Report
Office ofX
Caspian Oil: Exploration and Investment Keys to Growth
Caspian region's large peln>leum resource potential and local governments' willingness lo allow foreign participation in projects position the area toajor new source of oil for world markets.
ihe region holdsiinon barrelsenlialiy rcxxyvniOteto the Northsome observers have speculated that recoverable resources could be as muchillion barrels. |
Our forecast of Caspian oil pcoduicrjorv-Mfeyek>ped svirfa tbe support of indaistryis basedodel that'
indicates that future production levels respond most sensitively to in vestment flows and exploration activity:
Under our baseline scenario, foreign investmentobust level of exploration projects, international oil firms have already planned to spend0 billion on Caspian projects. At this rate of mvestment oil production will risearrels per day)8 tobe majority of production will come from Kazakhstan, followed by Azerbaijan. Turkmenistan, and Russia.
niformpercent increase in mvestment over theriod would provide addiuona! funds for exploration projects, which would yield new field discoveries and boost aggregate productionr>rnrcent decrease in investment would reduce funding for exploration and limit production to ]
Investment and exploration activity over the next five years will be critical (or the expansion of production through the latter half of the forecast period. New production resulting from continued investment in projects established as of die end7 is the main driver of output8rrxruction in the later forecast years, however, largely will be dexerriuped by new projects stemming from exploration activities8"
Depressed world oil markets present the most significant uncertainty in our forecasts. An outlook for prolonged low oil prices will prompt some companies to delay oil field development plans or even pull out altogether from projects that operate at the margin of profitability. Low oil prices also would dissuade investors from funding critical exploration activities. Regional political and economic stability and the availability of critical equipment are other unpredictable factors that could influence the pace of investment and production levels in the Caspian.
Caspian oil pipeline development will be another important element in derernmiing the region's oil production level. The existence of adequate export capacity will ensure producers have access to world oil markets and prompt them to move forwardull slate of development activity; at the same time, however, investors are unlikely to fund major export projects unless they are ensured that there will be adequate production volumes:
* Oil development projects already underway will produce sufficient volumes
in the next decade to justify US'promotedaku-Ceyhan main export pipeline and Ihe Caspian Pipeline Consortiumlong as investment continues to flow into the region and regional production is aggregated However, our forecast indicates that there is unlikely to be enough oil to support tbe volume requirements for more than one or two major new pipelines.
Tbe completion of new pipelines will need to coincide closely with scheduled production mcreases to ensure tbe availability of appropriate capacity and comrDerciaJ feasibility for producers and pipeline operaiors.S-backed pipeline proposals fail to move forward in line wiih production
increases. Iranian and Russian exporters could begin to secure
intermediate and eventually longer term export commitments.
Caspian Poised To Become Major Oil Supplier
The Caspian Sea region has the resource potential to become ooe of the most important new suppliers for global oil markets in the coming decade. The area's large resource base and the willingness of local governments io allow foreign participation in petroleum projects make it highly attractive to foreign energy investors. Oil industry predictions of long-term oil production vary widely, rangingo; actual production will depend on the results of future exploration and the pace of foreign investment. Investment in turn will depend on national policies that promote or discourage investment, wildcards such as regional conflict and world oil prices, and on ihc degree of regional cooperation in developing new export routes.
Oil Reserves Extensive But Subject to Further Exploration
The Caspian's extensive petroleum resource baserimary factor driving oil production projections. The area remains mostly unexplored by Western standards, and total resource estimates will evolve as oil field operators gain moreparticularly in promising offshore sections of the northern
the regiont leastillion barrels of recoverableto the original estimate for the Northaboutillion barrels of proved reserves andillion barrels of probable reserves. Some industry experts estimate that the region contains anillion barrels of possible oil reserves, raising total potential resources toillion barrels.
