The current, contradictory phase of events around the Caspian is captured by the difficult realism of Viktor Kalyuzhnyi, Russia's deputy foreign minister, who also serves as President Vladimir Putin's special envoy on Caspian affairs. As developments continue to accelerate, Russia is seeking to trace a course between the Scylla of hardball Realpolitik, which could alienate neighboring states, and the Charybdis of exclusively economic gain to the possible detriment of state interests. This contradiction is clearest in Russian policy towards Iran, which includes the question of influence over the choice of export pipelines for Kazakhstan's now undeniably significant energy resources.
1. The On-Again, Off-Again Caspian Summit
Originally, four documents were planned to be signed at the early-March Russian-Iranian summit in Moscow: a general document setting out the principles and the path for future development of bilateral relations, a "special" agreement on military cooperation, an accord on scientific and technological cooperation and a document establishing a common point of view on Caspian issues. In the event, the second and the third were not in fact signed, and the last was much weaker than expected.
Agreement was reached between the two sides on general "strategic" questions—such as an opposition to Western influence (and American influence in particular) in the region and in the world at large—and this agreement was indeed embodied in a number of specific measures (such as accords on military cooperation, including arms sales by Russia to Iran). Nevertheless, no genuine rapprochement occurred between the two sides concerning any of the fundamental Caspian questions, including the Iranian demand for the demilitarization of the Sea. This demand was not directed in the first instance against the United States, which of course has no navy in the area, but rather against Russia.
Readers will recall that the five-way Caspian summit planned for earlier this month in the port city of Turkmenbashi had to be postponed following the February meeting in Tehran at the deputy foreign minister level. This was because it became apparent that Iran had remained a hold-out in opposing the adoption of the "modified median-line" principle for the demarcation of national sectors in the Caspian Sea and had also maintained the somewhat impractical position that a joint-rule—or "condominium," not the same as "joint use"—legal regime should be imposed.
Under a condominium regime, decisions on energy development would be taken by consensus. Such an approach is equivalent under international law (although it was not expressed in these terms) to the liberum veto rule, which means that a single objection can stymie efforts to make any decision.
2. The Difficult Realism of Viktor Kalyuzhnyi
In Moscow, the Russian and Iranian sides agreed on the somewhat more practical, but still hard to implement, condition that the definition of a legal regime for the Caspian Sea must be arrived at by five-way consensus. Observers have commented that even the need for consensus on energy development issues could be taken to imply the requirement of unanimity to block any specific project—obviously impossible to achieve if a littoral state is one of the parties to the project itself.
Presumably this would even include undersea pipelines, though Moscow and Tehran agreed to oppose the laying of pipelines harmful to the Caspian ecological system. This would seem to represent a change in Russia's policy from the bilateral agreements signed with Kazakhstan and Azerbaijan. Indeed, when Kalyuzhnyi visited Kazakhstan in mid-March, he was reproached for such a reversal. In return, he repeated his endorsement (made in February) of undersea pipelines if they are "economically beneficial." Perhaps he means economically beneficial to Russian companies.
Kalyuzhnyi made a surprising but accurate comment prior to Iranian President Mohammad Khatami's arrival in Moscow earlier this month. He said that agreement between the two sides on demarcating national sectors in the Caspian and the creation of an international-legal regime for the sea would not be reached. This remark, borne out by events, was surprising because it went against the trend of the common Russian and Iranian attempt to portray the meeting (the first high-level encounter between the two countries for over 10 years) in a friendly light. Moveover, the Iranian side especially had invested the meeting with hopes for a definitive agreement between Russia and Iran on questions of the Caspian Sea's status.
It would seem, by the way, to be an error, to consider Putin as Kalyuzhnyi's actual boss. According to experts on Russian law, in the peculiar constitution that Boris Yeltsin effectively imposed upon Russia via popular referendum (after the country's armed forces attacked the Duma on live worldwide television in 1993), the president is not really a member of any of the three branches of government. If, in such a situation, we give credence to the Russian newspaper Vedomosti, which on March 12 published an analytical article stating that Putin was allowing the "oligarchs" freer rein than ever so long as they kept out of politics and was relying not upon them but upon popular opinion for his own legitimacy, then we have a reasonable explanation for the divergence between the president and his special envoy.
However, it is probably not correct in the present situation to speak of the "oligarchs" per se, since they are just a relatively small collection of individuals. Rather, if we understand that Putin is allowing Russian industry, including the energy trusts, to pursue economic profit so long as this does not hurt or disadvantage the Russian state, then we have a concise and consistent explanation of Kalyuzhnyi's declared opposition (stated yet again at a March 11 news conference) to the Russian state company Transneft's idea of building a Samara-Kazakhstan-Iran oil pipeline. Kalyuzhnyi went so far as to call the proposal "anti-state"—an interesting locution, coming as it did on the heels of Khatami's departure from his Moscow meeting with Putin.
