ENERGY INTERNATIONAL RISK ASSESSMENT (EIRA)
AN INDEPENDENT MONTHLY REVIEW
November 2014
VOLUME 2
ISSUE 11
 
Caspian Sea status: Agreed to agree, sometime later on

An unusual political event happened this fall in the Russian city of Astrakhan: a summit of the 5 Caspian countries, namely Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan focused on the complicated issues linked to the definition of the status of that big water surface. It was the 4th summit of that kind in history, after Ashgabat (2002), Teheran (2007) and Baku (2010).  

The main question is whether to declare it a lake (the Caspian has no connection with other seas and is an isolated watery plain, like a lake, but its water is salted) or a sea? Depending on the answer you give, its legal status changes. For example, if it’s considered to be a sea the United Nations Convention on the Law of the Sea (1982) should be applied. It regulates all the issues, including the definition of internal waters, exclusive economic zone, continental shelf, etc.

In Astrakhan, some important decisions were taken (Presidents were even talking about a “breakthrough”): first of all, the Caspian Five agreed that military presence in the sea/lake should be limited only to riparian countries. It was also agreed in principle that the Caspian Sea should be divided into a zone under the sovereignty of bordering countries and a fishing zone. But no compromise was reached on the division of the shelf plate, which remains the most controversial issue.

The host, Russian President Vladimir Putin, acknowledged that not all of the problems were solved but the list was effectively shortened. Putin expressed hope that in the near future the 5 countries would sign the Convention on the status of the Caspian Sea. What kind of compromise would it require? So far, it’s hard to guess due to controversial declarations of summit’s participants made in the aftermath of the summit.

The President of Turkmenistan, Gurbanguli Berdymukhamedov, confirmed his position: pipeline projects on the Caspian are part of the sovereign rights of each Caspian country. The President of Iran, Hassan Rouhani, on the contrary, believes that all the decisions should be taken by consensus by the 5 nations and not be dictated solely by national interests of any of the countries concerned.

  Before the collapse of the Soviet Union, the Caspian Sea status was regulated by an array of Soviet-Iranian agreements, the oldest one dated 1921. They defined fishing, transportation, resources and military fleet issues. These documents were internationally recognized. But at that moment there was no problem linked to the marine underwater pipelines and off-shore oil and gas production.

After the break-up of the Soviet Union, the post-Soviet countries signed agreements stipulating the compliance of new countries to the obligations of the Soviet Union. The same principle was supposed to be applicable to the Caspian Sea. Iran declared that the juridical principles of agreements signed with the USSR remain intact. But Azerbaijan pretended that it was not bound by Soviet era arrangements.

Since the 1990s, the global approach to the problem was fluid. At the beginning, Iran and Russia insisted on a common use of that sea by all the 5 countries, then Russia started to conclude bilateral agreements, the first was signed with Kazakhstan (1998) delimiting the seabed of the Northern part of the sea. Simultaneously, the US declared the Caspian the zone of its national strategic interests and entered into negotiations with Azerbaijan about the possibility of building a military base. In 2003 a framework convention about the protection of the marine environment of the Caspian Sea (“Teheran’s Convention”) was signed stipulating that all main local problems will be settled by consensus of all the riparian countries.

The discussions are focused now on 2 main issues, all linked to the seabed status. First, it is needed to define the owner of the off-shore oil and especially natural gas fields. Azerbaijan and Turkmenistan are disputing some of them, being not able to delimit the respective parts. Second, it is necessary to establish who has the right to decide whether to build or not a pipeline on the Caspian seabed across all the possible frontiers.

For example, Azerbaijan has no problems to build a pipeline from its gas field Shah-Deniz 2: it’s within Azerbaijani territorial waters. But building Transcaspian pipeline from Turkmenistan to Azerbaijan, supported by the EU, has to be regulated in another way, by a convention on the Caspian Sea status. So far, Iran and Russia were blocking the juridical possibility of such a pipeline. At the Astrakhan summit, there was no breakthrough on that issue.

Besides the legal aspect, there are some other components to consider, all linked to local gas reserves. Iranian and Russian gas fields are located far from the Caspian zone, and they are not in direct competition. Kazakhstan has oil but no gas, so the countries with high stakes in bridging the Caspian Sea with a seabed pipeline are Azerbaijan and Turkmenistan.

Azerbaijan has rather limited reserves, around 1.3 trillion cubic meters (tcm), maybe less: there is still controversy about the actual volumes. Presently, Azerbaijan is producing more that 16 bcm (2013), exporting less than 10 billion cubic meters (bcm) of gas and is not considered to be a big player on the market. The expected increase of production in Shah-Deniz 2 field up to 25 bcm would allow to export more gas and use TANAP/TAP pipelines to deliver gas through Turkey to Greece, Albania and Southern Italy. The planned export volumes amount to 16 bcm (6 bcm are to be sold to Turkey). But that surge in exports will hardly elevate Azerbaijan into an important market player: in 2013, Europe consumed 538.2 bcm of natural gas.

Turkmen gas reserves are more significant, 17.5 tcm, with the production reaching 72 bcm (2013), and exports of more than 42 bcm, bound to some former Soviet Union countries, Iran and China. By 2020, the export pipeline to Iran is planned to increase the off-take up to extra 20 bcm and the gas flow to China up to 80 bcm. Basically, Turkmenistan does not have enough gas for export through a Transcaspian pipeline, planned from 1996 and aimed to deliver 16 bcm to Turkey and 14 bcm to Europe. At this stage it should be noted that Turkmenistan would be not able to export gas westward taking into consideration that China is heavily investing in production and transportation capacities in Turkmenistan with the inevitable implication that extra volumes would be delivered to the Chinese market and nowhere else.

Last but not least, Azerbaijan having not too many reserves perceives Turkmenistan with its huge reserves as a competitor on the Turkish and European markets. Baku is not really interested now in constructing a Transcaspian pipeline. Maybe later, after having depleted its own resources Azerbaijan would be interested in transit fees from the flow westward of the Turkmen gas, but most certainly this is not the case now.

Bearing in mind the unsettled status of the Caspian Sea, the limited gas reserves in Azerbaijan and the reserves in Turkmenistan allocated mainly for deliveries to China, the conclusion looks as follows: both Caspian countries seem to be using the discussion on the Transcaspian pipeline project as an additional bargaining leverage in their negotiations and not as a realistic plan to implement the grand idea of increasing export to Turkey and Europe within the EU concept of South Corridor.

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