Case Name: Kazakhstan (Chevron)

1. The Issue

According to petroleum scientists, the Caspian Sea region
contains the third largest reserve of oil and natural gas in the
world, behind the Gulf region and Siberia (see map on preceding
page). Drilling for oil in the region is not new. Oil derricks
dotted the landscape during the latter decades of the nineteenth
century. Oil was a major source of hard currency for the former
Soviet Union, but drilling methods were technologically inferior
compared with western firms when it came to large-scale oil
exploration. This inhibited Soviet exploration in the Caspian
region. Western firms for decades had longed to be given the
opportunity to exploit the former Soviet empire’s massive oil
reserves, but the Cold War relationship did not allow this option.
When the Soviet Union implemented perestroika and glasnost in the
mid 1980s, its oil exploration sector was poised to reap benefits
from the west. The breakup of the Soviet Union, however, put a
hold on these plans, as several nations emerged in the former
Soviet lands around the Caspian Sea. There are environmental
concerns associated with drilling for oil in the Caspian region, in
addition to the already well articulated effects from drilling
itself. The major issue regarding oil exploration in the region is
a question of how best to deliver the oil to world markets. The
Caspian Sea area is landlocked, thus the only way to efficiently
transport the oil to world markets is via pipeline. The exact
route of such a pipeline is as of yet undecided, and may prove to
be the single most important factor in determining the ultimate
success of oil exploration in the region.

2. Description

Oil exploration in the region predates the travels of Marco
Polo. Legend has it that the “eternal flame” of the Zoroastrian
religion was fueled by natural gas around Baku, the present capital
of Azerbaijan, before the eight century. Serious exploration and
exploitation began in earnest in the 1850s, and by the 1890s, this
exploration instigated rapid development in the Baku region. By
the outset of World War I, Azerbaijan commanded 10% of the world’s
exports of oil and kerosene. This was down from the 30% figure
during the 1890s. It was only in the 1980s that modern technology
entertained the notion that the deeper fields (where the most of
oil reserves are) were more accessible.

The area around Azerbaijan, on the southwestern shores of the
Caspian Sea, is not the only portion of the region to have oil
reserves. One of the world’s largest oil fields, the Tengiz in
western Kazakhstan, was discovered in 1979. The Soviets had been
drilling in the Tengiz region, in the northeastern section of the
Caspian Sea, for many years. The Tengiz discovery dramatically
altered oil exploration potential for the region as a whole.

By most accounts the reserves in the region are very large.
When the region was still part of the former Soviet Union, western
oil companies were aware of the vast potential, but were not able
to gain access to the deposits. The Soviets wanted to develop the
area on its own, however, and focused more on the Siberian region
instead. When the Soviet Union splintered into several nations,
western companies began negotiations with the new entities.
Contracts have since been signed, but there are still many
obstacles, notwithstanding the negotiating hurdles. First, the
region is basically desert terrain, with dramatic seasonal
variations.

Second, there are extreme mountains in the northeast into
Russia. According to the Oil and Gas Journal, there is deep
sediment covering most of the predicted deposits. There is also a
phenomenon called salt tectonics which could effect the quality of
the product. These factors may prove burdensome to most companies,
but they should not render exploration futile. Modern technology
can overcome some geologic impediments. If the oil can be
reached, petroleum engineers believe it to be of high quality.
Because of the aforementioned deep sediment cover (up to 24 km)
and the fact that the Tengiz field is the biggest of the super
giants, some journals believe the project marks a new stage in oil
exploration.

The intricate political climate in the region is the factor
which will ultimately determine how oil can be delivered to world
markets. Kazakhstan is in the best position to profit from the oil
reserves. When the Soviet Union collapsed, the Kazakh government,
recognizing the importance of foreign investment, implemented the
most protracted effort to elicit foreign investment as a
cornerstone for development.

Chevron, the largest and to date the most successful oil
company in the region, initiated negotiations with the Soviets over
the Tengiz oil field in the latter 1980s. After the Soviet Union
imploded–and after a brief lull in activity–Chevron continued
negotiations with the Kazakhs. The investment is worth roughly $40
billion over approximately 40 years.

As mentioned previously, the oil in the region still ranks
behind reserves in the Gulf and Siberia regions. But companies are
looking more favorably to the Caspian region because of the
difficulties in the Russian system and harsh climactic factors in
Siberia. Another important reason why firms favor the region over
Siberia is the greater ease of dealing with the government.
Kazakhstan coddled western companies and facilitated a fairly
standard and efficient contract review process. Additionally, the
president took a personal interest in negotiations.

The region, however, is not without its own political turmoil.
Developing oil fields in Kazakhstan and Azerbaijan present unique
difficulties and extricating the oil from the region will be even
more tenuous. According to Chevron and oil analysts, a pipeline is
imperative to justify an increase in production. In the short-
term, production capacity is approximately 200,000 barrels a day.
Existing production can be transshipped by rail or road. But an
increase in output would be economically irrational unless there is
a more efficient method of transport. The route that the proposed
pipeline would traverse is probably the most difficult aspect of
the whole issue because there are several political “hot spots” in
the region that make a pipeline a difficult proposition.
Additionally, there is the realization that the nation which
controls the pipeline will be able to exert a substantial amount of
control over most aspects of oil exploration as well. Thus
several nations are jockeying for the pipeline in their territory.