1 For the purposes of this report, the Casrusnefined as the four centra! and northern Caspian Sci Kuoral countries: Azerbaijan, Kaxaktetnn. Russia, and Turkmoni*an.Q
This memorandum was preparedat Transnationaln
response io quetuooi raised byITtM LUpanmetLt of Sla& and CpiruocfccCn National Security Council about oil production potential in the Caspian region- Comments and Queries are welcome and may be directed to rhe Chief,!
Actual reserves ultimately will dependombination of the region's natural geological endowment and investment flows that shift in response to commercial, political, and economic conditions. While the Caspian is known toealth of hydrtxarbon-bearing source rocks and potentially oU-bcaring structures, the extern of recoverable resources will remain unknown until these structures are artiied.r^ I
ngon 1
Caspian OO Investment"
Btlho* us%
49 0 01
03 04 05 06 07 OS 09 10 11
15
The figure depict* estimated capita! and operating,current Mid preceded future development project*of eiplorucey drill log proerarni It developedIs niunatedillion (orillion fc* Turkrcenaun, andillionover the forecast period-
Source: OA and industry estimates
Reserve Classifications
There is no universally accepted method for defining in-thc-ground oil supplies. Tbe terrrdnology used by Western firms differs considerably from that used in regions of the forrner Soviet Union. The following definitions arc employed in this report for the purposes of discussing Caspian oil production
Investment Is
As exploration reveals tbe extent of rhe Caspian's resources, it will drive oil production forecasts and figure prominently in investment decisions and regional export planning Foreign investment willntical role in an area where ctomcstic capital is severely constrained. Investment over the next five years is particularly important to ensure that new production sources come on stream as older sources diminish. International oil firms have planned investments0 billion in the region to date, and interest in the region continues Io increase as reserve estimates grow and as commercial incentives develop:
July. Azerbaijan signed three separate contracts for new exploration and development projects with major UK energy firms, including an alliance of BP and StatoU. Ramco Gnergy, and Monument OU. according to press reports. The deals could beillion in new investment if initial exploration reveals large corrunercial deposits.
onsortium led by Italy's Agip fmalized an agreement with Azerbaijan to develop the offshore Kyurdashi prospect, according to
"Seecej^
Reserves or Proved Reserves commonly refer to oil that producers expect to recover under current economic conditions using available technology.
Probeblt Reserves denote oil that is expected to be extractedroducing reservoir. but specific circumstances make it impossible to fully count on rhe production of the oil under current conditions
Possible Reserves refer to oil volumes about which there is insufficient data to indicate whether the oil will be extracted. This oil typically is at the economic and technical margin of what can be produced.
Resources represent all reserve categories plus od that is estimatedeological perspective but rernains undiscovered and beyond current economic and technical means of extraction. [
Figure 2
Caspian Oil
Country
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1 1 !
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.
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99 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 S {
industry press reporting.
Baseline Oil Production
Our forecast for Caspian oil production is basedodel developed with the support of industry experts. The modeleries of
Under our basclioe scenario, foreign investment will5obust level of exploration projects. At this rate of investment, aggregate oil production will risearrels per day)8illionillionndillion1
Kazakhstan will contribute the majority of newhe forecast period, followed by Azerbaijan, with smaller amounts from Turkmenistan and Russia. The largest oil volumes will come from production projects currently under development, followed by future projects:
- New production resulting from continued high investment in projects under development will supply the main output increase during the forecast period, adding morewoAzerbaijan International Operating Company (AIOC) in Azerbaijan, and Tengizcbevroil inbe the primary drivers behind the boost, providing more5 and moreillionhese estimates arc based on historical field data, current project plans, and the extrapolation of data from similar projects in analogous geological areas.
