.com.
(15) "Georgia: Transit of Caspian Sea region oil and gas." US Energy
Information Administration, April 2001.
(16) "Pipeline projects in Georgia," US International Trade
Administration www.ita.doc.gov.
(17) "Oil & gas production, Georgia, 2000," US Energy Information
Administration, www.eia.doc.gov.
(18) The Republic of Abkhazia, www.abkhazia.org.
(19) Central Intelligence Agency, Ibid.
(20) Political news, Georgia, www.eurasianet.org.
(21) Delisio, C., "A quiet battle in the Caucasus: Georgia between
Russia and NATO, www.antiwar.com.
(22) Kazakbstan Fact Sheet, Eurasia Operations, ChevronTexaco.
(23) "CheveronTexaco to invest $4 Billion in Kazakhstan in next 4-5
years," TASS Energy Service News Agency, November 26, 2003.
(24) "LUKoil to develop Dostyk Block in Kazakhstan," NOVECON: Russian
Energy Digest, December 8, 2003.
(25) Central Intelligence Agency, Ibid.
(26) "Kazakhstan seeks Caspian oil cartel," Reuters, Moscow, December
28, 2003.
(27) Kazakhstan Country Analysis Brief, US EIA, July 2003.
(28) "Kazakhstan: Major oil and natural gas projects," US EIA, July
2002.
(29) Kazakh oil finds Confirm Caspian as world class," Energy Compass,
November 25, 2003.
(30) Caspian pipeline consortium to increase oil pipeline capacity,"
Kazakhstan-Gateway, RBC, November 20, 2003,
(31) Kazakhstan: China seeks oil investment with an eye on pipeline,"
Radio Free Europe, March 2003.
(32) "What's at stake for whom--China," World Press Review Online,
www.worldpress.org.
(33) "Kazakhstan-China gas pipeline study to be ready in 2004,"
Interfax, October 2003.
(34) "Work on mammoth Kazakhstan-China oil pipeline to start next
year," Agence France-Presse, October 10, 2003.
Randall Collum Jr. graduated from the University of Houston with a BS
degree in chemical engineering in 2001 and is enrolled in the masters
of petroleum engineering program at the same university. He has almost
three years of experience with a major petroleum company and has had
roles as both a production and reservoir engineer in the Gulf of
Mexico Continental Shelf.
Adrian J. Gregorek received a BS degree in mechanical engineering with
honors from Texas A&M University in 2000. He has been employed by a
major petroleum company as both a facilities and subsea engineer,
within the firm's E&P operations His experience ranges from operations
to project development and execution within Gulf of Mexico deepwater
blocks. His current focus is on subseawork He is working on his
masters in petroleum engineering degree from the University of Houston
Amit Sondhi has just completed his masters degree in petroleum
engineering at the University of Houston. He holds a BS degree in
electronics engineering from North Maharashtra University in India.
Michael J. Economides is a professor at the Cullen College of
Engineering, University of Houston, and the chief technology officer
of the Texas Energy Center Previously, he was the Samuel R. Noble
professor of petroleum engineering at Texas A&M University and served
as chief scientist of the Global Petroleum Research Institute
(GPRI). Before that, Dr. Economides worked in a variety of senior
technical and managerial positions with a major petroleum services
company. His publications include authoring or co authoring 11
professional textbooks and books, including The Color Of Oil, and
almost 200 journal papers and articles. He does a wide range of
industrial consulting, including major retainers by national oil
companies at the country level and by Fortune 500 companies.
COPYRIGHT 2004 Euromoney Institutional Investor PLC.
World Oil
Monday, March 1, 2004
Volume 225; Issue 3
ISSN: 0043-8790
An in-depth analysis shows Caspian oil's potential: whether one talks
about exploration, field projects or pipeline construction, the
Caspian Sea region is destined to influence global energy and
geopolitics for years to come.
(Supply And Demand)
By Collum, Randall, Jr., Gregorek, Adrian J., Sondhi, Amit, and
Economides, Michael J.
As new sources of hydrocarbons, particularly from non-OPEC countries,
become increasingly important to the world, the Caspian Sea region has
the potential to become one of the major oil- and gas-producing
areas. The region is thought to hold the world's third-largest oil and
gas reserves behind the Middle East and Russia. New oil discoveries in
the northern Caspian Sea have underlined the region's
importance. Kashagan field, off the northern shore of the Caspian Sea,
is expected to be the second-largest petroleum deposit in the world,
following Saudi Arabia's Ghawar field. It is the largest new oil field
found over the last 30 years. By 2010, the Caspian region is expected
to produce 3 million bopd, doubling current output of about 1.5
million bopd.
