CASPIAN ENERGY UPDATE

Created: 3/25/1997

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Of See of Russian and Eurasian Am lysis

Caspian Energy Update

7

possibilities for production and export of Caspian oil and gas resources coritinue to advance, albeit with some snags, with the signing of new production agreements and progress on transportation routes, heightening the need for cooperation among regional players to resolve potential boalenecks.

AVw Production Agreements Signed. Several new production agreements have been signed over the last several months in Azerbaijan and Turkmenistan, including the first two consortiums in Azerbaijan to exclude Lukoil. I I

Route Breaks Ground as Northern Route Breaks Down. The

Azerbaijan Iniernalional Operating Company (AIOC) will soon award contracts for the construction of the Western route for early oil, while Transoeft has delayed acceptance of Azerbaijani oil tlirough Ihc northern route.

Studies Options for Main Oil Export Pipeline. The AIOC isfive optionsain oil pipeline,inal decision on ais still several years away and will be influencedumber ofwell as commercial factors, including access to the Bosporus.

This Is onif aperiodk updates on drvrlopmenls in ihe txtraction andtransportation ofoil and gai tn the Caspian Sta basin and distributedelect group of US policy officials responsible for this issue. It It prepared by analysis in the Office of Russian and Eurasian Analysis, National Imagery and Mapping Agency, and Office of Transnational Security and Technology Issues. Our analysis is indicated in bold italicized type. Comments ore welcome and may be directed lo

Production Developments

No Room for Lukoil in New Consortiums

Underscoring the growing momentum of foreign investment in Caspian oil and gas projects, Azerbaijan has concluded two new contracts in the last three months. Aside from their conunercialey significance of the new deals is that they do not include Lukoil or any other Russian company--cr sign that Azerbaijan's confidence in its position on Caspian demarcation and other disputes -nth Moscow has likely grown to the point that it no longer feels compelled to bring Russian companies into every project. Press reports also indicate that President Aliyev has become disillusioned with Lukoil's ability to iiuiueitce Russian policy.

pace of signings with foreign oil companies is

picking upesult ot the Azerbaijani State Oil Company's (SOCAR) growing professionalism and experience. The negotiations arc less polidrizcd,|

I with negotiating authority increasinglyOCAR Director of Foreign Investments Alesketov, and the only real bottleneck in tbe process now is the sheer number of proposals on SOCAR's plate. I-

Project DevdopmenU In Brief

North Absheron Operatingahhsbed. Onecember. Baku2 billion deal with several Western cornpanics to develop the Dan-Ulduzu and Ashrafiapan'saudi Arabia's5ndrecoverable resourcesillion barrels of oil andillion cubic meters (bem) of naturalxpectcd peak productionarrels per day)

French Lead Fifth Consortium Onaku2 billion deal for the offshore Lenkoran-Deniz and Talysh-Deniz concessions .consortium headed by French firmsercent) andOCAR lo holdercent..while not finalized, Mobil may getercent and tbe German firm Deminex theercent recoverable oil resources are estimatedillion barrels of oil.

Join Forces in Turkmenistan Turkmenistan granted Mobil and Monument OU of Great Britain eaxiusive rights toroduction-sharing agreement (PSA)O-scj-km onshore region south of the Chelekenobil estimates areaillion barrels of oilJ

Recent Transportation Initiatives

TrarLSTieft's Muddling on tbe Northern Route

The continued failure of Russia's stale-owned pipeline monopoly Transneft ta fulfill its obligations on handling Azerbaijani oil exports through the North Caucasus Pipeline system is hurting its reputation in the region and seriously undermining Russia's goat of winning the competition for the main export pipeline. Transneft was obligated to begin haridling AzeAaijani oil exports as early asember, according6 agreement signed by Premier Chernomyrdin, but it has thus far refused to accept any oil and has given mixed signals about when it might be ready to start, according to pressf^

Much of tbe blame for the delays stems from difficulties with tbe Chechens, who control one-tenth of tbe pipeline andhare of the transit revenues. Transneft hasad situation worse by trying to wiggle out of Its contractual responsibilities In January, the company rejected the first shipment of Azerbaijani oil, claiming that the transit agreement only applied lo Azerbaijan International Operating Company (AIOC) oil, which is not scheduled to begin production until August. Transneft reversed itself in February, staling publicly it would begin accepting oil once it had signed an agreement with the Chechens. In March, however, itigher transit fee for handling all non-AIOC oil. according to press reports.

rransneffs actions have damaged its reputation among

western ou companies in the region and provoked sharp criticism from Azerbaijani officials, including President Aliyev, who stated publicly in March that the main export pipeline would transit Georgia, not Russia

Despite its unpredictable behavior, Transneft has strong incentives to ensure the success of the northern oil export route, and it probably has the resources to overcome the technical and financial challenges.

