The Caspian's back to the future

Even before the jaw-dropping discovery this year of the elephantine Kashagan oil field off Kazakhstan, where reserve estimates were 25-60 billion bbl, and the smaller, though still giant Shah Deniz find off Azerbaijan, UK analyst group Wood Mackenzie calculated there were some 76 billion boe of remaining reserves in the four Caspian region nations of Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan (OGJ, July 24, 2000, p. 38).

Even before the jaw-dropping discovery this year of the elephantine Kashagan oil field off Kazakhstan, where reserve estimates were 25-60 billion bbl, and the smaller, though still giant Shah Deniz find off Azerbaijan, UK analyst group Wood Mackenzie calculated there were some 76 billion boe of remaining reserves in the four Caspian region nations of Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan (OGJ, July 24, 2000, p. 38). Combined reserves in Western Europe, for comparison, stand at some 60 billion boe.

Such is the size of the oil and gas prize represented by the Caspian to the West that some observers suggest supply from the region, assuming intensifying exploration campaigns come good, could become an alternative to that from the Middle East.

Reserves, clearly, are not a worry to the region. The same, however, cannot be said of exporting the Caspian's crude to market.

Intergovernmental debate centering on a route for a primary trunkline out of this politically fraught region has been tortuous. And the way forward has been only slightly smoothed by three-way deals signed this summer by Azerbaijan, Georgia, and Turkey detailing the legal and regulatory framework for the construction and operation of the current frontrunner—the Baku-Tbilisi-Ceyhan Main Export Pipeline (MEP).

Favored route

The MEP became a "realistic" option in 1997 when the Azerbaijan International Operating Co. (AIOC) brought the Azeri-Chirag-Guneshli (ACG) fields on stream, but the present "favored" route—wlonger than proposed routes through Russian or Iranian territory-has led to charges that the US government-backed project hinges more on politics than economics.

Moving the 1,730-km MEP off the drawing board and toward start-up in 2005 is now being newly threatened by various cost estimates ballooning upward to $4 billion-and a scarcity of financial backers, lending support to the MEP's detractors.

"Finding willing financiers for the project is problematic, given the modest oil reserves discovered to date in Azerbaijan and the lack of committed volumes from Kazakhstan," stressed WoodMac. So far, Statoil AS and Turkish state firm TPAO are alone in stating their intention to join the group of project sponsors, MEPCO.

Missing barrels

The bottom line is that the MEP needs to transport 5-8 billion bbl, depending on the tariff, to reach profitability. Under the "most optimistic scenario," says WoodMac, some 4.2 billion bbl could come from the ACG fields, although AIOC, having already sunk huge sums into the Baku-Supsa pipeline project, the so-called Western Route, will likely want a return on its investment through use of that line and, therefore, will commit only 2.8 billion bbl. Moreover, Lukoil, a 10% shareholder in ACG plans to export its share of production to Novorossiisk, cutting committed ACG crude to 2.5 billion bbl.

No doubt the shortfall of 2.5-5.5 billion bbl could be made up over time by future exploration successes in Azerbaijan and increased output from the region's operating fields. Still, to make a commercial case for the MEP now, as WoodMac highlights, crude from Kazakhstan needs to be committed-and proving up Kashagan field is still 2 years off.

Perhaps it is worth remembering that necessity lay behind the multitude of trade routes used to move silk and spices with reliability across the Caspian region in the millennium before oil was discovered here.

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