The region's largest producers are Azerbaijan and Kazakhstan. The key to foreign investment in these two Caspian nations is obtaining secure export routes. Lack of a secure means of transporting Caspian Sea oil and gas to world markets has been an impediment to foreign investment. Until foreign investors can rely on access to markets, investment in the Caspian region's huge petroleum potential will remain small.
The lack of pipeline access is limiting production in the region. Russia is demanding participation in the region and derives its influence through its control of the only existing pipelines in the region. Also, disputes with Russia over the legal status of the Caspian Sea are being negotiated but they could still disrupt matters. Russia is seeking to push through new regulations stipulating that no offshore resource developments should be undertaken without the compliance of all surrounding states. Russian oil and gas companies, like Lukoil and Gazprom, have succeeded in acquiring stakes in large Caspian projects. Some foreign investors believe it is necessary to bring Russian participants into their projects to guarantee access to markets. In the meantime, various alternative routes have been proposed; however, until they become a reality, Russia will maintain its dominance in the area.
Many western companies would like to see multiple routes due to political instability in the area, to provide alternative access to markets for international companies involved and to diversify European energy supplies. However, the political climate for those interested in the Caspian region has delayed the development of proposed pipeline routes. The two most promising routes include pipelines that will link Caspian production fields with the Black Sea and, thereby, the Mediterranean Sea and European markets. The first proposed pipeline project is the Caspian Pipeline Consortium's (CPC) $1.2-billion project to refurbish and connect existing Russian pipelines to the Black Sea port of Novorossisk via Chechnya. However, the proposed project was additionally delayed when Chevron and others did not support CPC's proposals on financing and limited ownership of the 900-mile Caspian Sea oil pipeline. As a result, the original three-member CPC consortium (consisting of Russia, Kazakhstan, and Oman) negotiated and recently signed a new accord for a joint protocol to restructure the CPC, inviting Chevron and seven other international energy companies to join them, with an offer of 50-percent combined ownership. The consortium has awarded the following shares: Chevron (15 percent), Lukoil (12.5 percent), Rosneft (7.5 percent), Mobil (7.5 percent), British Gas (2 percent), Agip (2 percent), Oryx (1.75 percent), and Kazakhstan's Munaigaz (1.75 percent) {see Endnote 112}. The foreign companies will be responsible for financing the pipeline.
The second pipeline project arose from an agreement between Russia and the 12-member Azerbaijani International Oil Consortium (AIOC) {see Endnote 113}. The agreement between Russia and this largely western consortium gives these companies permission to use Russian pipelines to export oil due to be produced by the end of 1996 through two alternative export pipeline routes from Baku. One route is north through the CPC pipeline, which crosses Russia, and the other route is west through a pipeline to be built across Georgia. Both alternatives end at the Black Sea. The agreement is waiting final approval from the Russian parliament.
Turkey is undertaking its own plans to build a pipeline. The planned project is a $1.8-billion project to build a 1,047-mile oil pipeline linking the Caspian fields through Georgia to the port of Ceyhan in the eastern Mediterranean {see Endnote 114}. These plans however, have given rise to concerns over the environmental damage increased oil traffic through the Dardanelles would cause. One other option involves connecting pipelines in the FSU Caspian region to pipeline networks in Iran, although this latter option has met with strong opposition from the United States and Israel.
The two largest international joint venture projects include the Shakh Deniz prospect, with reserve estimates of 4-5 billion barrels, and the 1-billion barrel Karabakh prospect {see Endnote 116}. The Shakh Deniz prospect is an $8-billion project between SOCAR and the AIOC. The 30-year project is to explore the three large offshore Caspian fields of Azeri, Chirag, and Gyuneshli. Initial oil production is expected sometime in late 1996, with peak production estimated at 700,000 barrels of oil per day by 2010. In addition, France's Elf Aquitaine has recently signed a production-sharing agreement with SOCAR for a separate onshore/offshore block in the Shakh Deniz area.
The second largest Azerbaijan joint venture project is being explored by the Caspian International Petroleum Company, consisting of Pennzoil, Agip, Lukoil, and SOCAR {see Endnote 117}. The $1.7-billion project includes the exploration, development, and production of the Karabakh prospect in the Azerbaijan sector of the Caspian Sea.
