Three weeks ago I began describing part of the industrial infrastructure problem in the Caspian region. Limitations of physical geography require relative self-sufficiency in the development of basic infrastructure and installation of production facilities. The amount of investment required to build up the infrastructure capacity also limits the pace of the region's development. Steel fabrication capacity is especially key.
The recent press reports about the apparently huge Vostochny Kashagan field now being test-drilled by the Offshore Kazakhstan International Operating Company (OKIOC) bring this point even further home. Full evaluation of the first exploratory drilling will not be made public, according to the consortium, until August. Nevertheless, rumors and statements to the press give credence to the presence of a very big find. The well is being drilled to a greater depth than originally planned for the purpose of further evaluation.
The first figures publicized in the press mentioned 20 billion barrels of oil, of which six to nine billion might be recoverable. During U.S. Secretary of State Madeleine Albright's recent trip to the region, individuals associated with the Kazakhstani government and OKIOC floated an upper figure of 50 billion barrels, of which 30 billion might be recoverable. Between these two extremes, the estimate has been bruited of a 30 billion barrel field, of which at least 20 billion may be recoverable. Press reports have also spoken of the fact that five years might be needed to construct the transportation infrastructure necessary to exploit the Vostochny Kashagan field and another five years to bring production up to appropriate levels.
Whatever finally proves to be the case, it is clear that this is an enormous deposit that by itself outstrips the North Sea. While that still does not justify the exaggerated estimates of Caspian reserves publicized by Washington in the early 1990s, it certainly must be somewhat embarrassing to those observers who, through fashionable skepticism or for other reasons, have consistently minimized the Caspian's significance over the last decade. And these estimates do not even count the recent large find in the Severny field, located in the Russian sector.
It is important to note that Soviet energy outfits were world-class, even if they did not have Western deep-water technology, and that they made a point of surveying and inventorying natural resources throughout the territory of the USSR. The disappearance of the Soviet regime has hardly rendered those data inaccurate. The Vostochny Kashagan and Severny sites were selected for exploration on the basis of known facts.
This is not like playing darts blindfolded, as is sometimes implied by the skeptics. But if the Vostochny Kashagan strike only makes the point more strongly about the need for industrial infrastructure, then what is to be done? Azerbaijan has preferred to make old Soviet stock available and to insist that interested parties upgrade it for subsequent use. This has happened in a few cases, but clearly it has not been enough to promote the manufacture of needed quantities.
All of the publicity surrounding the large projects in which U.S. companies are heavily involved or which the U.S. government has been strongly pushing -- these being principally the Baku-Ceyhan Main Export Pipeline (MEP), the undersea Trans-Caspian Gas Pipeline (TCGP) from Turkmenistan, and the Caspian Pipeline Consortium (CPC) line from the Tengiz field in northwest Kazakhstan -- has diverted attention from the fact that the European Union has itself done a great deal to help the countries of the Caspian region to address issues of transportation infrastructure. The TRACECA program and INOGATE initiative in particular have been of great practical interest. The Energy Charter Conference, which is the institutional follow-on to the Energy Charter Treaty (ECT), is also playing a constructive role. (The Energy Charter Conference is not part of the EU family, even though the ECT resulted from a high-level EU initiative in the early 1990s.)
None of this addresses the issues of industrial infrastructure. Nevertheless, it is clear from the scale of the matter and the complexity of the issues, that some form of international cooperation is necessary.
The Center for European Policy Studies (CEPS) in Brussels, a main think tank of the European Union, recently published a policy paper that provides a basis for addressing these problems and others that have slowed down development of the region. Drawn up by an international team headed by the EU’s former Ambassador to Russia Michael Emerson, this paper focuses mostly on the need for a concerted multilateral effort to assure stability in the Caucasus, including the settlement of territorial issues. However, towards the end, it considers how to promote broader Black Sea-Caucasus-Caspian cooperation.
Noting that there exists at present no adequate forum for multilateral consultations on the complex issues of regional coordination of oil and gas development issues, it proposes the creation of a regular Black Sea-Caucasus-Caspian (BSCC) Energy Forum, under the auspices of the Organization of Black Sea Economic Cooperation (OBSEC). Such a forum would keep constantly under review the evolution of common-interest questions, such as management of the common environmental concern over Black Sea energy transportation.
This proposed BSCC Energy Forum would be an appropriate place to hold discussions about the industrial infrastructure problem in the broader Caspian region. The EU has already been involved in various OBSEC activities; it could, with the assistance of such consultations, rationalize and integrate its programs for the Caspian/Black Sea "meta-region."
Moreover, the United Nations Industrial Development Organization (UNIDO) studied some related questions in the early 1990s, although lately it has not had much of an actual role. UNIDO could add a dynamic impetus to the discussion of these problems. It could, for example, conduct the basic work of inventorying coal and iron ore reserves in the Caspian basin and adjacent areas so as to ascertain how best to meet the limitation on development, noted above, that are imposed by current steel fabrication capacity. This is something that no single corporation or energy consortium or country in the region has the incentive structure to do.
The paper further proposes, on the basis of an expanded OBSEC, creation of a wider BSCC Political Forum, which would serve broader political needs and include other Caspian littoral states and the United States. The BSCC Political Forum would be the place where broader questions of international policy and national interests would be aired, while the BSCC Energy Forum would be a more hands-on, applied technical body. Naturally, both Fora would include working groups to interact with one another. The organizational model of the Energy Charter Conference, where the member-states must reauthorize the activities of its Secretariat every five years, would guarantee that spin-off organizations would have a limited lifespan and only for well-defined purposes as required by circumstances.
No such arrangement, of course, would presume to impose itself upon negotiations that properly occur between resource-holders and development consortia. However, there can be no doubt that such a package of political, security and economic measures would transform the business climate for the region as a whole. It would enormously reduce perceived political risk for major long-term investors, particularly in the oil and gas sector. This would set the stage for significant expansion of the local goods and services markets, manufacturing industries, construction, banking and financial services and other economic sectors. That in turn would both support and propel the creation of industrial infrastructure capacity. It would drive energy development in the region in a way that no other sector can, providing the economic motor for satisfying the basic needs of the populations living there, and thus ensuring that perceived political risk does not impede investment decisions. This is called a virtuous circle, the opposite of a vicious one.
Copyright © Robert M. Cutler
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First published in FSU Oil & Gas Monitor, No. 83 (23 May 2000): 4–5.