Most of the Caspian discoveries are in Kazakhstan, although by 2010 a
significant amount of oil should come from Azerbaijan, predicted to
account for almost one-third of the region.
In December 2003, Kazakhstan President Nursultan Nazarbaev stated,
"Global experts consider the nervousness of Arab countries and all of
OPEC's (members) comes not only from the massiveness of the Caspian
reserves, but also because the region's states do not enter OPEC." He
further suggested that the countries surrounding the Caspian should
create an OPEC-like oil cartel, to support oil prices and reassure
OPEC, itself.
Until recently, Russia controlled oil exports from the area, with the
main export pipelines for Caspian oil passing through its
territory. The US government supports alternative routes that bypass
Russia, which is not pleased that the new pipelines will give the West
access to Caspian oil and gas, without Russian control.
The geopolitics associated with the region have been a major influence
on the Caspian petroleum industry. The US has blatantly thrown its
clout behind the American petroleum companies involved.
Transportation of Caspian oil and gas does not only involve
Russia. Conflicts over land ownership and the US' bad relationship
with Iran have played important roles in establishing potential
pipeline routes. Also, the division of reserves located in the Caspian
Sea has been an ongoing dispute, with Iran and Turkmenistan in
disagreement with Kazakhstan, Azerbaijan and Russia on how the Caspian
Sea should be divided.
An example of hostility that surrounds this issue is what happened to
BP in 2001. While a BP research vessel was in a presumably Azerbaijani
sector of the Caspian Sea disputed by Iran, an Iranian gunboat chased
it out of those waters. This event prompted BP to suspend its work in
that Caspian oil field for a period of time.
The US has played an important role in influencing the Caspian
pipeline situation by endorsing five pipelines in the region, three of
which originate in Baku. (1) These three pipelines consist of the two
already exporting oil, plus the Baku-Tbilisi-Ceyhan (BTC) pipeline
that is under construction. Construction associated with the BTC
pipeline is shown in Fig. 1. (2)
[FIGURE 1 OMITTED]
For now, the pipeline routes seem to be accepted by most
countries. Russia has accepted construction of the BTC pipeline, and
there are questions as to whether Iran would have transported
Azerbaijan's oil through its territory. The route to ship oil through
Iran would have been the cheapest, by far.
AZERBAIJAN
Of the estimated 3 million bopd to be produced from the Caspian by
2010, about one third would come from Azerbaijan. (3,4) In 2002,
Azerbaijan's oil production was 22% of total Caspian Sea output. If
Azerbaijan's political situation continues to favor investment by
foreign companies, and the geopolitical state of affairs can be
resolved between the Caspian Sea's surrounding countries, then
Azerbaijan's potential is even greater.
Azerbaijan has been an oil-producing province for a long
time. According to some historians, it is supposed to be the site of
the first purpose-drilled oil well in the world, drilled in 1848-1849,
just south of Baku. Oil field exploitation began in the 1870s and
continued until World War I. Azerbaijan became an independent republic
after the demise of the Russian Empire in 1918 and was recognized as
an independent country by Western nations in January 1920. Three
months following this recognition (April 1920), the Russian Red Army
took over this country, and it became part of the emerging Soviet
Union (USSR).
Azerbaijan's production peaked at over 500,000 bopd during World War
II, but it has yet to reach that production level again. It was a
strategic, potential oil supply that Nazi Germany targeted in World
War II but was never able to acquire. Had the Germans achieved this,
the balance of the war could have shifted from the Allies to the
Germans. Azerbaijan stayed as a member of the USSR for most of the
Twentieth Century, until it became an independent country for the
second time in history, in August 1991.
Azerbaijan's current promise of hydrocarbons lies in the Caspian Sea,
to the country's east. In 2002, Azerbaijan's oil production was a
little over 300,000 bpd. (5) Given the current development projects in
the Caspian Sea, the country should surpass its historical oil
production peak in the near future.
