How does an obscure, minor-league dictator make the leap to major player in the world of politics and business? One word: Oil.
This week, Saparmurat Niyazov, the president-for-life of Turkmenistan, a California-sized former Soviet republic just northwest of Afghanistan, met with officials from Russia, Iran, Azerbaijan and Kazakhstan in an attempt to divide one of the world's richest oil and gas regions — at the bottom of the Caspian Sea.
While talks between the leaders of the five nations in Ashgabat, Turkmenistan, ended today with no agreement, for Niyazov and his colleagues, the stakes remain high.
Estimates for the oil reserves beneath this landlocked sea range from 35 billion barrels up to an optimistic 300 billion barrels. At the high end, that's more oil than even Saudi Arabia's 260 billion barrel reserve, and half as much as the entire Middle East. And while few analysts expect the Caspian to truly challenge the Middle East, its crude is already seen as shifting the global oil dynamics.
By 2020, the Caspian could be pumping out 6 million barrels of oil a day, or about 6 percent of the world's forecasted daily demand, according to the U.S. Energy Department. That, in turn, would generate about $150 million every 24 hours for the Caspian states and the Western oil companies that have partnered with them.
Clickable Map: Guide to Caspian's Oil Riches
Six percent may seem like a drop in an ocean of oil. Yet at a time when major energy consumers like the United States, Japan and Europe want to cut their dependence on the politically unstable Middle East — and when Western oil companies are desperately seeking new oil assets to put on their books — the Caspian has emerged as the petroleum equivalent of El Dorado.
"Caspian oil may eventually be as important to the industrialized world as Middle Eastern oil is today," declared former U.S. Secretary of State James Baker several years ago.
Just last December, Colin Powell, the current secretary of state, described the oil reserves in Kazakhstan as being of "critical importance" to Western energy consumers in the near future.
Yet as this week's contentious talks in Turkmenistan have already made clear, unlocking the Caspian's energy riches has been exceedingly difficult. Before Caspian oil can flow to Western markets, producers, consumers and oil companies must address three major issues: boundaries, pipelines and investment.
Whose Oil Is It?
Since the collapse of the Soviet Union in 1991, the five nations bordering the Caspian — Russia to the north, Iran to the south, Azerbaijan to the west and Kazakhstan and Turkmenistan to the east — have been arguing over how to apportion the oil-rich sea floor.
Previous settlement talks have stalled. Meanwhile, as more gas and oil discoveries are announced, and as billion-dollar production contracts are signed, tensions among the five nations have risen dramatically.
Last July, for example, when an exploration ship operated by British Petroleum and Azerbaijan entered waters claimed by Iran, Iranian gunboats arrived and forced the vessel to leave. And in February, according to one published report, Iran announced it was moving ahead with oil and gas projects even without a settlement of the boundary issue, saying it would "prevent others from exploiting what it considers its share of the sea."
And while this week's talks in Turkmenistan mark the first time all five nations have agreed to discuss the issue simultaneously, few observers are expecting a fast-track settlement.
"It is a difficult process," a Turkmen Foreign Ministry spokesman told reporters. "And to expect a final resolution after this one meeting is hard."
Pipelines in the Middle of Nowhere
Even if a final resolution can be reached, there remains the daunting challenge of moving the Caspian's oil to market. The landlocked region is hundreds of miles from major shipping ports, necessitating the construction of expensive pipelines.
Last November, after years of delay and unanticipated expense, oil began to flow from the massive Tengiz fields in Kazakhstan to the Russian Black Sea port terminal of Novorossiysk, via a 990-mile, $2.5 billion pipeline built by a consortium of Western oil companies and regional governments.
Yet even at its maximum capacity of 1.3 million barrels of day, this new pipeline will handle just a fraction of the total Caspian potential production. By most estimates, the region will need at least two additional pipelines — a prospect clouded in uncertainty as the United States, Russia, Iran and Turkey maneuver for control over this politically crucial part of the world.
The easiest and cheapest pipeline route would be either north, into the existing Russian pipeline system, or south into Iran. But the United States regards Iran as a sponsor of terrorism and has done everything it can to block this so-called southern route.