Future production from discoveries in the next five toears is
projected to provide major increases in output beginninguture production is impossible to specify without actual field data, but, based on current Caspian development trends, it is likely to be the primary driver of outputiscoveries in the three Caspianmiddle, andwill continue to fuel production through the end of the forecast period, providing5 andlow production decline at older fields. Production from new discoveries could continue to rise beyond the forecast period if mvestment remains robust.
protection- -the smallest, but most rjtedictable source of Caspian oilestimated by projecting historical data from existing fields. These projects, mostly initiated in tbe Soviet era and controlled by state oil companies, are likely tolow decline8esult of depleted reservoirs and scarce capital, according to industry experts. | [
Our estimates of Caspian oil production are sensitive to tbe flow of investment. The region's resource base is large enough to support more aggressive exploration if more funding is available than in our baseline scenario:
perccm increase in overall investment to the region during the forecast period would raise total production6 millionillionccording to our forecast model. Some of the additional funding would help maximize production from ongoing projects, but most of it would facilitate new exploration projects.
ecrease in investment by aboutercent over the forecast period would reduce production growth toiillionillionower-than-expected investment levels would translate into reduced funding for exploration and growth of development projects.!-
The oil resource base willivotal production role in the outlying forecast yearss current development projects begin to slacken, production brought on line from exploration activities will accountrowing share of total output. Eventually, regional production willlow decline as new discoveries taper off; although, it is difficult to predict exactlyecline will commence.ownturn has been delayed for years in other regions including the North Sea and Alaska's North Slope largely because of continuing exploration efforts and ihc application of new production technology:
The discovery of large oil fields in the northern Caspian could significantly expand the region's production forecast, particularlyhe
Figures
Invrstrmnt
Alternative Caspian Oil Productionr
uture production
New aeoflecion
Old product**.
Pmlucllon under
I wnut-.ij
Conversely, unexpectedly poor exploration results or low levels of exploration activity would lead lo lower production over tbe forecast period.roduction levelill require aggressive exploration efforts throughout the region in the next five years. This will require oil companies to testorospects annually, rather than the handful they are currently examining, according to industry experts:
* Some Western oil executives are doubting preliminary assessmentsmuch-touted Absheron Trend lies within the oil-richInstead, they believe that the
trend lies one ndge beyond Aloe's enormous oil-bearing structure,ompletely different basin with little evidence of major hydrocarbon deposits.
Officials from the Caspian International Operating Company recently attempted to terminate their contract to develop Azerbaijan's Karabakh prospect in the Absheron Trend. The first two exploratory wells drilled in thepromoted as one of tbe most promising in theno oil and only noncoriurtcrcial amounts of natural gas, according to press reports.
Oil Prices and Other Factors Could Affect Investment
The world oil market outlook presents the greatest clement of uncertainty in our production forecast, which implicitly assumes that world oil prices over the forecast period willn real terms and support adequate returns for investors. Many international energy investors arc willing to ride out short-term price drops to meet long-term demand expectations. However, an outlook for prolonged low world oilfrom continued financial problems in Asia and low globalcause investors to scale back involvement in Caspian projects that operate at the margin of profitability:
In earlyenior AIOC official confirmed that AIOC will delay the implcmenuuion of phase-one development in9 by several months in part because of the continued slump in world oil prices.
]AJOC wants to avoid overcommitting itself to an aggressive
development schedule in lightecent forecast by British Petroleum that predicts the world oil price slump will last for approximately five years.
At the same time, the timing between field discovery, initial production, and peak production could affect the region's production outlook.
A number of other unpredictable commercial and political factors will influence the pace of investment and production levels. While some of these factors can be anticipated, the clement ofin discoveringwillajor role in either undramuning or enhancing Ibe willingness of finns to invest in Caspian projects:
Business climate. The continued flow of foreign investment into the Caspian region largely will depend on improvements to erratic local business sectors, which in turn depend on economic reform efforts of Caspian governments. Reform programs in Russia. Azerbaijan, and Kazakhstan generally have been moving forward, while Turkmenistan has shown only limited interest in change. Foreign investors could increasingly back away from large deals unless regional governments remain on the reform track and provide consistent legal frameworks for contracts.