From 1987 through 1995, Azerbaijan's oil production declined at a
rate of 5.4%. (5) Thanks to the "Contract of the Century," this
decline has ended. The contract, signed in 1994 between Azerbaijan and
11 international companies, involves the development of Caspian Sea
reserves in the Azeri, Chirag and
Gunashli (ACG) fields. Through this contract, Azerbaijan International
Oil Co. (AIOC) was created. Members include state oil company SOCAR
and 11 international firms.
After the contract was signed, oil production stabilized between 1995
and 1997. It has been increasing at an average 10.2% since 1997. (5)
If this rate (considered conservative, given the number of new
projects slated) continues, Azerbaijan will surpass 500,000 bopd in
2007. First oil from the BP-operated ACG fields was in 1997, and this
has been the main reason for the country's production increase. In
early 2004, the area produced 130,000 bopd. It is expected to produce
400,000 bopd by 2005 and peak at 1 million bopd. (6) Production,
consumption and exports of Azerbaijani oil since 1985 are shown in
Fig. 2. (5)
[FIGURE 2 OMITTED]
The Contract of the Century paved the way for many more production
sharing agreements. So far, these pacts have committed a total
investment of more than $60 billion in Azerbaijan's oil
development. (7) The prize that the international operators are
chasing is proven oil reserves of between 7 billion bbl and 12.5
billion bbl, with a potential for an additional 32 billion bbl.
Proven natural gas reserves also total 30 Tcf. Potential exists for
an additional 35 Tcf. (4) Although Azerbaijan has fewer reserves than
Kazakhstan, the country's ability to cooperate with, and openness to,
international investment has enticed such companies as BP, ExxonMobil,
Statoil and others to invest heavily.
Azerbaijan's economy. Azerbaijan's future economy depends greatly on
the proper utilization of hydrocarbon revenues. The country is
low-income, with a per capita income in 2002 of only $710. (8)
Nonetheless, Azerbaijan's income has quadrupled since 1995, much of it
due to the Contract of the Century. This increase compares to a GDP
that decreased by 18.5% in 1995. (8) The projected GDP growth in 2004
is 9.1%. (9) The economy is growing at a fast pace.
With 64% of the population below the poverty line, the country is in a
transitional economy. While the oil sector accounted for 90% of
Azerbaijan's exports, it generated only 1% of all jobs. (10) The
projected $60 billion of international investment in oilfield
development should add plenty of employment.
One sign that the government is attempting to diversify its economy
and keep it growing far into the future is the creation of the State
Oil Fund of the Republic of Azerbaijan (SOFAZ). SOFAZ was established
in 1999 and created to put aside some of the country's oil-related
revenue and manage it for future use. (11)
Becoming a major player. Azerbaijan faces many of the problems common
to other Caspian Sea nations in its quest to become a major player in
hydrocarbon exports.
While oil companies have lined tip to take part in Azerbaijan's
hydrocarbon development, issues still stand in the way of delivering
commercially viable hydrocarbons. Azerbaijan sits on the western coast
of the Caspian Sea, and its neighbors include Iran to the south,
Georgia and Armenia to the west, and Russia to the north.
"Transportation of Azerbaijan's abundant reserves is a major
problem. There is not enough pipeline capacity to export the amount of
oil that can be produced. Also, as Azerbaijan in the past has been a
gas importer, there are no export pipelines available for its
potential gas output. New lines will be necessary for fields that will
be coming onstream, such as Shah Deniz. As one of the largest
gas/condensate fields in the world, it will begin exporting gas in
2006.
Pipelines are the only feasible way to transport oil and gas out of
the Caspian Sea, where most of Azerbaijan's reserves are located.
With the Caspian landlocked, there is no possibility of using tankers
to ship oil to other locations. Therefore, new pipelines are being
built, and more are contemplated for the future. With some of the
future pipelines still under consideration, Azerbaijan's location and
Western geopolitics are playing an important role in the location of
these lines.
With current and planned pipelines, Azerbaijan seems to be in
reasonable shape regarding future capacity. Currently, Azerbaijan has
two export pipelines. The "northern route" is the 100,000-bpd
Baku-Novorossiysk pipeline, which sends oil to the Russian Black Sea
coast. h began exporting oil in 1997. Under present plans, this
pipeline's capacity will be upgraded to 300,000 bopd. (2) The "western
route" is the 115,000-bpd Baku-Supsa pipeline, which sends oil to
Georgia's Black Sea coast. It began exporting oil in 1999.
