Uncertainty surrounding the legal regime that will eventually govern hydrocarbon development and exports from the Caspian Sea is one of several risk factors that investors have had to consider in doing business in the region.
Despite recent setbacks, however, there are signs that the clouds are beginning to clear. Each of the five countries that share the Caspian shore knows that future prosperity depends on their ability to resolve the complex legal dispute regarding mineral and territorial rights in the Caspian Sea.
World's largest lake
The Caspian Sea is nearly the size of California in areal extent and five times larger than Lake Superior. Its surface, which stretches 746 miles (1,200 km) from north to south and 270 miles (430 km) east to west, has been an important trade route since the Middle Ages.
In the 19th century, ships of the Russian and Persian empires ruled the Caspian Sea, but their captains were interested in the sea as a trade route and a source of food-not for the wealth of minerals beneath it.
After several wars, Russia and Persia (now Iran) signed treaties to fix the land borders between them and to regulate use of Caspian waters. New treaties in 1921 and 1935 established a 10-mile, exclusive fishing zone for each country, and a 1940 agreement referred to the Caspian as the "Soviet-Iranian Sea," yet none of the treaties addressed mineral rights to the seabed.
That wasn't a problem before 1991, when all of the countries around the edge of the Caspian, except Iran, were republics of the Soviet Union. After the breakup of the Soviet Union, however, Russia, Kazakhstan, Azerbaijan, and Turkmenistan became independent-and each new Caspian state wanted its share of the sea.
Caspian importance
Connoisseurs know that the Caspian Sea contains some 90% of the world's sturgeon and all the best caviar. Economically, it remains an important trade route between the littoral states, and the Caspian is resuming its place as the central link on the "Silk Road" between Europe and China.
The biggest push now, however, is to develop the oil and gas resources. As new fields are developed, the Caspian will become an important transit route for oil and gas exports from the region-and that volume could be huge. Estimates of Caspian region reserves are 179-195 billion boe.
Peaceful development of the sea, and the rational governance of it, are essential to economic development around the Caspian. This is especially true for the developing economies of Kazakhstan, Turkmenistan, and Azerbaijan.
'Law of the Seas'
Since the early 1980s, 135 countries have signed the United Nations' Convention on the Law of the Sea (UNCLOS). The landmark agreement states that every nation bordering a sea or ocean may claim 12 miles from shore as its territorial waters and a 200-mile Exclusive Economic Zone (EEZ) beyond that. Everything farther out is considered the common property of the world's nations.
UNCLOS is an important document because it represents the best collective wisdom on laws to govern waters that are shared by two or more states. It takes into account centuries of rules developed to control international navigation, maritime borders, and the use of ocean resources. UNCLOS also addresses the role of modern technology, environmental concerns, and the need to resolve disputes in a peaceful, orderly way.
How Caspian differs
How a body of water is classified-lake, sea, inland waterway-can affect the legal regime that applies to it. UNCLOS defines the term "enclosed sea," and customary international law contains the concept of an "international lake," but here the law falls short. In the Caspian, history and international law have created a special case.
The Caspian is not an "enclosed sea" under UNCLOS because, for centuries, the countries around it have exercised exclusive control over its use. It has no internationally navigable outlet. Although 5 major rivers and more than 100 minor ones drain into it, the Caspian has no contact with the world's oceans. Its only navigable outlets are the Volga River and a series of canals and rivers extending to the Black and Baltic seas. These, however, are long, inland-Russia waterways, unusable without Russia's permission.
On the other hand, the Caspian cannot be easily characterized as an "international lake," completely free of the international rules governing seas. It bears the oceanographic characteristics of a sea, and the number of states surrounding it makes agreement on the use of its resources and the boundaries crossing it considerably more difficult than, say, the Great Lakes between Canada and the US.
Accordingly, it is appropriate, in some respects, to view the Caspian as a sea that is subject to the international laws of the sea.
Regardless of how the Caspian is classified-sea or lake-an effective hybrid legal model can be constructed, building on the solid UNCLOS framework.
Caspian policy history
The history of Caspian policy includes a series of bilateral agreements between Russia and Iran, and since 1991, between Russia and the other former Soviet countries. Despite these agreements, the positions of each of the littoral states have continued to evolve.
While commentators often focus on the differences between the Caspian states, a more remarkable fact is the extent to which their positions have begun to converge since the mid-1990s.
Iran started from the position that the Caspian should be treated as an international "condominium," with each of the five littoral states holding an undivided 20% share in its resources. That suited Iran, because a simple division of the sea into national sectors based on the shoreline they control would give Iran the smallest share, the deepest water, and the most speculative areas to drill.
Other Caspian states forced the issue by proceeding to develop hydrocarbon resources on their own within the zones they would most likely get if the seabed were eventually divided.
Backing away from the condominium idea, Iran then said it would accept a territorial division of the sea, but only if it got a 20% share.
Meanwhile, Russia argued that the treaties between its predecessor, the Soviet Union, and Iran should continue to govern the Caspian. This was particularly unhelpful, because those treaties did not address the interests of the three newly created states, nor did they address mining the seabed.
In the mid-1990s, Russia shifted its position to the establishment of 20-mile territorial waters and 20-mile EEZs along the shores of the littoral states, with the center of the Caspian being subject to joint development by the five states (Fig. 1).
Russia changed its position again in 1998 when it signed an agreement with Kazakhstan to divide the seabed along a median line without leaving a common development zone. Russia also signed a communiqué later with Azerbaijan based on the same principles: a division of the seabed into national sectors along a modified median line, leaving no common zone for joint development.
Since 1991, Azerbaijan and Kazakhstan have consistently maintained that the seabed should be divided into national sectors along a median line-although they have had some differences over joint fishing and navigation rights.
