Russia pushing to shore up influence over Caspian Sea

Nikkei Report (Japan) October 4, 2014

Jacopo Dettoni, Contributing writer

Almaty, Kazakhstan — Russia has strengthened its influence over oil and gas exports from the Caspian region after a summit with the other four nations bordering the inland sea produced an outline agreement on the key principles to regulate maritime frontiers in the basin.

« This is truly a breakthrough, » Russian President Vladimir Putin said at the end of the summit on Sept. 29 in Astrakhan, southern Russia, where he met leaders from Iran, Kazakhstan, Azerbaijan and Turkmenistan.

« Our talks enabled us to reach agreement on clear wording on delimiting marine areas, the seabed, subsoil resources, and rules and principles covering navigation and fishing, » Putin said.

Moscow is now a step closer to establishing that most of the Caspian remains outside the borders of any of the five littoral states, which is likely to mean that Russian agreement will be required for most oil and gas production and distribution by the other countries.

That would help with Russian attempts to limit oil and gas exports from its Caspian neighbors to Western Europe — the biggest market for its own exports, and a major element of its economy. « The provision that the greater part of the Caspian Sea’s marine area remains in our countries’ common use is very important, » Putin said.

The five countries said they would work toward a final agreement at a follow-up summit in Kazakhstan in 2016, which would end a legal impasse over the status of the Caspian that has continued since the collapse of the Soviet Union in the early 1990s.

New order

As a new regional order emerged in Central Asia, the five coastal states recognized the need for an update to the Soviet-Iranian treaties that had regulated the basin since 1921. Russia initially tried to veto any deal involving oil and gas, only to take a step back in the late 1990s, when it signed bilateral treaties with Azerbaijan and Kazakhstan that gave those countries sovereign rights over the resources off their coasts.

Although Iran and Turkmenistan have never recognized these agreements, the treaties gave Azerbaijan and Kazakhstan legal grounds for the development of oil and gas fields. With the construction of the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, which came on stream in 2006 and 2008, Caspian oil and gas began flowing from Azerbaijan on the west coast of the sea to Turkey, and on to Western Europe. Both pipelines are outside Moscow’s control.

The Astrakhan summit produced a tentative agreement that embraces the division of the sea into two types of maritime zones: Each country will have a sovereign zone extending up to 15 nautical miles from the coast, and another granting fishing rights extending up to 25 miles. Anything beyond that limit remains in the littoral countries’ common use and will be developed jointly by the five states altogether. That leaves Russia with substantial leverage over the region at a time when Moscow is seeking to reassert control over the flow of Caspian oil and gas toward Europe.

« I think they still insist that all five littoral countries must approve of any major project beyond their shores, » Richard Weitz, director of the Center for Political-Military Analysis at Hudson Institute, a Washington, D.C.-based think tank, told the Nikkei Asian Review.

Massive reserves

The Caspian basin contains as much as 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proven and probable reserves, according to estimates from the U.S. Energy Information Administration. In the 1990s, Russia conceded that Azerbaijan and Kazakhstan could team up with Western oil companies to develop offshore oil and gas fields such as Shah Deniz, Tengiz and Kashagan, which is believed to be the largest oil field outside the Middle East.

However, Russia also sought to prevent or delay the construction and use of pipelines carrying Caspian oil and gas, especially to Europe. In the words of Sheila Heslin, a U.S. State Department researcher in the mid-1990s, the Kremlin « was slowly undermining the independence » of the Caspian countries through its « iron umbilical cord, » meaning a network of Soviet-era pipelines now controlled by Russia. As Russia’s relationships with Western countries grow more tense, joint governance of the Caspian middle waters, including oil and gas below the seabed, would perfectly serve a revival of Russia’s pipeline diplomacy.

« Russia’s main concern is not production, but delivery, » said Dmitry Shlapentokh, professor of Soviet and post-Soviet history at Indiana University, in South Bend, U.S. « Moscow wants to keep the monopoly over gas supplies to Western Europe. Because of that, with its large endowment of gas resources, Turkmenistan is a cause of major concern, » Shlapentokh said.

Talks about a trans-Caspian pipeline have been underway for years among Russia’s three ex-Soviet neighbors, in spite of opposition from Moscow, which claims that the idea would threaten the basin’s plant and animal life. In the meantime, Turkmenistan, which lies on the eastern shore, is moving forward with an internal west-east pipeline network that will connect its Galkynysh gas field, the world’s second largest of its kind, with the Caspian. From there gas could be sent either north to Russia or west to Azerbaijan through a future trans-Caspian pipeline.

Kazakhstan, also on the eastern shore, is also seeking export alternatives as most of its oil exports still depend on pipelines in Russian territory. Talks with Azerbaijan are underway to use tankers to ship some production from Kazakhstan’s Kashagan field to Baku for pumping westward. Iran has shown interest in resuming oil swaps with Kazakhstan, and it will activate a Kazakhstan-Turkmenistan-Iran railway link in a matter of months, although its ability to absorb Kazakh oil will depend on the outcome of international negotiations on its nuclear program, and the lifting of sanctions on Iranian oil exports.

Trans-Caspian competition

Meanwhile, Azerbaijan, on the western shore, recently launched a project for a southern gas corridor that would augment the country’s gas export capacity through Georgia, Turkey and on to Europe. Should a future trans-Caspian pipeline be connected to the southern gas corridor, Russia would find its gas sales to Europe competing with gas coming from its Caspian neighbors, unless the basin’s revised legal status gives Moscow the power to veto the project.

In an attempt to create some momentum for Russia-friendly alternatives to a trans-Caspian pipeline, Putin pledged support at the Astrakhan summit for a north-south corridor linking Western and Northwestern Europe to the Caspian basin and southern Asia. This would halve the distance from the Caspian to these markets, compared with the current route, passing through canals wholly within Russia that connect the Caspian Sea to the Black Sea and the Baltic Sea. Most importantly, from Russia’s point of view, the route could be rigorously controlled by Moscow.

Whether the north-south corridor goes ahead or not, however, a final treaty over the Caspian Sea’s legal status appears within reach for Russia at the 2016 summit, shoring up its ability to limit competition with its own exports to Europe. « I cannot claim that all issues (related to the sea’s legal status) have been settled completely, but there are far fewer outstanding matters now, » Putin said in a statement.