Under construction since early 2003, the Baku-Tbilisi-Ceyhan (BTC)
pipeline is expected to increase export capacity five-fold with its
1-million-bopd capacity. This new pipeline is scheduled to begin
exporting oil in early 2005, and it will cover 1,040 mi through
Georgia and Turkey, bypassing the progressively busier Bosporus
Straits. Another new pipeline will be built parallel to this, to
transport natural gas. It will be called the Baku-Tbilisi- Erzurum
pipeline and will handle 233 Bcf of natural gas per year. It should be
finished in 2006, in time for Shah Deniz's first contracted gas
exports. The locations of the existing, under construction and/or
proposed pipelines in the region are shown in Fig. 3. (12)
[FIGURE 3 OMITTED]
Azerbaijan fully intends to become a major player and has tried to
alleviate the region's geopolitical tensions. The one conflict that
needs to be resolved is a dispute with Turkmenistan and Iran with
regard to overlapping fields. Hopefully, this can be resolved
peacefully.
One troubling event to international observers is the recent election
of Ilham Aliyev as president in October 2003. He is the previous
president's son, and he won in a landslide election described as
"falling short of international standards."
GEORGIA
Georgia is strategically located between the Black Sea and the
oil-rich Caspian, and it has been a focus of potential conflict
between the US, other Western nations and Russia, Fig. 4. (13,14)
Although Georgia has limited hydrocarbon resources, it controls much
of the Caucasus Mountains and the potential pipeline routes through
them. Thus, it is emerging as a key transit country. (15,16,17)
[FIGURE 4 OMITTED]
Georgia was absorbed into the Russian Empire in the 19th
century. Independent for three years (1918-1921) following the Russian
revolution, it was forcibly incorporated into the USSR until the
Soviet Union's collapse in 1991. Ethnic separation in Abkhazia (18)
and South Ossetia, plus poor governance and Russian military bases,
deny the government effective control over all of the state's
internationally recognized territory. There has been a discernible
effort by Georgia to approach the West, often at the consternation and
mistrust of Russia. (19)
Widespread corruption in Georgia led to the storming of parliament in
December 2003. Mikhail Saakashvili, a 35-year-old American-trained
lawyer, organized and headed up the nearly month-long street
demonstrations that led to President Eduard Shevardnadze's
resignation. Georgian parliamentary and presidential elections were
planned for January 2004.
Georgian economy. The dissolution of the USSR precipitated a
significant fall in the overall size of Georgia's economy. This was
made worse by hyperinflation, and accompanied by an associated fall in
standards of living. The Georgian economy reached a record low in
1992-1994, although the country still enjoys a considerably higher
per-capita GDP than Azerbaijan, at about $5,500. However, recent
statistics suggest that more than half of Georgians are unemployed.
The country risks financial collapse without immediate Western
aid. The economy is in worse shape than is publicly known. Georgia's
interim leaders are seeking help, not only in financing the new
elections, but even more important, in rebuilding Georgia's
dilapidated public infrastructure.
Georgia vs. Russia. Russian President Vladimir Putin has expressed
readiness for radical improvement of Russian-Georgian relations. Yet
Georgia accuses Russia of being "barbaric" at the same time that it
wants to improve relations. This is important, as the Georgian
economy and energy needs depend so much on Russia.
One of the main issues of conflict with Russia is the Georgian army's
inability to deal with Chechen rebels, who have been embroiled in
militant activities in Russia. The would-be, breakaway Russian
republic of Chechnya is crucial for control of the rich oil supplies
of the Caucuses. Georgia and Russia conflicted recently over the
"Pankisi Gorge" on the border with Chechnya, after Tbilisi accused
Moscow of aggression. Russia strongly denies the accusations and in
turn, claims that Georgia has failed to act against Chechen rebels,
who Moscow believes use the gorge as a shelter. Russian politicians
are also angry at US support of the Georgian version of events. (20,
21)
Russia is very much interested in Georgia's political stability,
because an unstable Georgia can mean hundreds of thousands of refugees
crossing into Russian territory. Also, Georgia's territory could be
taken by international terrorists, who might launch attacks on Russia
from that site. Russia has long considered Georgia part of its sphere
of influence and is uneasy seeing US troops deployed there.