Turkmenistan, although initially veering between Russia's proposal for 20-mile territorial waters and 20-mile EEZs and Iran's condominium proposal, now embraces the concept of dividing the seabed into national sectors based on the median line principle.
So all five states now agree on the principle of dividing the seabed into national sectors. The only real sticking point is Iran's insistence on a disproportionate share.
Although other issues remain, such as where to alter the median lines to account for special factors, the views of the littoral countries are converging on the principles of individual vs. joint control and on cooperation in environmental matters.
Applying UNCLOS
The Caspian states should recognize that more unites them now than divides them and should proceed to negotiate a multilateral settlement of the Caspian's legal status.
Any problem the Caspian's unique situation poses can be worked out on the principles that UNCLOS established. Such an agreement should include the following elements:
- Twelve-mile territorial waters for each littoral country as provided under UNCLOS. Each state would have complete sovereignty over its own territorial waters.
- Because the Caspian is not wide enough for countries on opposing coasts to have 200-mile EEZs, the lines between them must be drawn according to the median-line principle, taking into account special factors that may cause the line to deviate in certain areas. Within its EEZ, each country would have exclusive control over oil and gas development, fishing, and the management of other resources (Fig. 2). The EEZ would not prevent free navigation, however, by the military and civilian vessels of other littoral states, nor would it prevent one state from laying pipelines or cables through the EEZ of another state (Fig. 3).
- Because the Caspian states are environmentally and economically interdependent, any agreement between them must incorporate mechanisms for cooperation, coordination of national policies, and the settlement of disputes. A joint governing body is not likely to work in practice.
A better approach would be for the littoral states to form working groups to write model laws that could be adopted by each country individually. The adoption of uniform laws on fishing, hydrocarbon production practices, pipeline standards, and environmental issues will not only assist economic development in the region, it will also ensure that each country is required, under its own legislation, to adhere to the best environmental, safety, and conservation practices.
- The agreement should create a neutral forum for the resolution of disputes by mediation or arbitration. In the first instance, the forum could adjudicate any disputes over the drawing of the median line that cannot be settled by negotiation. In addition, any Caspian state should have the right to bring legal action against another state for failing to enforce its own laws on fishing, hydrocarbon production practices, pipeline safety, or protection of the marine environment. That is, State A could sue State B for the latter's failure to enforce State B's laws. Legal actions could also be brought in accordance with customary international law or for failing to carry out other terms of the agreement.
- Finally, the agreement should provide for joint activities in those areas where the five countries are most likely to find it in their interest to cooperate. One obvious example is emergency response to oil spills and other environmental hazards.
The Caspian is a self-contained ecosystem where pollution in any country's sector can affect another country's sector. Whether environmental regulation remains under the control of individual states or is jointly managed, cooperation between the states will be essential to the survival of the Caspian's threatened species and unique natural heritage.
The agreement therefore, also should provide for the joint training of environmentalists and game wardens. That training could be carried out under the auspices of a Caspian Coordination Center led by a neutral international organization such as the UN Environmental Program and staffed by the nationals of all five littoral states.
If the five countries agreed to give it such powers, the coordination center could monitor and report on each country's compliance with its obligations under the agreement.
Development outlook
The recommended approach for the Caspian has three main advantages.
First, it is realistic. It builds on accepted principles of international law to create a system that gives each state maximum control over its own resources. It therefore respects the natural tendency of states, especially newly independent ones, to guard their sovereignty closely.
Cooperation is accomplished through noncoercive means, focusing on issues upon which the states are most likely to agree. Because it is realistic, the proposal offers the quickest route to the solution of legal, economic, and environmental problems that must be addressed very soon.
Second, it allows each state to maximize its own wealth while requiring each state to exhibit due regard to the interests of its neighbors.
Supported by a multilateral agreement, common legislation, collective monitoring, and provisions for resolving disputes, each state is free to pursue its own interests in an environment more stable than the current one and one that ensures the protection of collective interests.
Third, assured national control over hydrocarbon resources and the adoption of UNCLOS rules for underwater pipelines offer greater certainty to potential investors, who would be wary of a system based on unpredictable joint-control mechanisms. This certainty is good not only for investors, but for the littoral states who need their investment.
In all likelihood, oil and gas development in the Caspian will proceed on the relatively safe assumption that the boundaries of EEZs will be drawn on lines that are already predictable.
Azerbaijan deserves credit for articulating an UNCLOS-based position that has gained increasing acceptance among the other states, whether they admit it or not.
Russia deserves credit for taking a leading role, especially in the past year, in trying to bring all the parties to the table in a spirit of cooperation based on common principles and understandings.
The need to attract investors and financiers for hydrocarbon export projects will continue to drive this process of consensus-building, but the littoral states need to be reassured that it will have a clear and mutually beneficial result.
The international community and foreign investors should use their contacts with governments in the region to give them that confidence. Although the problem of the Caspian's legal status is complicated, it is eminently solvable.
The difficult but successful task of getting 135 states to agree on UNCLOS demonstrates that nations can agree on international mechanisms to govern their most vital interests in maritime resources.
The time is right for the Caspian states to get down to serious multilateral negotiations. The rewards-in terms of increased trade, enhanced economic development, and the preservation of a precious ecological resource-are far too important to ignore.
The author
Ted Jonas serves as counsel in the International Trade and Investment group in the Washington, DC, office of Baker Botts LLP, where he advises clients on a variety of public and private international law matters.
Before joining Baker Botts in January 2000, he practiced law in the Republic of Georgia, advising clients on Caspian basin petroleum development and export projects. During 1994-96, he served as a consultant to Georgia's Parliament under the auspices of the National Democratic Institute for International Affairs. Jonas received his JD, cum laude, from Cornell Law School in 1991 and his BA from Cornell in 1984.