Regional stability. Military confrontations, assassinations, or succession struggles around the Caspian region could directly disrupt oil development activities, prevent or delay pipeline projects, and scare away risk-averse foreign investors. Numerous ethnic and nationalist conflicts are simmering in theChechnya. Dagestan, Abkhazia, Nagomo Karabakh, and southeastern Turkey, andfew prospects for lasting resolutions.
Infrastructure and equipment availability. The lack ofespecially drillingthe Caspian has hampered several exploration and production projects. For example, there is only one deepwater drilling rig available to explore Azerbaijan's numerous offshore prospects, according lo industry press reporting.
II this shortage of critical
equipment and infrastructure is not overcome in the coming years, contracts will be delayed.
New Export Capacity Needed
Expanding oil production and new discoveries will set the stage for the construction of new regional export pipelines. The actual decision to build pipelines and the timing of
and Capacity ot New Caspian Export Options
Sdrcic4puflrawMi eumnilr cpeming. underor innccouaiioa
99 ZOOO 01 01 03 M 05 06 07 01 09 10 11 12 13 1* S
mm
Source CIA
construction will be determined by the availability of reserves levels and production volumes needed lo justify pipeline costs. Pipeline investors will require througliput guarantees before undertaking costly projects, and oil producers are likely to seek their most economical option by expanding current routes to keep pace with incremental production until they reach maximum design capacity1:
the same time, commitments to new pipeline routes will encourage continued investment in upstream activities by ensuring investors that tbey will be able to export the oil tbey produce. The continued absence of an agreementajor new Caspian export pipeline could discourage producers from committing to long-term production plans.
In our baseline production scenario. Caspian oil producers will requiren new export capacity
The bulk of Caspian oil production will be available for export to world markets. Consumption levels in Azerbaijan, Kazakhstan, and Turkmenistan are likely to be moderate, amounting to8 and increasingercent in each country each year of the forecast, reachingccording to our estimates of average annual economic growth and oil use io the region.
Based on these growth estimates, oil volumes available for export are likely to increase from8illionillionillion
t'S Policy Implications
Oil development projects already underway are likely to produce sufficient volumes in the next decade to justify US-promotedaku-Ceyhan MEP and the CPCinvestment remains robust and regional production is aggregated. Forecast production levels, however, are noi large enough to support more than two major new export pipelines. Both tbe CPC project and an MEP will have to move forward soon to keep pace with expected production. Protracted negotiations among central players over regional pipelines could delay construction and cause planned projects to fall out of step with production schedules;
Azerbaijan has been resisting an intergovernmental process with transit states that will facilitate an MEP project and both Azerbaijan and AIOC have been reluctant to include other producers in an MEP. Oil production
1 See AppendU B" "Potential Caspian Pipeline_
1 All Russian oil produce on from the Caspian regno Is likely to be exported became
enormous reserves in outer areas are sufficient to supply domes lie needs.I
from Azerbaijan alone is unlikely io fill. pipeline lo Ihe Mediterranean Sea commercially feasible major new
Significant delays in regional pipeline construction will prompt producers to turn to other export schemes to meet their needs. Iran and Russia could absorb growing volumes into their own export networks and position themselves to capture ever larger future Caspian volumes, delaying or possibly even obviating the need for an MEP. Iran is attempting to secure mtermediate Caspian oil productioneries of swap schemes:
In June, Tehranhree-phase, multiyear plan to attract upf Caspian oil In phase one, Iran willipeline to deliver Caspian oil to its northern refineries and export an equal amount of its own oil via the Persian Gulf on behalf of Caspian producers. The second phase will increase the pipeline capacitynd the third phase calls for the construction ofl trans-Iranian pipeline.
The completion of phase two of the Iranian plan could provide the intermediate export capacity needed for expanding eastern Caspian production and effectively preempt the Baku-Ceyhan route.