Georgia and the US. The relationship between Georgia and the US is
growing stronger. The American influence and its role in the recent
political drama is the most vivid example. Shortly after Eduard
Shevardnadze resigned as president, his US-backed successors joined
with US Secretary of State Colin Powell to publicly criticize Russia,
and demand that it remove its troops from Georgia and another former
Soviet republic, Moldova. US Secretary of Defense Donald Rumsfeld's
visit in December 2003 was an additional show of US support. In
return, Georgia has provided coalition troops in Iraq.
Energy in Georgia. Shortages abound in the energy industry, which is
the most corrupt sector in Georgia and has been for 10 years. Since
1991, Georgia has faced an acute energy crisis. Russia and
Turkmenistan (main exporters to Georgia) dramatically increased the
prices of their energy supplies, and this caused a severe decline in
Georgia's economy. The situation worsened with destruction of a
stretch of the gas pipeline between southern Russia and Georgia in
1992. It was exacerbated in 1994 by Georgia's inability to pay for gas
imports. Currently, Georgia imports oil from Iran and continues to
import electricity from Russia and Turkey.
Georgia is important, because it is positioned to become an important
corridor for oil and gas transportation between the Caspian Sea and
Western markets. At least four pipelines are either operational or
planned/under construction: (15,16,17)
* Baku-Supsa Oil Pipeline. In 1999, the Baku-Supsa early oil pipeline
was inaugurated at the Supsa terminal on the Black Sea coast,
beginning the flow of Azeri oil across the Caucasus to market. The
pipeline's 115,000-bopd capacity can be doubled with additional
pipeline upgrades and facilities. The pipeline is owned by the AIOC
consortium of" Western energy companies.
* Kashuri-Batumi Pipeline. ChevronTexaco has been granted rights to
utilize an existing, yet aging, pipeline from Kashuri (near Tbilisi)
to Batumi (on the Black Sea coast).
* Main Export Pipeline, the Baku-Tbilisi-Ceyhan (BTC)
pipeline. Georgia is set to be the transit country for the Baku-Ceyhan
main export pipeline. When completed, the project should deliver up to
1.0 million bopd at its peak. This project is of regional
significance, as it represents the first direct transportation link
between the Caspian and the Mediterranean, thus avoiding the Bosporus
Straits.
The BTC pipeline should be completed by 2005. The Georgian section of
the pipeline is 248 kin (154 mi) long and will generate substantial
revenues for Georgia. Although BP owns 38% of the venture and ENI
recently took a 5% share, all nine members must make final commitments
to the 1,730-km (1,075 mi) project. Construction of the Georgian
section began in April 2003.
* Trans-Caspian Gas Pipeline Project: Georgia is set to be one of the
transit countries in the Trans-Caspian Pipeline (TCP) project between
Turkmenistan and Turkey. The line's capacity is expected to be 1.0 Tcf
of gas per year, with about half consumed in Turkey and the remainder
re-exported to Europe.
KAZAKHSTAN
Situated in central Asia, on the edge of the European and Asian
continents, is the world's largest landlocked country Kazakhstan. It
is four times the size of Texas and holds the largest recoverable
crude oil reserves in the Caspian Sea region. Kazakhstan produces
roughly 1.0 million bopd, or about two-thirds of the region's total
production. (5)
It is easy to see why, as foreign investment pours into the country's
oil and gas sectors, that Kazakhstan is beginning to realize its
enormous production potential. Such companies as ChevronTexaco (the
first major Western oil company to enter the region in 1993) have made
Kazakhstan their place to develop some of the world's largest oil
fields. (22)
In 2003, ChevronTexaco announced plans to invest $4 billion in
Kazakhstan over the subsequent four to five years. (23) The funds will
further develop the company's three regional projects, TengizChevroil,
the Caspian Pipeline Consortium and the Karachaganak Integrated
Organization. (24)
Russia's LUKoil also made a similar announcement last December about
investing $3 billion in the Dostyk Block. Comprising two fields, the
block's reserves are estimated at "several hundreds of millions of
tons of oil." (24) With sufficient export options in the near future,
and with much infrastructure presently under development, these
announcements, alone, would make Kazakhstan a major producer and
exporter over the next decade.
Kazakhstan consists of three ethnic groups; it is primarily Kazakh, at
almost half of the population, followed by Russian and Ukrainian. The
population is split almost evenly between the Muslim and Russian
Orthodox religions. Although Kazakh is the official language, Russian
is also spoken rather widely, primarily in business.
