SENIOR EXECUTIVE INTELLIGENCE BRIEF

Created: 11/15/1999

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Geopolitics and US Interests in the Caspian

The cotitpentiori for the rich energy resources in the Caspian region, heraldedajor oil and gas supplier fixt century, is movingay of reckoning as energy development rimciines create pressure for decisions oa major export projects from this landlocked re poo. Some of these decisions will determine tbe path and security of future energy flows, the Caspian states' sovereignty and financial stability, and the US roleegion where Russia, Iran, Turkey, and China also vie for influence]

the intense political attention, oil companies so tar have largely determined the pace and nature of the region's energyCaspian oil production is expanding slowly, restrained by logistica shortage of offshoreaonth decline in oil prices through March of this year that reinforced ct-fr.pj.nv reluctance to invest in large-scale prpeiines.

Ar the same rinse, divergent national objectives and rivalries among Caspian states arc hindering progress on US-supported export projects such as the pipeline from Baku, Azerbaijan to Ceyhan, Turkey, and the Trans-Caspian gas pipeline. [Sec map)

Azerbaijan, the likely geographic hub of an east-west pipeline route, so far hasegional leadership role. Kazakhstan hasaiting game, despite having the region's largest oil reservestrong desireon-Russian export outlet. Turkmenistan President Niyazov's desire to be treated as an equal player in the Caspian has kept him from making compromises that might advance pipeline

alterative scenarios for the great game

Caspian could produce cafYerent scenariosn Urge part on regional stability, good governance. and the success of US efforts to push

for pipeJincs that would Erik the region to Turkey

and the West.

East-west export routes would help establish secure outlets for Caspian energy and position these countries to make rhe most of their energy wealth, but such routes also wouldacklash from Iran and Russia aod would leave the us vulnerable to blame if energy revenue falls short of expectations.

ailure to develop east-west oudets could enable Iran and Russia to dominate Caspian energy flows, adding to global energy depen<IeiHc on :hesc mo suppliers and diminishing, the benefits from energy wealth to the Caspian states.

reakdown in order in rhe Caspian countries could disrupt oil and gas development, especiaUy if combinedrang of sancuons against Iraq and low oil prices. This would undercut global and US energy security and leave the region more vulnerable to inierwnDort by Russia and Iran.p

Even if the OSCE Surrimit in Istanbul this week advances the cast-west pipelines, the three scenarios will remain in play. US diplomatic efforts will continue toirect bearing on riieir probabilities]

caspian energy potential large butival to the persian gulp

early dxiros that Caspian energy resource* mat

those of the Persian Gull ore exaggerated.!

[dtt Caapl

region probably holds at km btllKm barrels of recoverable oil, similar to die oriprul resource base of the North Sea but only about one tenth of current reserves in the Persian Gulf. iCI*

Manvbservers remain tewssrx about the region's resources despite sow rccetst dKap-acjsajag ccpaoraoon rcsidta oetshorc

Scenario l:

US-Backed East-West Routes Are Developed

DEVELOPMENTS: Azerbaijan, Kazakhstan, and Turkmenistan cooperate to build the large od and gas pipelines the US is promoting. The Baku-Ceyhan main export pipeline is financed and built by the US backed target dates oil companies combine od volumes from projects in Kazakhstan with production in Azerbaijani. Turkey follow* rJirough on its comrnltmencs to make the pipelinenactive to the oil companies and provides purchase agreements for the Trans Caspian gas pipeline. Instead of seeking separate pipelines, Azerbaijan and Turkmenistan put aside their orrshore boundary dispute and agree to share access to the Turkish gas market in the interests of building the gas pipeline.

OUTCONLE: Completion of the Baku-Ceyhan oil pipeline and the Tram-Caspian gas pipeline from Turkmenistan to Turkeyajor HinspoctiDon corridor linking the two sides of the Caspian to Turkey and other western markets. Growing volumes of oil and gas from the Caspian states are shipped through this corridor because expansion generally is more cost effective than desesofjihg new routes. Tbe successas pipeline from

Turkmenistan to Azerbaijanrans-Caspian oil pipeline to ship increasing volumes of oil from Ka/uklistan and Turkmenistan to Azerbaijan and on to Ceyhan.