Likewise, although U.S.-Russian relations have warmed considerably since Sept. 11, Washington still fears that Moscow will use an oil pipeline as a lever to reassert control over the Caspian region.
For these reasons, since the mid-1990s, the United States has supported a so-called western alternative — a pipeline from Baku in Azerbaijan though Tbilisi, Georgia, and on to the Mediterranean port city of Ceyhan in Turkey.
This BTC pipeline, as it is called, is expected to cost more than $3 billion, but won't begin operating until 2004 at the earliest. It will also carry just 1 million barrels a day — significant volume, but still only a fraction of the regional total potential production.
Oil Will Move, With or Without U.S. Support
Not surprisingly, many Western oil companies operating in the Caspian, including those based in the United States, are chafing against Washington's restrictive pipeline politics.
For companies like ChevronTexaco and ExxonMobil, majority stakeholders in Kazakhstan's Tengiz operation, or British Petroleum, a key operator in Azerbaijan, the Caspian is a rarity — one of the few remaining oil regions where outside companies can still own a real piece of the action.
In the Middle East, by contrast, the oil is owned by the state, with Western oil companies hired mainly as contractors. Similarly, the oil-rich fields of Siberia are dominated by Russian firms, with limited opportunity for full Western participation.
As such, the Caspian is seen as the last best hope for oil companies hoping to build their reserves and ensure long-term production revenues — revenues that will be diminished if companies can't get that oil to market via the cheapest, most efficient route.
"There is no good reason, other than domestic U.S. politics, why we're not already working on a pipeline to Iran," groused one U.S. oil executive during an energy conference in Kazakhstan earlier this month. "We need more economics and less politics."
Indeed, despite a U.S. law that prevents American companies from doing business with Iran, already there are other countries and companies working with Iranian officials to transport Caspian oil. Many observers fear American political interests may be superceded by the larger commercial interests of a global oil market that cares little for U.S. foreign policy.
As one high-ranking Iranian diplomat explained, "Believe me, Caspian oil is already moving through Iran, with or without U.S. support."
Who’s Paying to Pump?
The third variable in the Caspian equation is future investment. Although Western oil companies have already pumped perhaps $8 billion into exploring and developing the Caspian Sea, much more is needed.
Unlike Middle Eastern oil, for example, most Caspian oil is hard to extract, requiring complex machinery, expensive technology and massive infrastructure development. To reach its potential of 6 million barrels a day by 2020, oil analysts believe the Caspian will need another $30 billion to $60 billion in foreign investment.
That's a staggering volume of cash, even in the best of investment climates, and the Caspian region, for a number of reasons, has always been something of an investor's nightmare.
Political instability and corruption are rampant in the three former Soviet states — Azerbaijan, Kazakhstan and Turkmenistan. And Iran, despite its efforts at reform, remains wracked by internal political tensions and international pressure, mainly from the United States.
Moreover, as the Caspian oil states begin to feel more politically and economically powerful, some are pressuring Western oil companies to reopen the original production contracts and renegotiate royalties and other terms.
"There is nothing that will chill investment faster than a fear that the contract you signed isn't worth the paper it's printed on," says one Western investment consultant based in Almaty, Kazakhstan.
Some observers predict that the Western oil companies will simply have to bite the bullet and accept new terms if they want to continue to share in the Caspian bonanza, especially in Kazakhstan. "The projects that Kazakhstan is pushing to renegotiate are very big and very profitable for the foreign oil companies and they are not likely to want to walk away from them," said Julian Lee, energy analyst at London-based Centre for Global Energy Studies.
Yet Lee and other analysts are quick to note that global capital markets are only so large, and that oil investment is essentially a zero sum game. If the Caspian becomes too challenging or difficult, capital will flow instead to more business-friendly oil regions, like Russia, South America or the Gulf Coast of Texas.
"Kazakhstan's desire to renegotiate terms is unlikely to drive existing investors out of the region," said Lee. "But it will raise questions in the minds of potential future investors."
Added another oil industry analyst, "This is absolutely the wrong time to be sending the message that it's hard to business in the Caspian."