- The Washington Times - Saturday, March 15, 2003

BAKU, Azerbaijan The hopeful words are heard everywhere: Rough-edged Baku is an oil boom town just waiting to happen.
It's hard at first to imagine. Electricity often blinks off, then surges at bulb-frying voltage. Bits of charmless Soviet-era apartments drop away during rainstorms. Shantytowns teem with refugees from Chechnya and from Azerbaijan's territorial fights with Armenia.
But possible war in Iraq and deepening instability around the Middle East have accelerated the drive to develop new sources of oil and gas. The untapped Caspian Sea is shooting to the top of the list.
And look to the horizon.
Out there, on the steel-gray Caspian Sea, the dream seems plausible. A thicket of rigs and drills points toward the center of the giant inland sea and its untapped oil and gas riches. They could rival, even surpass, some of the richest sites outside the Middle East.
"The Caspian has blessed us with the potential for wealth," said Sabit Bagirov, a former president of Azerbaijan's state oil company. "Wealth can also attract troubles. Unfortunately, we live in a tricky region."
One that's not getting any easier.
The five Caspian nations Iran, Russia and three other former Soviet republics make disputes among the nations of the Organization of the Petroleum Exporting Countries seem genteel. Deep divisions cut into every key issue around the Caspian: how to divvy up the resources, deal with deep-pocket Western energy giants and where to lay the pipelines.
And it doesn't stop with economics. The political compass is being tugged by three forces: the longtime Caspian masters in Moscow, newcomers from Washington and Europe and anti-American Iran.
The competition may only intensify. A possible war in Iraq and growing insecurity around the Middle East have given urgency to the development of new oil centers, mainly in Africa and the Americas. The Caspian long known more for caviar than the other "black gold" is suddenly moving high on the agenda of nearly every international fuel prospector.
The 143,000-square-mile Caspian is the world's biggest inland sea and its second deepest. It is nearly five times the size of Lake Superior.
As former Soviet republics Azerbaijan and Kazakhstan align with the West, some see a replay of the "Great Game" the battle in the 19th and early 20th century for influence in Central Asia between the Russian and British empires. Others see flaws in the analogy. The Caspian, they say, is just the latest stage for the timeless interplay of politics and profit.
"All politics is a great game. States will always try to expand their power and extend their influence," said Brenda Shaffer, research director of the Caspian Studies Program at Harvard University. "Every area is up for grabs if there is something to be grabbed. In that sense, the Caspian is perhaps a greater game than most."
Even Marco Polo noticed the inland sea's potential.
The 13th-century Venetian traveler described the strange, flammable ooze in the sands around Baku. In the late 19th century at the dawn of the oil age wildcat drillers hit gushers using just hammers and spikes. The Caspian had its first taste of petro-wealth.
The Soviet Union later swallowed most of the Caspian, leaving Iran with just its southern edge. But offshore exploration was limited in favor of plentiful supplies on land.
Everything changed with the Soviet Union's disintegration. The new Caspian countries Azerbaijan, Kazakhstan and Turkmenistan offered Western oil companies a new frontier with possible vast rewards. Almost every big player has come calling.
In Azerbaijan, British Petroleum is leading an international consortium planning a $2.95 billion pipeline to a Turkish Mediterranean port, Ceyhan. The project, scheduled to be ready in early 2005, is a who's who of big oil: France's TotalFinaElf, Italy's ENI Agip and U.S. firms Unocal Corp. and Exxon Mobil Corp.
Across the Caspian in Kazakhstan, American energy giants Chevron Texaco Corp. and Exxon Mobil have joined a host of major European partners.
This month, CNOOC, a Chinese offshore oil and gas mining firm, said it paid $615 million for an 8.33 percent interest in a Caspian Sea oil project in Kazakhstan's Caspian waters that contains one of the world's largest oil and gas discoveries of the past 30 years.
In Turkmenistan, on the other hand, Exxon Mobil shut down its operations last year after test drills at an onshore site yielded little oil, as have others at sea and on land around the Caspian. But surveys suggest Turkmenistan could eventually yield some of the Caspian's biggest offshore reserves.
So how much oil and gas is really out there? Proven oil reserves are just 10 billion barrels, roughly equal to Norway's.
But possible levels considered at least a 50 percent gamble could reach 243 billion barrels of high-quality crude oil comparable to the benchmark North Sea Brent, according to U.S. government and private estimates. That's close to Saudi Arabia's ocean of oil.
Natural-gas reserves could hit 463.4 trillion cubic feet, or about 25 percent of the entire Mideast reserves, industry reports say.
The big figures still fall short of the sky-high hopes of the mid-1990s. The Caspian, it seems, will be a major sideshow. The Middle East remains the main event.
"There was a lot of hype around that Baku would overnight become a new Kuwait," said David Woodward, president of BP's Azerbaijan operations. "Today, we really don't believe the Caspian is going to be a new Middle East, but it's going to be a significant source of oil and gas for international markets, on a scale comparable to a new North Sea or a new Gulf of Mexico."
Strategically, however, the Caspian is huge. The United States and other nations have sought to reduce dependence on Mideast oil since the 1973 Arab embargo. Fears of terrorism have made new energy frontiers a priority.
The oil in the Caspian Sea can keep the momentum going for decades, specialists say.
"The Caspian is just part of the global diversification of oil sources," said Miss Shaffer, the Caspian studies director at Harvard. "The days of using oil as a weapon are over."
But sharing the Caspian is a serious challenge.
The five Caspian nations tried to reach accord at a summit in Turkmenistan in April 2002. They failed.
To the relief of Western investors, Azerbaijan, Russia and Kazakhstan have defined their maritime borders. But Iran and Turkmenistan are not happy with them.
Iran insists the Caspian be divided evenly: 20 percent for each littoral country. Iran, which accounts for less than 15 percent of the Caspian coast, would gain. Others such as Russia and Kazakhstan would lose.
Iran's closest Caspian ally, Turkmenistan, appears more flexible, but still disputes some midsea oil fields with Azerbaijan.
Turkmenistan's president, Saparmurat Niyazov, worries that territorial spats could one day get out of hand. "The Caspian smells blood," he said last year.
In 2001, an Iranian gunboat intercepted a BP-funded Azerbaijani oil-research vessel in a disputed area of the Caspian. Kazakhstan plans to build its own navy to challenge Russian military dominance in the Caspian.
"Iran is nervous. And a nervous Iran can be dangerous," said Eldar Namazov, president of the Public Forum for Azerbaijan, a policy think tank. "It's really about their worries of Western encroachment."
Iran is feeling pressured as U.S. influence expands in the region. Azerbaijan has clearly staked its fortunes with the West, and some officials even talk of NATO membership. Iran has a large population of Azeris people of the same ethnic background as those in Azerbaijan whose allegiance could drift away from Tehran.
Kazakhstan, too, is considering shipping more oil through Baku and cementing political and economic ties with the West.
Russia, by far the biggest Caspian power, appears content to allow heavy foreign investment as long as enough Caspian oil is directed to its Black Sea port of Novorossisk, where tankers head to Western markets.
"But Russia could become very unhappy if it starts to feel it's being bypassed," said Mr. Namazov of the Azerbaijan think tank.
The trends all pointing West have seriously undercut Iran's push to become the main transit point for Caspian oil and gas to markets in Pakistan, India and Southeast Asia.
"The whole geopolitics of the Caspian has changed," said Abbas Maleki, chairman of the International Institute for Caspian Studies in Tehran. "Russia especially after the September 11 attacks wants good relations with the United States. … Russia no longer will automatically stand in the way of U.S. moves in the region."

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