Projected Persian Gulp

20

Projected Caspian Region

0

t.

W.M

Russia completes the Caspian Pipeline Cotisortium's (CPC) pipeline from JUaakhstan. but most othet east Caspian oil is exported across the Caspian Sea.

Iranit player in the Caspian, importing relatively small volumes of oil and gas into its northern temtory.|

IMPLICATIONS: US and Turkish links and influence in the Caspian are strengthened, fueling expectations of future support and perceptions that the US bears some credit or blame for the competence of Caspian regimes.

Turkey is pleased char the Baku-Ceyhan pipeline relieves some pressure from the Bosporus for shipping Caspian oil.

Russia's perceptions of US infringement on Its sphere of influence arc increased.

Iran's sense of Western encirclement is heightened as it loses ground in competition for Caspian exports and the Turkish gas market.

Caspian states arc less dependent on Russia and more strongly linked to Turkey and Europe. Increasingoward the West encourages Caspian governments to implement economic and

Scenario 2:

Support for East-West Routes Falls Apart r

DEVELOPMENTS: US efforts to facilitate cooperative efforts fail as Azerbaijan, Kazakhstan, and Turkmenistan sock to their "mexport strategies. Iran uses the advantage provided by its infrastructure to attract Caspian energy exports and gains more foreign investment after the Iran-Libya Sanctions Act (ZLSA) expires in

Russiatronger bid for Caspian exports by pushing completion of live CPC pipeline andcarrot-and-srick" approach to attract Azerbaijani oil at the same tune it is destabilizing Georgia to undermine its roleransit state.

Oil companies decline to pool their oil volumes and to cooperate on large-capacity export projects, except for the CPC pipeline project from Kazakhstan through Russia.

Turkey fails to support any of the gas export projects compering for its market bur continues ro resist growing oil traffic through rhe Bosporus.

OUTCOME: Commercial negotiations on the Baku-Ceyhan oil pipeline break down as Azerbaijan and Kazakhstan decline to cooperate and oil companies balk at Turkey's terms for the project. Bickering between Azerbaijan and Turkmenistan kills the Trans-Caspian gasIranajor conduit for Caspian oil and gas by expanding its infrajuueture. Russia completes and expands the CPC pipeline andipeline to bypass Chechnya to handle oil exports from Azerbaijan. Azerbaijan increases oil exports through Russia and Iran as Moscow's meddling in Georgia makes oil flows

there unsecure. As tanker traffic through die Bosporus mounts, Turkey carries out its longstanding threat to restrict flows, making additional oil exports through Iran even more attractive. With help from European msttcunons, oil pipelines through Ukraine and the Balkans arc established ro deliver oil to Europe and ease shipments of Caspian oil through the Bosporus. Azerbaijan decides to send gas to Turkey on its own.P

IMPLICATIONS: Iranajor transit state for Caspian oil and gas, earning largeand extending its political and economic influence into the Caspian.

also attracts larger volumes of exports and uses its economic leverage to increase ics political influence.

" US and Turkish influence wanes, and the Turks' sense of betrayal by Azerbaijan weakens their backing for Baku on the Nagorno-Karabakh dispute, increasing risks of renewed conflict between Armenia and Azerbaijan. Turkey's dependence on Russia and Iran for gas supplies grows, iiscreasing the Turks' strategic exposure.

