- The Washington Times - Saturday, April 27, 2002

The five nations bordering the Caspian Sea, eager to harvest its vast oil and gas resources, have nevertheless failed to agree on a declaration to settle their rival claims.

While Russia, Kazakhstan and Azerbaijan want the Caspian split into national sectors according to the length of each country's shoreline, Iran has been insisting it be divided equally five ways.

Iran, which shared the Caspian's resources equally with the Soviet Union, is concerned it will lose most of the access it enjoyed until the Soviet collapse in 1991 created countries along the littoral.

This week, leaders of the five nations did not agree on boundries across the inland sea.

Still, many states dependent on Persian Gulf oil are hoping to find new sources of energy in the Caspian Sea, a source believed to be more reliable and less subject to political disruption.

"There is nothing new about this idea" of making Caspian oil more available, said Frederick Starr of the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University. He said that increasing the amount of Caspian oil in the world market is welcome news.

The Caspian Sea, which is believed to hold the world's third-largest reserves of oil and natural gas, after the Persian Gulf and Siberia, has long had the attention of Western governments.

Western nations, including the United States, have been particularly interested in tapping Caspian oil because of their heavy reliance on Persian Gulf oil.

The Gulf has an output capacity of 22.7 billion barrels per day, 27 percent of world's oil supply, and contains about 679 billion barrels of proven oil reserves, about 66 percent of world oil reserves.

More important, the region holds 91 percent of the world's excess oil capacity the ability to compensate for oil unavailable during disruptions of trade. If there were any long-term disruption in oil deliveries from the Persian Gulf, it would cause energy shortages, rising prices and general economic panic for the world economy.

Caspian oil will help lower the cost of any disruption of oil supply from the Persian Gulf, said Lucian Pugliaresi, president of LPI Consulting Inc. and former member of the National Security Council under President Reagan.

"Oil from the Caspian Sea can help, just as oil from Alaska can help," Mr. Pugliaresi said. "Marginal supplies outside the Persian Gulf can engage in price discipline."

Caspian oil will be useful for price leverage "when the price of oil reaches a certain level" that is too high for the market to handle, Mr. Starr said. "It is enough to become a crucial buffer of oil supply, putting them on warning that there are other voices in the chorus," he said of Persian Gulf states.

Nevertheless, increasing the amount of Caspian oil on the world market is difficult because the sea is landlocked. Because of geographic limitations, the only cost-effective means of conveying Caspian oil is through pipelines to Georgia and Turkey, countries with port access in the region.

Mr. Starr said that transporting oil by land is, in a sense, building an old-fashioned road next to a high-speed highway the latter being oil transport by sea.

"Even in year 2002, the cheapest way to move anything is by water," Mr. Starr said. "There is kind of a distance tariff. You just have to add a surcharge and it makes Caspian oil less competitive."

But with no alternatives, oil-extracting nations of the Caspian region have built and continue to build pipelines to ports in Georgia and Turkey.

In the case of Georgia, President Eduard Shevardnadze has been the driving force in propelling the country to prominence on the world's oil market. He created the Georgian International Oil Corp. (GIOC) in 1995 to lay pipelines that could move Caspian oil.

"We had to manage all the pipeline process and do it in a way that was open and transparent. We wanted a company that would have acceptance with the major oil companies," said Giorgi Chanturia, head of the GIOC.

Georgia's debut as a transit nation came with the establishment of the Baku-Supsa pipeline, which carries "early oil" from Azerbaijan to the Supsa terminal on the Black Sea. The Baku-Supsa line, which has been operational since 1999, moves about 100,000 barrels per day.

Another oil pipeline, the Baku-Tbilisi-Ceyhan, is planned to be operational by 2004. According to a spokesman at the Georgian Embassy, the line begins in Baku, Azerbaijan, and stretches northwest to Tbilisi, Georgia, where it turns sharply southwest to end at the Mediterranean port of Ceyhan, Turkey.

The 1,085-mile pipeline will cost an estimated $2.7 billion to build, and it will be able to move 50 million tons of oil per year, generating 70,000 new jobs and boosting the Georgian economy by $130 million.

Countries in the Caspian basin also plan to construct gas pipelines to Georgia and Turkey.

Last month, Mr. Shevardnadze and members of the consortium investing in the Shah-Deniz gas line signed a host government agreement. The estimated cost of the 430-mile gas pipeline from Baku to Erzurum, Turkey, is $1.5 billion. It is expected to be completed by 2005.

Much of the gas transported by the Shah-Deniz pipeline is destined for Turkey's domestic market, where demand is growing 9 percent each year and is expected to continue through the year 2015. The Russian firm Gazprom, the world's largest gas company, supplies 70 percent of Turkey's gas needs.

For participants of Caspian oil projects, pipeline security was a major concern even before the start of the U.S. military campaign against terrorism.

"We did not consider routes where security would be a problem, and we built security into the design," said David Woodward, president of British Petroleum PLC's Azerbaijan business unit. The entire pipeline will be buried, and security systems that control access are incorporated into the design, Mr. Woodward said.

"There will be contract security personnel in place when the pipeline is operational," he added, "and the governments of transit countries are obligated to provide security."

Constructing oil and gas pipelines is a challenge to Russia and Iran, states that have been the region's dominant energy producers and suppliers since the Cold War. "It is good news that they don't go through Russia or Iran," Mr. Starr said of the new pipelines.

He said the pipelines will warn Russia and Iran to abandon efforts to influence other oil-producing countries in the Caspian Sea region.

"It changes all the dynamics in the southern Caucasus. It tells the Russians, 'You don't have a chokehold on exports in the region.' It tells the same thing to Iran," Mr. Starr said.

Along with American oil companies, Washington has pursued a growing involvement in the Caspian region through such agencies as the U.S. Agency for International Development (USAID).

"We can help interested companies get their feet on the ground. We can provide them with copies of oil and gas rules, regulations, reports, studies and basic information," said Herbert Emmrich, senior energy advisor for the region's USAID office.

Aside from promoting Caspian oil development, the United States must continue to diversify its oil supplies in other regions and increase its strategic petroleum reserve, Mr. Pugliaresi said.

However, he cautioned that financial assistance from the U.S. government for the oil projects is unnecessary. "It is not wise [for the U.S. government] to spend money there. The private sector knows how to do these things," Mr. Pugliaresi said.

Despite new pipelines and plans for increases in oil output, it is unlikely the Caspian Sea will replace the Persian Gulf as the No. 1 source of oil in world trade. The Persian Gulf will continue to be the predominant supplier of oil for the near future, Mr. Pugliaresi said.

In the first place, the Caspian basin holds less oil than the Persian Gulf, and restrictions on transporting oil and territorial disputes hinder the region from overtaking the Persian Gulf in oil extraction.

Nonetheless, alternative oil supplies such as the Caspian Sea will make it more difficult for the Persian Gulf states to raise oil prices.

Special correspondents Jane Wiegand and Zurab Vanishvili in Tbilisi, Georgia, contributed to this report.

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