After the USSR's demise, the newly created, independent Republic of
Kazakhstan opened its doors to foreign business in 1991. Its economic
growth in recent years has been driven not only by petroleum, but also
by changes in its governing system. Its President, Nursultan
Nazarbaev, a former leader of the Soviet Kazakhstan Communist Party
since 1977, became the new republic's first interim president. He was
then elected president in the country's first national elections in
December 1991. Due to a 1995 referendum that extended his term,
President Nazarbaev was re-elected in 1999. He will be up for
re-election again in 2006. (25)
Kazakhstan's economy. Kazakhstan holds Central Asia's largest
economy. Because of its booming energy sector, economic 2reforms and
foreign investment, Kazakhstan's GDP grew 9.5% in 2002 to an estimated
$120 billion. This resulted in an estimated per-capita GDP of about
$7,200. (25) This marked the first time that significant economic
growth was observed over three consecutive years since Kazakhstan's
independence in 1991.
More than 55% of the country's revenue is dependent on oil and
gas. The country's other exports include zinc, copper, titanium, gold,
silver, machinery, coal and meat. Kazakhstan's industrial sector
depends heavily on the recovery and processing of these natural
resources, as well as on its growing machine fabrication sector that
focuses on construction equipment, tractors, agricultural machinery
and armaments.
Kazakhstan's economy experienced a decline in the mid-1990s, as a
direct result of the breakup of the USSR and the fall in demand for
Kazakhstan's traditional heavy industry. The steepest annual decline
was observed in 1994.
Shortly following the decline, the pace of the governmental program of
economic reform and privatization quickened, resulting in a
significant shift of assets away from the state into the private
sector. The 2001 opening of the Caspian Consortium pipeline, from
Tengiz field to the Black Sea, has significantly raised export
capacity while allowing for economic growth. However, despite the
large petroleum sector, Kazakhstan has adopted an industrial policy
designed to diversify the economy away from over-dependence on oil and
gas by developing light industry. (25)
Kazakhstan's energy sources. Kazakhstan controls a large portion of
Caspian coastline and possesses this freshwater lake's largest known
oil field (Kashagan). According, the country has absorbed $20 billion
of foreign petroleum investment since the fall of communism. (26)
Combined onshore and offshore proven reserves are estimated to be
between 9.0 billion bbl and 18 billion bbl. This is comparable to the
reserves of Algeria or Qatar. (4) Kazakhstan's 2002 oil production was
just shy of 1 million bpd, of which about 130,000 bpd were consumed
inside the country. (5) Kazakhstan's historical oil
production/consumption trend is charted in Fig. 5. Although still a
relatively minor oil exporter, Kazakhstan is on its way to becoming a
significant player in the next 10 years. The country's proven natural
gas reserves total 65 Tcf; mostly in western Kazakhstan's Karachaganak
field. (4) These gas reserves rank roughly 20th in the world.
However, despite the large gas reserves, Kazakhstan has only recently
begun to produce more than it consumes, with current output around 0.4
Tcf(1.1 Bcfd). (5)
[FIGURE 5 OMITTED]
Kazakhstan's oil production grew an average 16% annually between 1999
and 2002, and output has nearly doubled since its independence in
1991. In June 2003, the government announced a new offshore
development program. Through this program, new offshore blocks will be
auctioned off, starting as early as 2004. Kazakh officials hope that
this effort will boost the country's production to approximately 2.4
million bopd by 2010 and 3.6 million bopd by 2015. (27) This output is
expected to come from the country's three largest fields--Tengiz,
Karachaganak and Kashagan.
Located onshore, just inland from the shores of the Caspian, Tengiz is
considered to be the world's deepest super-giant oil field. (22)
According to operator ChevronTexaco, its discovery in 1979 generated
estimated reserves of 6 billion bbl to 9 billion bbl. The field has
been developed by the Tengizchevroil (TCO) joint venture between
ChevronTexaco, ExxonMobil, Kazmunaigaz and Luk-Arco. Tengiz produces
about 285,000 bopd, or approximately one-third of national
production. A new agreement between Kazakhstan and TCO has initiated a
$3-billion expansion project that will increase the field's capacity
to 450,000 bopd by 2006. (27)
In northern Kazakhstan is Karachaganak onshore oil and gas/condensate
field. It holds reserves comprising more than 2.3 billion bbl of oil
and 16 Tcf of gas. It has a projected 40-year life span at the
current output rate of about 100,000 bopd, with plans for
expansion. (28)
Kashagan field, although still being appraised, is expected to produce
its first oil in 2005, at an initial rate of 100,000 bopd. (27) As
stated earlier, the field is expected to be the second, most prolific
deposit in the world, following Saudi Arabia's Ghawar Field. (29)
Future production potential is very significant, but current
difficulties that need to be resolved include Caspian ownership,
export routes and infrastructure.
