Caspian economics

The global slump in oil prices could be a positive development for the Caspian Sea region, says analyst Daniel Yergin. Yergin, chairman of Cambridge Energy Research Associates, spoke at a Washington, D.C., conference on Caspian pipelines. He explained, "Low prices will guarantee that companies and host governments will put a lot of extra effort into minimizing costs of production and transportation."
Dec. 14, 1998
3 min read
Patrick Crow
Washington, D.C.
[email protected]
The global slump in oil prices could be a positive development for the Caspian Sea region, says analyst Daniel Yergin.

Yergin, chairman of Cambridge Energy Research Associates, spoke at a Washington, D.C., conference on Caspian pipelines.

He explained, "Low prices will guarantee that companies and host governments will put a lot of extra effort into minimizing costs of production and transportation."

He said that international energy companies have invested $6 billion in the Caspian region, and low oil prices have not noticeably diminished their interest because the region still promises to become "an important source of new oil and gas supplies."

Yergin said that large firms will continue to take a long-term view of the Caspian region despite the astounding 40% drop in prices from 1997 to 1998.

He added, "There are no prospects for oil prices to return to their 1997 level anytime soon."

Competition

Yergin said that the Middle East may be the main threat to Caspian development.

He contends that Persian Gulf nations have been signaling a willingness to open their doors wider to international oil companies.

"The production costs in the Middle East are very low, and transportation is simple, much more simple than in the Caspian. What this means is there will be intensified competition, and the Caspian states will have to work harder to get investment dollars."

Yergin said that, since the first oil crisis 25 years ago, the oil-exporting nations have learned much.

"The first lesson they learned was that, when oil prices are too high, you lose market share. The second lesson was the importance of having access to markets for your production. The third was the value of having private companies come back with their capital investment skills and managerial talent.

"And now I think the lesson will be that, during a period of very low prices, nations will be competing very hard for the highly prioritized capital budgets of the oil companies. And that will affect Caspian development, Middle East development, and development in many other parts of the world."

Exxon's view

Terry Koonce, president and CEO of Exxon Ventures (CIS) Inc., agreed that Caspian export strategies must bring transportation costs as low as possible.

He said that regional and world politics are playing a significant role in export pipeline decisions.

"It is understandable that each country with a strategic interest in the region should have an opinion on the location of the routes. There are financial, security, and environmental issues at stake, and clearly not every government can be in agreement.

"However, to attempt to address the political issues without addressing the economic factors would not be prudent. The cost of each potential route must be evaluated, and timing will be critical to ensure that pipeline investment decisions are not made prior to the discovery of adequate reserves.

"In time, we likely will find that multiple pipeline routes will be needed to satisfy market demands, meet the economic needs of investors, and mitigate political risks in this complex area."

Copyright 1998 Oil & Gas Journal. All Rights Reserved.

Sign up for Oil & Gas Journal Newsletters