The conflict between Armenia and Azerbaijan threatens to
disrupt not only the oil production slated off Baku’s shores, but
the proposed pipeline route through the region. Additionally, the
Azeri power struggle may end Turkey’s influence in the region,
which the western nations have been counting on as the moderating
influence. Because it is questionable who will even rule
Azerbaijan, any negotiations are less than definitive. Russia has
been adamant regarding its desire to have the pipeline be routed
through its southern territory to its Black Sea port of
Novorossivsk.

Perhaps strategically, Russia has ties to some of the
competing factions in the Azeri power struggle. But there are two
problems with a pipeline through Russia. Russia has been embroiled
in a bloody conflict in Chechenya and the rest of the region is not
very stable. Secondly, Turkey is against such a route. Their
official reason is that the Dardanelles Straits (a thin waterway
connecting the Black Sea to the Mediterranean) cannot handle the
excess tanker traffic. Such a route would place extreme pressure
on ecological efforts to protect the region. More importantly,
however, is the Turk’s desire to increased their sphere of
influence in the region by having the pipeline go to their ports on
the Mediterranean. The problem with this is that it would have to
go through the Azeri-Aremenian corridor or Iran. The latter route
is not popular with the west, especially the United States.
There have sporadic media reports of late that point to a pipeline
going through Russia and Turkey. It remains to be seen when a
definitive solution will concocted.

Heavy tanker traffic thorough the Mediterranean, Red Sea and
Persian Gulf have already alerted states to the polluting effects
of such activities. Increased production in the Caspian region
will increase the above effects, no matter which pipeline route is
eventually chosen. Unique to the Caspian region however, is the
fact that the Caspian Sea is rising. It could rise possibly three
meters in the next twenty-five years. Resultant environmental
damage would be immense. In the last decade, the sea has risen
one meter, inundating some parts of Baku already. Some of Iran’s
most productive fields lie on the southern shores of the sea and
would be submerged if it were to rise.

More damaging to the environment, however, is the potential
flooding of refineries on the coastal plains of the region. These
regions are some of the most polluted areas in the former Soviet
Union, according to US Embassy reports. This trend might be
cyclical however. The Caspian sea was falling, much like the Aral
Sea to the east. Old photographs of Baku show the shoreline much
closer to the center of the city. But the sea is definitely rising
now. Russian archeologists claim to have found the ruins from the
1,000 year old Khazar empire at the bottom of the sea. Geologists
believe that the sea bed might actually be rising, giving way to
springs of water.

Existing oil drilling in the sea is a major cause of
pollution. The US Embassy in Baku reports that one can see oily
film on the sea’s surface. Another problem is the flaring of
natural gas; about 4.5 million cubic meter a day. Natural gas
flares, however, can be contained with the appropriate western
technology. While the sea is less polluted than the Black Sea,
much needs to be done to lessen the harmful environmental effects
of oil drilling, and the potential disastrous effects of the rising
Caspian Sea.

3. Related Cases

BOSPORUS case
AZERI case
CASPIAN case
CAVIAR case
BLACKSEA case

Keyword Clusters
(1): Product = OIL
(2): Bio-geography = DRY
(3): Environmental Problem = Pollution Sea [POLS]

4. Draft Author: Vincent P. Bonner

B. LEGAL FILTERS

5. Discourse and Status: Disagreement and incomplete

The major disagreement is over the pipeline route. The
countries involved primarily include Russian, Azerbaijan, Armenia,
Turkey, Iran, Georgia, Turkmenistan, and the United States. There
is no agreement on an international framework that governs the
development of the region. Indeed, there is considerable
disagreement in this regard. Some western firms have signed
contracts to develop the fields, but these agreements are
ineffectual if regional conflicts proliferate. Current regional
conflicts already make extraction of oil from the region very
difficult.

6. Forum and Scope: Kazahkstan and Regional

At this point there is no deliberative body that can step in
and “take charge.” The United Nations would hardly be appropriate,
if not effective in the first place. Russia claims the region
within their “sphere of influence,” a dubious distinction indeed,
since Turkey and Iran claim this also. Because Kazahkstan
surrounds the largest reserve in the region, considering monetary
reasons alone, it probably exerts the most influence with regard to
oil exploration. The fact that it is further along oil development
than the others bolsters this contention somewhat. If and when
conflicts ease in the region, only then could some sort of
organized entity figure the best way to develop and extract the
resources to markets.

7. Decision Breadth: 5

It may not be exaggeration to state that whatever is
eventually decided would have affects resounding beyond the Caspian
region, for the nations involved directly in the extraction and
those that are potential customers (please see appendices). The
existence of another oil area beyond the Gulf region would be very
welcome by many nations. Prices of oil would inevitably be
altered, depending on the amount and various other factors. Still,
analysts believe that Kazakhstan could become “another Kuwait” in
that oil development would spur development of the nation. This is
not a forsworn conclusion of course, but the other nations in the
region are anxious for the fruits of providing the world with oil.