Petroleum transportation. Kazakh oil is exported in three general
directions-- westward, northward and southward. Oil heading west is
transported via the Caspian Pipeline Consortium. Additional excess
capacity is shipped on a barge through the Caspian Sea to Azerbaijan.
Oil transported north to Russia is shipped via a pipeline system or
carried on the existing rail network. Finally, the oil shipped south
is typically swapped with Iran. Because of its geographical location
and access to ports on both the Black Sea and Persian Gulf; Kazakhstan
is able to trade some of its oil on the world market. Because of the
expected rapid growth of Kazakhstan's exports, many efforts are
underway to expand infrastructure to allow a higher export capacity.
One such project, which adds extra export capabilities and connects
the area's oil deposits with Russia's Black Sea ports, is the Caspian
Pipeline Consortium (CPC), overseen by the Russian, Kazakh and Omani
governments in conjunction with various international companies. The
pipeline opened in November 2001 at an initial capacity of" 560,000
bopd. (27) CPC recently announced plans to more than double its annual
capacity to 67 million t, or approximately 1.3 million bopd. (30)
Prior to completion of the CPC, nearly all of Kazakhstan's oil exports
were distributed though the Atyrau-Samara line, a northbound pipeline
linking up to the Russian system.
Many other pipelines have been reported under active or theoretical
consideration. They include a highly ambitious, controversial pipeline
heading eastward to what will be an ever more oil-demanding China, as
well as a subsea pipeline across the Caspian Sea connecting to the
Baku-Tbilisi-Ceyhan project.
Several natural gas pipeline projects are also under consideration or
already in development. Although they are in their infancy, these
lines have the potential to open up markets for Kazakh natural gas.
Further, Kazakhstan could play an important regional role, given that
it serves as a gas transit center for Turkmen and Uzbek gas piped to
Russia and beyond, Fig. 6.
[FIGURE 6 OMITTED]
Kazakhstan-China connection. On its east, Kazakhstan borders China for
approximately 1,000 mi. (25) As the Chinese demand for oil and gas
increases, China has begun exploring options with its neighbor by
making major investments within the Kazakh oil and gas sector. China's
CNPC recently Joined the Kashagan field consortium. and the firm in
1997 bought 60% of Kazakh oil company Aktobemunaigaz. (31,32) A
pipeline is essential to export oil from Kazakhstan into
China. Feasibility studies for route options are underway and should
be completed by the fall of 2004. (32,33)
Last October, Kazakhstan announced that work would begin in 2004 on
this project, one of the world's longest pipelines. (34) Building the
pipeline, however, will be a formidable task, with many physical and
political problems looming. Many observers have warned that the
Kazakhstan-China route could be very problematic, due to numerous
obstacles associated with its 3,200-km length. One of the most
important project issues is that China has asked Kazakhstan to deliver
50 million t of oil annually via this pipeline. This is more than
Kazakhstan's current, total production of 47 million t. The likelihood
of Kazakhstan selling all of its oil to one customer is zero, given
the country's ambitions for a world role. Initial hopes from several
years ago to complete the entire Kazakhstan-China pipeline by 2005 are
now unattainable.
LITERATURE CITED
(1) "Caspian sea oil and gas exploration update and hearing summary,"
hearing testimony, 106th US Congress, May 16, 2000.
(2) BTC website; BP plc, www.caspiandevelop-metuandexport.com.
(3) Koerner, B., "What if the Caspian region was a major oil
supplier," Worldlink magazine, World Economic Forum, January/February
2002.
(4) US Energy Information Administration (EIA), Caspian &a Region."
Key Oil and Gas Statistics, August 2003.
(5) BP Statistical Review of World Energy, June 2003.