In early March—perhaps under pressure from Putin—Kalyuzhnyi had to backtrack from his widely noted statement, made in an interview with the Moscow newspaper Vremya Novostei and published February 23, to the effect that the Baku-Tbilisi-Ceyhan (BTC) pipeline project was not a threat to Russia's interests. Kalyuzhnyi had said that the BTC pipeline would not be detrimental to Russian interests since it would carry oil for transshipment to the United States, whereas Russia's pipeline strategy targeted markets in other areas of the world. How remarkable, then, that at the March 11 news conference, he declared that Moscow could induce Kazakhstan to transport maximum volumes of oil across Russian territory only by providing the most commercial and politically favorable route. (Compare this with the strong-arm Russian tactics used in the early and mid-1990s.) How remarkable that he declared—yet again—that he did not oppose multiple export routes but sought to ensure that the Russian route was the most economical.
Why, if Kalyuzhnyi favors multiple pipelines, would he oppose so strongly the Samara-Kazakhstan-Iran pipeline proposal? The only apparent answer is that this line would be a direct competitor with the Russian pipeline system.
3. The Iranian Connection and Vostochny Kashagan
The question of the Samara-Kazakhstan-Iran pipeline is pertinent not just due to the Tengiz field, oil from which is scheduled to begin flowing through the Caspian Pipeline Consortium (CPC) line across southern Russia to Novorossiisk later this year, but moreover because of the huge find at Kashagan.
Knowledgeable observers in the industry aver that this offshore field is one of the most remarkable they have ever seen, the fifth largest such deposit in the world and the largest outside the Persian Gulf region. Informed industry sources suggest that from the operational side, Kashagan will be a difficult and also extremely complex in the political and economic sense. They also say, though, that the concession will inevitably attract a lot of attention because of its sheer size. It is likely to be a very deep field as the first test well drilled was extended beyond the planned depth for further samples. The second test well was sunk to a depth of over three miles.
As is the case in Tengiz, oil from Kashagan is likely to contain a good deal of hydrogen sulfide; the depth of the deposit indicates that a fair amount of gas is probable. Kazakhstan's oil swaps with Iran to the Persian Gulf over the last five years have foundered on the problems of the high sulfur and salt content of the product and high Iranian prices for the swap services. Recently, however, Iran has decreased those prices and upgraded its infrastructure so that it can deal more effectively with the crude and also expand potential transport volumes. Iran also seeks to engage in swaps with Turkmenistan.
The conditions placed by the Kazakhstani government upon the Offshore Kazakhstan International Operating Company (OKIOC), the consortium that is developing Kashagan, and its newly chosen operator Eni of Italy, include the mandate that the gas must be commercially developed and not burned off.
4. Caveat Lector! Object Lessons from Vostochny Kashagan
Meanwhile, reports on the gas content of the Kashagan field are giving rise to cases of what could be called "disinformation" and misinterpretation. I mention this in order to alert the reader to the ease with which even experienced observers can draw inappropriate conclusions from major news by failing to attend to details or simple facts on the ground.
In the first instance, some analyses published in recent days by electronic media have disingenuously speculated that Kashagan may contain mostly gas. This conclusion appears even more plausible given that Eni, which is involved in the construction of the Goluboi Potok (Blue Stream) pipeline that will carry Russian gas to Turkey, was chosen as the operator of OKIOC.
Yet it should be noted that such unproven speculations are usually found among observers who appear to represent interests with a transparent interest in badmouthing the BTC, and who apparently believe it is possible to dissuade investors from committing to the BTC by downplaying the significance of the Kashagan find. These analyses are examples of how to take a fact—that Kashagan may contain significant quantities of gas—and draw a tendentious conclusion from it.
The second instance provides an example of how to jump to conclusions by overlooking small details. An anecdote concerning recent events serves to illustrate. Earlier this month, Kazakhstani President Nursultan Nazarbaev contradicted a statement made in January by his prime minister, Kasymzhomart Tokaev, who said that an oil transport route across Iran was the top priority. Nazarbaev stated, after meeting with Elizabeth Jones, the new U.S. senior diplomat dealing with Caspian energy affairs (whom the president knows from her previous stint as the American ambassador to his country), that oil from Kashagan would go through the BTC.
Many observers assumed on the basis of this statement that Nazarbaev was committing his country to build an undersea pipeline to turn the BTC or Baku-Ceyhan pipeline into what is now sometimes called the ABC (for "Aqtau-Baku-Ceyhan"). However, such observers missed a significant detail.
The reference in the announcement was to "first oil" or "early oil". What this meant was simply that when Kashagan starts, oil will go in relatively small initial quantities by tanker across the Caspian to Baku to be put into the BTC pipeline. Nor is this fundamentally anything new. Oil from Tengiz already moves by tanker to Baku, whence it is taken by pipeline and rail across Azerbaijan and Georgia to Ajaria for further transshipment. Moreover, as knowledgeable industry sources confirm, investors in the BTC project are not looking at Kashagan to make the pipeline commercially viable. They will make their decisions on this matter solely on the basis of reserves available in the south Caspian off Azerbaijan.
Copyright © Robert M. Cutler
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First published in FSU Oil & Gas Monitor, No. 124 (21 March 2001): 4–6.
