By Ben Partridge
London, July 9 (RFE/RL)
A leading Western oil executive says Central Asian and Caucasus countries need to be more realistic in their expectations of the amount of wealth that is likely to be created by Caspian oil and gas fields.
Willy Olsen, senior adviser to the Norwegian state oil company, Statoil, says predictions of a new �El Dorado� in the Caspian region are exaggerated. Olsen, involved in Caspian oil and gas developments since 1991, says it is understandable why the Central Asian and Caucasus countries �see the energy sector as the foundation of great wealth, influence and power.� But he says some predictions are far too optimistic. He spoke this week before the Royal Institute of International Affairs (RIIA) in London.
�Some reports of the bright future go over the top, though, as the journalist from the San Francisco Chronicle who traveled to the region in 1998 and wrote, and I quote, �the region�s oil and gas wealth will shovel unimaginable wealth on people whose annual per capita GDP hovers between $400-600, building a new El Dorado.� I believe it is necessary to try to paint a realistic picture of what we can expect in years to come rather than dream of new El Dorados.�
Olsen says the Caspian region has �exciting prospects of becoming a significant exporter of oil and gas in the next decades.�
But he says there are many problems including the unknown size of Caspian reserves, the difficulty of exporting oil and gas to world markets, the time and cost needed to build the infrastructure for a modern energy industry, and shortage of drilling rigs and other equipment.
Olsen says it will take years to discover the size of the oil and gas reserves of Azerbaijan, Kazakhstan, Turkmenistan and the other countries. Geological knowledge is limited because in the Soviet era the region was behind a closed border. He says geologists have identified 250 undrilled sites across the region. But the chance of finding oil in commercial quantities at any one place are only 15-20 percent.
Olsen addressed the question: how fast can the Caspian oil and gas fields be developed? He says much will depend on the level of world oil prices. They have slumped in recent times, but have now recovered to a level of $18 a barrel. He says any return to lower oil prices will make the Caspian less attractive to foreign investors.
Much depends on whether the cost of developing Caspian oil makes it competitive. In the past 15 years, the cost of finding, developing and producing, for example, North Sea oil has fallen from $20 a barrel to $10. Costs will have to come down in the Caspian as well.
Olsen says the fact the Caspian nations lack access to an open sea means it will be difficult to transport their oil and gas to market.
�The huge distance between the region it serves and world markets imply a considerable financial burden, and it may add up to two to four dollars per barrel to the cost. As important, and it is very often forgotten, the Caspian countries do not have access to all the worldwide resources of the oil and gas industry, such as marine drilling and construction fleets, or world scale fabrication facilities.�
Olsen says the shortage of oil drilling rigs is slowing down exploration. He says the three rigs in the region, two in Azerbaijan and one in Kazakhstan, will never meet the requirements of the many oil production sharing agreements already signed. He says the Caspian needs more drilling rigs, but the cost will be enormous.
In addition, there is only one crane barge in the region, needed for hoisting equipment onto the rigs. This depends on 30-year-old technology no longer in use in the oil industry elsewhere.
Olsen says the Caspian region is also handicapped by the lack of investment and maintenance of the old Soviet industrial infrastructure. Azerbaijan used to be the main supplier of oil equipment to oilfields in Siberia, but no longer has an industry for �tomorrow�s requirements.� The lack of export pipelines for oil and gas is yet another problem and one that gets considerable attention.
Olsen says energy companies are also facing environmental challenges which are already causing delays to energy projects in Kazakhstan. Olsen says drilling companies want to ensure they do not cause further harm to the Caspian sturgeon population and to wildlife in the north.
Regional instability is another element that could delay the exploitation of oil and gas fields. Olsen says without a solution to existing hot spots � including Nagorno-Karabakh, Abkhazia, and South Ossetia � political risks will remain high, and impede development.
In summary, he says the Caspian region is an exciting region for the international oil and gas industry. But governments and industry have under-estimated the time and cost of developing the modern infrastructure needed for export success. He also says the Caucasus and Central Asian nations must not depend on the energy sector alone, but must set out to build diversified economies.
�I do believe the energy sector can become a locomotive for growth and prosperity in the Caucasus and Central Asia, but to depend only on the success of the energy sector will be a very very dangerous strategy. Future petroleum revenues are exposed to the price of oil, and, as we have learned again in the last 15 months, the price of oil fluctuates. The Caspian energy states will have to diversify their economies if they are to succeed, and they will need western engagement to succeed.�
The lecture coincided with the launch this week of a new RIIA study of Central Asian and Caucasian prospects. The study, �Western Engagement in the Caucasus and Central Asia�, is by Neil MacFarlane, who is a professor of international relations at Oxford University.