Caspian states and Georgia are more dependent on Iran and,esser extent, Russia for economic survival, reducing their political independence. Turkmenistan sutlers serious economic difficulties and defaults on its international loans, especially if the Iranians were to cut off its access to the Turkish gas market. Georgia is weakened by the loss of potential revenues from failed east-west routes. I

major Caspian export pipelines

Baku-Supsa Western Early Oil PipcUnc

Atrran-Samara Plpriine

Baku-Novoro&Hyjk Northern Early OU Pipeline

AIOC: BP/Amoco, Unocal, Liikoil, SOCAR, SratoU, Exxon, TPAO, Peruizenetgy, Itocbu, Ramco, Delta- Heas

Transoeft, XazTransOO Tranmeft, SOCAR

Scenario 3:

Caspian Instabeuty Disrupts Energy Developments

developments: The Caspian statesreakdown in order triggered by political succession and ethnic conflict and aggravated by continuing corruption, inept governance, growing ^equalities, and subversion by Russia and Iran. Oil companies perceive much greater risk to investment in the Caspian. An end to un nrcoocs cm Iraq coupled with an opening by Saudi Arabia and Kuwait to more foreign energy participation exerts downward pressure on oil prices and diverts investment by od companies to the Persian Gulf. Turkey is too preoccupied with internal politics to help stabilize the Caspian oroherent policy on pipelines. I

outcome: Oil company investment is drawn away from die Caspian, slewing petroleum development there. Mistrust, weak regimes, and corruption hinder alu'ances or cooperation among Caspian governments. Oil companies are reluctant to honor their Caspian investment commitments, except for the tew projects already generating revenues. Oil and gas cononue to bleed out of the region in all directions, but major us-backed oil and gas export projects are delayed indefinitely. The lifting of un sanctions on Baghdad also enables Iraqi gas to beat Caspian gas to the Turkish market, runner impoverishing the Caspian states and leaving them with few financial means to deal with domestic problems.

Caspian Oil bleeding Out but Natural Gas still Stranded

Caspian oil output has risen by moreine Is per das*)5 rohis year. Exports fuse surgeddoublere Weeding out of die region in all directions.

The largest volume* of oil art sported from Kazakhstan through existing pipelines that transit Russia.

Additional routes that rely bcivily on existing utiijjiructure include the frccjuentrj' disrupted pipeline from Arerhtijin through Cbedraiya. several raU routes from Kazakhstan io Black Sea and Baltic ports, and small ranker traffic rroen the cast Caspian to Iran for rraojshi proem to Iranian refineries, or to Axerbaijjo and on through Georgia via nil.

The one octv oH csport pipeline and the first to exclude Russia cunenrJy delivers

f exude rroro Azerbaijan to the Black Sea port atecond new route, the Caspian Pipeline Consortium project from Kazakhstan through Russia, is under conanjetionj

Caspian production and exports of natural gas have fallen over die same period. Turtjocnisun has one of the world's largest natural gas resource bases andajor gas producer and exporter und) (he. Turkmenistan relies on Russian pipelines for moa of its gas exports, and in theussia started locking out Turkmen gas from customers who couldard cosh. Turkmenistan's gas exports plummeted to smail volumes sent to its Central Asian neighbors

Turkmenistan has signed agreements to sell gas to Turkey, but itipelineS-supponcd pipeline project crossing the Caspian and* competing with projects to deliver Russian and Iranian gas to Turkey and also may have to compete ivjth gas from Azerbaijan.

Russia and Iran exploit Caspian governments* ineffectiveness to expand their totes in exporting Caspian energy

IAU'LICATIONS: The world economy Is

energy security by diversifying supply. Caspian states still look to the US totabilizing role and may overestimate US willingness to intervene aod put troops in harm's way in response to regional conflict.

Turkish influence is reduced as ineffective governance in the Caspian and the collapse of pipeline projects transiting Turkey eliminates useful levers. Turkish dependence on Russian and Iranian gas increases.

Russia becomes bolder and more heavyhanded in trying to regain influence in the region, especially the Caucasus.

a Iran benefits from the collapse of cast-west oil and gas export routes by expanding oil swaps atvdrowing market for Turkmen gas exports.

Caspian states evolve toward autocratic and corrupt governments that finance tbeir rule with unlawful activities such as the smuggling of narcotics, people, and perhaps even weapons of mass destruction.

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