In addition, Exxon and SOCAR signed an agreement in June 1996 for two Caspian sea exploration blocks, while Occidental, Chevron, Mobil, and Unocal are actively seeking opportunities in offshore Azerbaijan.
Downstream provides another potential target for foreign investment. The state-owned monopoly, SOCAR, has 2 refineries with a refining capacity of 441,808 barrels per day {see Endnote 118}. Foreign investment will be necessary to help finance the modernization proposal to upgrade the refineries, but current investment plans have been delayed due to the previously-cited pipeline dispute and debt owed by the refineries for past deliveries.
Restructuring the oil industry included setting up the state holding company Munaigaz to coordinate all oil industry activities {see Endnote 122}. Prior to an international tender last month, there were seven producers and three refineries under Munaigaz control. There has been a proposal to end Munaigaz' monopoly, following the Russian example, by creating vertically-integrated oil companies. In what is being called a test case for privatization, Kazakhstan held an international auction for shares in two of its producers, Aktyubinskneft and Yuzhneftegas. These companies have combined proven reserves of more than 2 billion barrels, and also own the 150,000-barrels-per-day Chimkent refinery. Samson Investment Company, a U.S. firm, won a 100-percent stake in the Kazak producer Yuzhneftegas. Samson submitted a joint bid with the local investment firm Munainvest, fending off a single challenge from Canada's Hurricane Hydrocarbons. The Swiss Trading Company, Vitol, won the tender for a 90-percent stake in Kazak's Chimkent oil refinery, but the terms have not been settled {see Endnote 123}. Kazak companies' large debts, non-productive assets, and lack of transparency made investors cautious. Companies also were concerned about the many preconditions associated with the awarding of shares, particularly the required pledges for investment, social guarantees, payment of old debts, and environmental liability {see Endnote 124}.
Thus far, in Kazakhstan, privatization has mainly been limited to joint ventures, with many of the republic's most attractive fields being acquired by international companies. In 1993, Chevron began a long-term investment in Kazakhstan at one of the largest fields in the world, the Tengiz oil field with 6 billion barrels of proven reserves. The 40-year joint venture between Chevron (50 percent) and the government-owned producer Tengizmunaigaz could produce 700,000 barrels of crude per day and bring in $20 billion in investment. However, lack of a reliable export route has led production to be cut to 60,000 barrels per day, even though current capacity is 120,000 barrels per day. The high hydrogen sulfide content of the field has also posed potential transportation and marketing problems. Chevron, which has spent over $1 billion already, has delayed expansion plans until the pipeline issue is resolved.To help finance its share of the project, Kazakhstan sold half of its 50-percent stake to Mobil in early 1996 for $1.1 billion {see Endnote 125}. In 1993, seven foreign companies, including the British Petroleum/Statoil partnership, Royal Dutch/Shell, British Gas, Total, Agip, and Mobil, signed a contract for seismic testing in Kazakhstan's area of the Caspian Sea region, in exchange for the right to select two blocks for further exploration and development and the right to bid on the remaining blocks {see Endnote 126}. In addition, Mobil (50 percent) and three Kazak partners are exploring the western Atyrau and northwest Aktyubinsk regions in the $80-million, 25-year, Tulpar-Munai venture. In 1994, Oryx Energy signed two agreements to explore Kazakhstan's eastern Caspian Sea area. One involves the exploration of a large block in western Kazakhstan, in which Exxon later bought a 50-percent stake. The other is a 50-50 joint venture with two Kazak partners to develop the Arman field in the north Buzachi Peninsula.
Despite large gas reserves, development of natural gas resources also has been limited due to inadequate infrastructure. The country currently is a net importer of natural gas. The only existing export route for natural gas is a Gazprom pipeline that runs through Russia. This has led British Gas and Agip, who have exclusive rights to negotiate for reserves of the Karachaganak field, estimated to hold 16 trillion cubic feet of gas and 2.4 billion barrels of condensate, to bring in Gazprom as a partner with a 15-percent stake. However, a production-sharing agreement has not been finalized and Gazprom has yet to put up its share of the equity.
The pipeline issue also is holding up downstream projects. Kazakhstan has three refineries, with a refining capacity of 393,611 barrels per day {see Endnote 127}, that are in need of Russian crude deliveries, lower demand, and limited access to international export markets have reduced refining throughput and delayed modernization plans to expand capacity.