WASHINGTON, June 6 (UPI) -- The peaceful implosion of the Soviet Union in December 1991 completely changed the geography of the Caspian Sea region: Where Iran had previously shared the Caspian with the Soviet Union, in its place arose four new states -- the Russian Federation, Azerbaijan, Kazakhstan and Turkmenistan.
Ever since then, the world's largest inland sea has been subjected to a relentless covert conflict between the Kremlin and the West to exploit the water's riches, as the oil in the Caspian basin is by some estimates worth more than a staggering $12 trillion. Needless to say, such riches have focused the attention of the Bush administration, the most hydrocarbon-friendly government in U.S. history. In 1998 Vice President Dick Cheney, former Halliburton CEO, said, "I can't think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian."
The entry of Western companies to the region is strongly opposed by Russia, which continues to view the region as the "near abroad." To the south, Iran, OPEC's second-largest producer, is hardly disposed to see an increased U.S. presence in the Caspian basin, as Tehran is still simmering over the 1996 Iran-Libya Sanctions Act and Washington's pressures about its nuclear activities. Brandishing a large cudgel, ILSA threatened not only U.S. but foreign countries and energy companies with possible sanctions if they invested more than $20 million in developing Iran's energy resources. As the United States is the world's largest oil importer, it was a potent threat, but the policy alienated many allies, particularly those in the European Union.
Unlike Kazakhstan and Turkmenistan, which for the moment are still largely dependent on Russia's Transneft government monopoly Soviet-era pipelines for exports and thus still under the Kremlin's thrall, Azerbaijan has been able to cast off completely its dependency on export routes under Moscow's control, with the result that Baku has one of the world's fastest-growing economies. Because of its oil revenues, last year the International Monetary Fund predicted Azerbaijan's growth would be 29 percent, down from 31 percent in 2006.
Azerbaijan's drive for energy independence began immediately after the dissolution of the Soviet Union. For initial oil exports, Azerbaijan was forced to use Transneft's Baku-Novorossiisk pipeline, a privilege for which Russia charged extortionate transit fees. Azerbaijan's Heydar Aliyev, the former KGB boss who became president in June 1993, was determined to break Moscow's monopoly, and the following year signed the $13 billion "Contract of the Century," whose International Contract No. 1 for the development of the Azeri, Chirag and offshore Gunashli fields with international companies gave them access to potential oil reserves estimated at 6 billion barrels, signaling the start of massive development of Azerbaijan's oil assets.
In 1999 Baku's export options broadened with the opening of the $600 million Baku-Supsa 100,000 barrel per day pipeline. The 515-mile pipeline terminated on Georgia's Black Sea coast, and Tbilisi's transit fee of $3 a barrel stood in stark contrast to Transneft's $15 per barrel charge that Russia extorted from the State Oil Co. of Azerbaijan Republic. Azerbaijan still continued to use the Baku-Novorossiisk pipeline, but sent decreasing volumes through the network.
Azerbaijan was able to completely sever its reliance on the Baku-Novorossiisk pipeline when in May 2006 the $3.6 billion, 1,092-mile, 1 million barrel per day Baku-Tbilisi-Ceyhan pipeline became operational.
Moscow has never accepted its loss of influence over Azerbaijan, however, and now a new covert struggle with Western energy companies has developed over Azeri natural gas reserves. Russia's state-owned natural gas giant Gazprom is eying future production from Azerbaijan's Shah Deniz field in the Caspian Sea. According to SOCAR President Rovnag Abdullaev, Shah Deniz's gas output will soon reach 20 billion cubic meters, while foreign experts believe that by 2020 Azerbaijan's gas output if Shah Deniz is included will approach 50 bcm, and the fields are estimated to contain up to 1,300 bcm.
To that end, Gazprom CEO Alexei Miller flew into Baku and on June 2 offered President Ilham Aliyev a deal to buy Azeri gas at market prices under a long-term contract. The offer represented a complete about-face by Gazprom; according to a SOCAR official, last year Azerbaijan had offered to Gazprom some of the gas from Shah Deniz, but "they did not agree to that proposal."
Gazprom's previous greed may come back to haunt it. The company offered the European price for Azeri natural gas less the "costs of transportation" to the consumer. Azeri officials, who remember Transneft's "carrying charges" on the Baku-Novorossiisk pipeline, no doubt feel Western offers have additional appeal because of their transparency and the fact that engagement with Western companies produced the country's current prosperity.
On June 4 U.S. Deputy Assistant Secretary of State for European and Eurasian Affairs Mathew Bryza, speaking at the Caspian Oil and Gas-2008 conference in Baku, could not resist floating the idea that perhaps Gazprom did not have enough gas to fulfill its European contractual obligations, drawing an immediate aggrieved riposte from Gazprom spokesman Sergei Kuprianov, who sniffed, "Gazprom has always performed its contractual obligations, and there is no doubt that it will do so in the future," adding, "Gazprom's gas production in Russia has increased considerably over the past five years, unlike that of many other producers, including in the U.S."
Brussels is closely watching the debate, as Russia currently provides more than 40 percent of the European Union's natural gas needs.
Bryza said he would like to meet with Gazprom officials at the upcoming economic forum in St. Petersburg. After the exchanges in Baku, he'd better go loaded for bear.