Appendix B
Potential Caspian Pipeline Projects
Several international consortiums are promoting major new pipelines to transport Caspian oil to world markets. Forecast production levels, however, are unlikely lo support more than two of the new export proposals below in addition to existingas early AIOC oil routes and older Russianare likelye upgraded. We estimate that Caspian oil exporters will requiref new capacity1 white the following export proposals representf new capacity.!
Main Export Pipelineil field operators and producing and transit countries are oegotiating the constructionarge-capacity pipeline to export the bulk of Caspian oilwo main routeBaku to Supsa and from Baku toemerged as the most likely choices. AIOC is scheduled tooute to Azerbaijan by late October.ilometer Supsa route probably wouldillion to build, whileilometer Ceyhan route would cost3 billion, depending on its capacity, according to industry estimates. Ultimately. AIOC is likely to recommend the constructionipeline to Supsa with an option to expand the pipeline's capacitynd extend it to Ceyhan if volumes reach sufficient levels. However, supportoute to Ceyhan is building among eastern Caspian oilupsa route will have to contend with Turkish reluctancencrease tanker traffic in the Bosporus,ipeline from Baku to Ceyhan will require supplemental oil from the eastern Caspian to ensure its commercial viability]
Caspian Pipeline Consortium (CPC) Project. Russian and CPC officials are in the final negotiating stagesilometer pipeline that primarily will carry oil from the Tengiz oil field in Kazakhstan to the Russian Black Sea port of Novorossiysk beginrung inhe pipeline's initial capacity will.lanned second phase will increase capacity4rojectates recently rose from aboutillion toillion, raising some questions about the pipeline's commercial appeal in an environment of depressed world oil prices, but CPC officials claim they are still moving forward, according to press reports. In addition, Russia has indicated lhat it plans to increase the capacity of existing regional routes, such as the Aiyrau-Samara pipeline, in the next decade in an attempt to cxpon more Caspian oil via the Russian pipeline system.
ia
Iranian Pipeline Plans. Iran hasong-term plan to transport upf Caspian oil through its territory by expanding current small-scale swap arrangements with oil field operators in Turkmenistan. Under the swap deal, Iran absorbsf Caspian oil for its northern refinery system, while
P^
exporting the same amount of Us own oil via the Persian Gulf on behalf of Caspian swap partners. Iran recently floated iniernalional tenders for the first phase of the plan, which involves boosting swap volumes byipeline from Iran's Caspian Sea port of Ncka to Tehran. The second phase would increase the capacity of the NeVa-Tehran pipelineb/d. while the third phase calls, for the construction ofrans-Iranian pipeline from the Caspian Sea to the Persian Gulf in several years. |
Chinese Pipeline Option. China has proposed the constroctionilometer pipeline from Kazakhstan to western China to export oil from concessions operated by Chinese oil companies. The revenues generated by the sale of throughput volumes are unlikely to support the5 billion cost of the project, although China may view the pipelineolitical necessity rather than an economic one.
Eastern Eumpe Pipelineumber of East European governments and energy firms arc rxrxroting projects to move Caspian oil via tankers between ports on ihc Black Sea and then on to Western Europe via rapelines with capaciUcs ranginghe proposed pipelines also would supply local markets in transit states. Greek companies, Bulgaria, and Gazpromilorneter, SI billion Bosporus bypass pipeline from Bulgaria to Alexandroupolis. Greece. Gazprom recently scaled back its involvement in the project, however, probably because of financial difficulties. Ukraine is0 million pipeline to link the Black Sea port of Odessa with the Russian pipeline system that reaches Western Europe. Similarly, Romanian and Italian companies areilometer.illion pipeline to cany Caspian oil from Romania through Serbia, Croatia, and Slovenia to Trieste. Italy. P
Appendix C
Country and Project
Chi Resources (barrels)
Correal Production.
Peak Production) and Year
Total Cost (St
million
in
billion
millionillion
million
4
billion
million
milium
Daft'Bunin
million
3
million
IS
Original document.
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