8. Legal Standing: Kazakh Law

C. GEOGRAPHIC FILTERS

9. Geographic Locations

a. Domain: Asia
b. Site: West Asia
c. Impact: Kazakhstan

10. Sub-National Factors: No

11. Type of Habitat: TEMPerate

C. TRADE FILTERS

12. Type of Measure: REGSTD

Once developed, the trade restriction would probably be export
restrictions to manipulate the price of oil in the market, not
unlike the operations of the OPEC oil cartel. It is feared
however, that the increase of oil on the world market, if not
regulated, could depress prices. Prices that are too low would be
anathema to the Caspian region because of their initial dependence
on consistent prices to boost export earnings. Inadequate earnings
from such an ambitious endeavor would be disastrous for the
region.

13. Direct vs. Indirect Impact: Indirect

14. Relation of Trade Measures to Resource Impact:

a. Directly related: Yes Oil
b. Indirectly related: Yes Fish
c. Not related: No
d. Process related: Yes Sea Pollution [POLS]

15. Trade Product Identification: OIL

The product at issue is oil, refined for export and usage in
international markets. Oil is often called the “blood of the
economy” and therefore is extremely important to all nations, with
little difference to the various stages of development (please see
appendices). The oil shocks in the 1970s proved the vulnerability
of nations reliant on oil imports. The shocks instigated inflation
and recession in many industrialized nations and is frequently
mentioned as a catalyst for the debt crisis that emerged in the
early 1980s. Thus the importance of stability in the world’s oil
markets cannot be overstated. Oil from the Caspian region can have
dramatic effects on the world market. OPEC levels are near full
utilization and their share of world markets are growing (please
see appendices). Another major source beyond the Gulf region may
allow a “safety” if instability engulfs the Arabian region. For
example, succession is not clear in Saudi Arabia (the king is 75
years old), and Iraq and Iran continue to threaten stability in the
region.

16. Economic Data

According to NatWest Securities, an oil consulting firm, world
demand for oil is roughly 70 million barrels a day (see
appendices). Thus, this is no small business. OPEC has already
demonstrated its ability to manipulate demand by alternating
supply. Existing oil exporters are not operating at capacity to
supply world demand. What the future holds is far from certain.
A conflict that breaks out in the Gulf can have dramatic affects
immediately on the supply and price of oil. The United States is
the largest consumer of imported oil.

Because of the uncertainties surrounding the exploration and
extraction of oil from Kazakhstan, it is difficult to place a
dollar figure on its potential earnings. Most analysts place the
figure to be billions annually.

17. Impact of Trade Restriction: HIGH

Any major increase in the amount of petroleum on the world
market will instigate price fluctuations unless some sort of
agreement is reached among oil-exporting members. It remains to be
seen whether or not oil exporting nations in the Caspian region
will form an agreement or partnership with Gulf members and other
oil exporting nations. Pure competition can be detrimental to all
nations in the long run. A massive drop in prices can have regime-
destabilizing affects on the member nations because these nations
rely heavily on oil revenues. Thus an arrangement, given the
potential instability due to pure competition, would be beneficial
to oil-exporting nations. It is imperative for the region, which
will rely on stable prices to a greater extent than the already
established oil exporting nations.

18. Industry Sector: OIL

19. Exporters and Importers: KAZAKHstan and MANY

The exporters in question are primarily Kazakhstan and
Azerbaijan. Every nation in the world will have a need for oil.
The exporters will in the longer term probably evolve into state
enterprises, after western assistance is completed. In the
interim, western drilling firms will share in the profits and
engage in exporting, with the nation taking credit in international
financial statistics.

E. ENVIRONMENT FILTERS

20. Environmental Problem Type: Pollution Sea [POLS]

21. Species Information

Name: MANY
Type: MANY
Diversity: ?

22. Impact and Effect: HIGH and REGULatory

The extraction of oil from the region can have major
consequences of the ecology of the region. This is due to the man-
made effects of such development, perhaps further exacerbated by
the rising of the seabed.

23. Urgency and Lifetime: LOW and long term

Because of the high demand and importance of oil, the
potential effects of environment damage to the region will be
probably be understated although the rising of the seabed may grab
more attention and demand more scrutiny of ensuing actions. The
regions populace, however, is starving for development and
prosperity. It is likely for this reason alone that environmental
concerns are downgraded in importance.

24. Substitutes: ALTERnative Energy

Alternative fuels are technically another option to oil, but
because of their price they are not realistic in the short term.
Conservation is always an option, but price determines the severity
of such movements. If oil prices dramatically increase, there will
inevitably be some conservation. For example, citizens may not
drive their autos as much.

VI OTHER FACTORS

25. Culture: YES

Culture is a factor only in the sense that such differences
seem to instigate regional conflicts, which as already stated, will
ultimately determine how the oil gets to the market.

26. Human Rights: NO

27. Trans-Boundary Issues: YES

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