The company has begun refurbishing the pipeline, which was not heavily damaged during the Chechnya conflict, und could complete this work within ihrcc to four months.

the pipeline is fully orjerationalJ initial oil flows through alternative roWs;

Iransneft could route

tnciutling by barge or train.

Transneft can get the pipeline operating, its success would strengthen Russia's stake in Caspian oil projects,teady source of revenues for Chechnya, and could help Transneftore professional player.

Failure on TransraiYs part will undermine Moscow's chances forhare of ihe regions much larger oil exports expected

While neither Moscow nor Groznyy would benefit from further combat operations, there are still risks that rogue elements in Chechnya could try to target the oil pipeline to sabotage the peace treaty.

Continued Progress on Western Route

Progress on the Western route for early oil continues to stay on schedule, according to press reports, with actual construction set to begin this month and finish by the endhe AIOC took final bids in February from three consortiums and two companies vying to lay0 million pipeline from theilometers across Azerbaijan and Georgia,ew Black Sea port facility at Supsa, according to SOCAR officials.

Bidders include US. Azerbaijani, Georgian. Turkish, Australian, French, and Italian firms. The AIOC is expected to pick winners soon and may choose separate applicants form section in Azerbaijan andilometer Georgian stretch, or couldingle contract for both. I i

Meanwhile, Georgia's importanceransport corridor for both bringing equipment into and exporting oil from the region continues to grow.

Accord: ng to press reports, the AIOC used tbe rail corridor from Batumi and Poti to Baku to nriport more0 tons of suppliesever half of its total imports since starting up operations more than two years ago.

While re porting on precis* volumes is confUctiog. it appears that al least several thousand ions of Kazakstani crude oil have been shipped by nil across Azerbaijan and Georgia to the Black Sea for export, and SOCAR officials indicated in February that ihey were considering crude exports along the same route later this year, according to press reports.

I

The Main Oil Pipeline: Options and Obstacles | |

To meet its contract obligation totudy on optionsain oil pipeline to SOCAR by June, tbe AIOC is studying the economic viability of five different pipeline options. The costs for these options range from3 billion, and each has the capacity to carry up, according to AIOC |

The options for the pipeline routes fall into two groups, depending on whethererminate at the Black Sea. The two options in the lessexpensive Black Sea group are economically competitive with each other. The other group consists of three cost<ornpeutive options: two options to the Mediterranean and one to the Persian Gulf.

The two Black Sea pipelineeorgianussian port-are the least expensive because Ihey follow the same pipeline corridors thai arc being established to export initial oil volumes through Russia and Georgia. These two options, however, require uwmrjeded use of the Bosporus Straits, which remains problematic.

Thc more expensive options bypass ihe Bosporus bat involve new. longer pipeline corridors and in two cases new port construe!!on.

One optionew pipeline from the Black Sea town of Burgas, Bulgariaew terminal on the Mediterranean ai Akxandroupolis. Greece. This option includes Ihe constructionain oil pipeline to either Supsa or Novwossiysk.

A second optionipeline thai follows rhe Georgian early oil corridor to Tbilisi, then runs southwest across Turkey to the Mediterranean port of Ceyhan on Turkey's southern coast

The third non Black Sea optionrans-Iranian pipeline from Iran's northern coast on the Caspian south to the Persian Gulf. AIOC executives admitted lhat this option probablyonstartcr because of US policy J

A final decisionipeline route is several years away. On the basis of its production schedule and early oil export capacity, the AIOC does not anticipate the needain oil line until4iving it1 toontract and to secure financing.

ft

According to AIOC officials. President Aliyev isecision earlier than the company*-prjjccod tnoeline. Moreover, the AIOC will need additional volumes from other offshore projects just getting under way toain oil

The AIOC does not prefer one option over the others publicly,

major issues must b; cieareti lor any option to emerge

as Die preferred

Viah'e if Turkey dr0DS its Ejections to increased traffic in the Bosporus and measures are adopted to allow increased volumes of oil to transit Ae Bosporus. The AIOC reported last month that the Turks are tendering for the instaUationodem vehicle traffic system in the Bosporus,

'be affected by the Caspian demarcation

dispute. The World Bank has expressed reluctance to support any pipeline option until the dernarcauon issue is resolved, whereas the European Bank for Construction and Development has expressed no such reservations.

for various options could be damaged by flareups of regional strife territories that tbe pipeline would cross.

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