By Michael Lelyveld
Boston, July 8
(RFE/RL)
Kazakhstan has all but given up hope for an ambitious oil pipeline to China, as Beijing seems to be investing in other projects where it has more to gain.
On Saturday, Kazakhstan�s energy minister, Mukhtar Ablyazov, said the construction of a 2,800-kilometer pipeline to China is not feasible as long as oil prices remain low. Instead, oil swaps are seen as more profitable than long-term pipeline projects to sell Kazakhstan�s oil, the minister said.
The statement quoted by Agence France-Presse comes at a curious time. Oil prices have been low. But they have now risen steadily to a 19-month high, nearly reaching the level of September 1997, when China agreed to pursue the pipeline plan.
The statement also seems to contradict a claim in May by the China National Petroleum Company that it was speeding up its construction and that nearly 500 kilometers of the pipeline has already been built.
Now it appears that China�s comments may have been meant to reassure Kazakhstan. Judging from Kazakhstan�s assessment, the progress has been a disappointment.
The line, which would cost over $3 billion, was one of several big projects that China announced as a part of an investment package with Kazakhstan totaling $9.5 billion. Among the projects was development of the Uzen oilfield, the second largest so far in Kazakhstan. At the time, the size of the commitment stunned analysts and convinced them that China was ready to be a major player in Central Asia and the Caspian region.
It may still be a major player, but skepticism has grown about the commitment as China has delayed development plans. There has been little progress on the third element of China�s big designs for Kazakhstan, the construction of a pipeline through Turkmenistan and Iran to the Persian Gulf.
Even less has been heard about an even bigger scheme that was publicized two years ago, the construction of an 8,000-kilometer gas pipeline from Turkmenistan through Uzbekistan, Kazakhstan and China to South Korea and Japan. If completed, the project would be the longest gas line in the world. But analysts see little chance that the investment will proceed.
If China has delayed, its caution may be blamed on the Asian currency crisis which has forced it to conserve on finance. But China may also have sought to extend its influence over Kazakhstan with promises it was unlikely to fulfil.
In 1997, Beijing won the bidding for the Uzen oilfield against competition from U.S. companies, including Amoco, Texaco and Unocal. One reason cited was its plan to invest in the pipeline projects that now seem in doubt. In June 1997, China also won the competition to develop Kazakhstan�s Aktyubinsk oilfield after offering the incentive of export pipelines.
But Kazakhstan has stopped short of publicly criticizing its powerful neighbor. Instead, Ablyazov�s statement shows support for the option of swapping oil, in which China also has an investment interest.
The China National Petroleum Corp. and China Petrochemical Corp., known as Sinopec, have joined in a consortium to build a pipeline from the Caspian to Iranian oil refineries to carry out the swaps. The line from the Iranian port of Neka to the refinery in Tehran will allow the use of Kazakh oil in northern Iran while equal amounts of crude are shipped from Iran�s ports on the Persian Gulf.
Iranian officials expect the $400-million project to start in September. The Chinese companies are also working to extend the swaps to other Iranian refineries which they have agreed to upgrade for handling to other Iranian refineries which they have agreed to upgrade for handling Kazakhstan crude. The United States opposes the plan and has denied swap licenses to U.S. companies seeking to participate with their shares of Caspian oil.
But China�s involvement in the swaps suggests that it may be doing more than seizing opportunities from which U.S. firms are banned. With the swap project, it may now exert control over Kazakhstan�s exports both to the east and to the south. Beijing�s role in two possible outlets for Kazakhstan at the same time is unlikely to be a coincidence.
Much of the international attention has focused on the country�s export access to the north and west through Russia and its planned pipeline to the Black Sea. But in the meantime, transit from Kazakhstan remains difficult. Even the 390-kilometer swap line from Neka will take two years to build.
China appears to have calculated that its greatest interest will remain in oil transit by tanker through the Persian Gulf. Its involvement in the swap plan may allow it to influence Kazakhstan and Iran at the same time for a relatively modest investment.
If the project takes place on schedule, it could capture Turkmenistan�s oil, as well as a portion of the larger volumes to come from Kazakhstan. If the swap route is delayed, Kazakhstan may wonder whether it made the right choice in awarding its oilfields to China two years ago.
All Over the Globe is published by IPA House.
© 1998 IPA House. All Rights Reserved.