(6) BTC website, BP pie. www.casplandevelop-mentandexport.com,
Azeri-Chirag- Gunashli fact sheet.
(7) The World Factbook, Central Intelligence Agency, December 2003.
(8) Azerbaijan fact sheet, Development Data Group, World Bank.
(9) Azerbaijan Country Analysis Brief, Energy Information
Administration, June 2003.
(10) United Nations Resident Coordinator's Annual Report for
Azerbaijan, 2002.
(11) "About the fun&" State Oil Fund of Azerbaijan website,
http://www. oilfund.az.
(12) An energy overview of the Republic of Azerbaijan," US Dep't. of
Energy, www.fe.doe.gov.
(13) "Georgia's rose revolution: A made-in-America coup,"
www.khila-fah.com, December 7, 2003.
(14) Caspian development map and pipelines, BTC website, BP pie,
www.caspiandevelopment-andexport.com.
(15) "Georgia: Transit of Caspian Sea region oil and gas." US Energy
Information Administration, April 2001.
(16) "Pipeline projects in Georgia," US International Trade
Administration www.ita.doc.gov.
(17) "Oil & gas production, Georgia, 2000," US Energy Information
Administration, www.eia.doc.gov.
(18) The Republic of Abkhazia, www.abkhazia.org.
(19) Central Intelligence Agency, Ibid.
(20) Political news, Georgia, www.eurasianet.org.
(21) Delisio, C., "A quiet battle in the Caucasus: Georgia between
Russia and NATO, www.antiwar.com.
(22) Kazakbstan Fact Sheet, Eurasia Operations, ChevronTexaco.
(23) "CheveronTexaco to invest $4 Billion in Kazakhstan in next 4-5
years," TASS Energy Service News Agency, November 26, 2003.
(24) "LUKoil to develop Dostyk Block in Kazakhstan," NOVECON: Russian
Energy Digest, December 8, 2003.
(25) Central Intelligence Agency, Ibid.
(26) "Kazakhstan seeks Caspian oil cartel," Reuters, Moscow, December
28, 2003.
(27) Kazakhstan Country Analysis Brief, US EIA, July 2003.
(28) "Kazakhstan: Major oil and natural gas projects," US EIA, July
2002.
(29) Kazakh oil finds Confirm Caspian as world class," Energy Compass,
November 25, 2003.
(30) Caspian pipeline consortium to increase oil pipeline capacity,"
Kazakhstan-Gateway, RBC, November 20, 2003,
(31) Kazakhstan: China seeks oil investment with an eye on pipeline,"
Radio Free Europe, March 2003.
(32) "What's at stake for whom--China," World Press Review Online,
www.worldpress.org.
(33) "Kazakhstan-China gas pipeline study to be ready in 2004,"
Interfax, October 2003.
(34) "Work on mammoth Kazakhstan-China oil pipeline to start next
year," Agence France-Presse, October 10, 2003.
Randall Collum Jr. graduated from the University of Houston with a BS
degree in chemical engineering in 2001 and is enrolled in the masters
of petroleum engineering program at the same university. He has almost
three years of experience with a major petroleum company and has had
roles as both a production and reservoir engineer in the Gulf of
Mexico Continental Shelf.
Adrian J. Gregorek received a BS degree in mechanical engineering with
honors from Texas A&M University in 2000. He has been employed by a
major petroleum company as both a facilities and subsea engineer,
within the firm's E&P operations His experience ranges from operations
to project development and execution within Gulf of Mexico deepwater
blocks. His current focus is on subseawork He is working on his
masters in petroleum engineering degree from the University of Houston
Amit Sondhi has just completed his masters degree in petroleum
engineering at the University of Houston. He holds a BS degree in
electronics engineering from North Maharashtra University in India.
Michael J. Economides is a professor at the Cullen College of
Engineering, University of Houston, and the chief technology officer
of the Texas Energy Center Previously, he was the Samuel R. Noble
professor of petroleum engineering at Texas A&M University and served
as chief scientist of the Global Petroleum Research Institute
(GPRI). Before that, Dr. Economides worked in a variety of senior
technical and managerial positions with a major petroleum services
company. His publications include authoring or co authoring 11
professional textbooks and books, including The Color Of Oil, and
almost 200 journal papers and articles. He does a wide range of
industrial consulting, including major retainers by national oil
companies at the country level and by Fortune 500 companies.
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