US, Russia Vie for Rich Oil Fields in Caspian Sea

A SWANKY Hyatt Regency hotel opened its doors in May in this windy Caspian Sea port, just in time to fill its rooms with hordes of visiting Western oil company executives.

Down "Oil Boulevard," lined with the decaying mansions built by oil barons of the 19th century, oil men of today gather at Charlie's restaurant to eat steak or pizza and listen to country music.

For the second time in history, this capital hums with the oil business, luring people and money from around the globe. The fields that were the largest source of the world's oil at the turn of the century are played out. But new fields offshore promise even greater riches.

With the oil and gas fields of Kazakhstan and Turkmenistan, on the opposite shore of this gray inland sea, the Caspian is believed to hold reserves second only to those of the Persian Gulf.

According to a well-informed Western diplomat here, there is at least $200 billion worth of oil under the Caspian, "and probably several multiples of that."

It is a rich prize, one that has sparked a struggle for control that pits Russia, until the collapse of the Soviet Union the ruler of this region, against the West, led by the United States.

The neighboring regional powers, Iran and Turkey, are also in the fray, aligning themselves with Russia and the US respectively. This geopolitical battle is reminiscent of the oil wars over the Persian Gulf, one which will shape the destiny of the entire Transcaucasus, if not beyond.

"If the West gets the oil and strengthens the independence of the states in the region, then Russian influence will decrease," explains Archil Gegeshidze, national security adviser to Georgian President Eduard Shevardnadze.

A big deal

The battle was joined in earnest last September when after two years of talks, punctuated by one coup in Baku and several attempted coups, the Azerbaijani government signed a contract with a consortium of 11 foreign firms to develop three huge offshore fields.

The Azerbaijan International Operating Committee, as the consortium is called, is led by British Petroleum and Norway's Statoil, but it includes five major US firms holding a combined 44 percent stake in the project.

The US government has become increasingly involved in backing this project. Earlier this year, the US publicly supported the construction of a pipeline that would transport the Caspian oil through Turkey to the Mediterranean Sea, completely avoiding Russian territory. The Russians see this combination of the Western firms and the Turkish pipeline as a major threat to their security interests, particularly to Russian domination of a region that has traditionally been under their control.

"US involvement makes it more of an issue for the Russians," says Laurent Ruseckas, oil analyst at Cambridge Energy Research Associates in Cambridge, Mass. "It's become practically like NATO expansion," which Russians say threatens their security by taking steps to include Central European states in the defense alliance.

Russia is exerting pressure on two fronts: by challenging the legal right of the states bordering the Caspian Sea to own the offshore resources beyond their territorial waters, and by trying to block any pipeline route that is not under its control.

Immediately after the Azeri oil contract was signed, the Russian government issued a formal protest, saying the Caspain is not a sea as defined by international law but a lake. Referring to earlier treaties between the Soviet Union and Iran regarding the Caspian, the Russians contend that there must be communal use of the sea and that no state can act unilaterally.

Moscow has garnered the support of two other littoral states for this stance - Iran and Turkmenistan - and is putting heavy pressure on Kazakhstan as well, hoping to isolate Azerbaijan.

Until recently, however, there was division within the Russian ranks, with the powerful Energy Ministry, backed by Prime Minister Viktor Chernomyrdin, a former state gas industry boss, showing more flexibility. They are represented in the consortium itself by the Russian state oil firm Lukoil, which has a 10 percent share of the project.

This gave rise to hopes in Western oil and government circles that Russia could be bought off with a piece of the action. US Deputy Energy Secretary William White tried to sound out Russian officials after a tour of the region in April, and he was surprised by the tough stance he found in Moscow, according to Georgian officials who were briefed on his visit.

The closing of ranks was evident on May 18, following a summit with the Turkmenistan leader, when Russian President Boris Yeltsin for the first time spoke out on this issue. "The Caspian Sea is a special inner sea, and it cannot be divided," Mr. Yeltsin told reporters. "This concerns oil and gas as well."

The official US view, echoed by the Western oil firms, is to reject the Russian claim and to proceed with the project. Privately, some US officials talk about creating a fait accompli as quickly as possible by getting the oil flowing.

But they also recognize that if Russia gathers support for its position, the oil companies will be reluctant to invest large amounts of money. US Energy Secretary Hazel O'Leary, speaking at an oil conference in Baku on May 23, said Azerbaijan must establish "an unassailable legal regime" for the Caspian project.

Possible routes

Investment will also depend on the oil companies finding a way to get the oil out. This problem has two phases - "early oil," the smaller amounts of production that are scheduled to begin flowing in 1996 and that are crucial to funding the second phase of "major oil." The major oil may require more than one route, particularly if it includes the flow of oil from the huge Tengiz field being developed by Chevron Corporation in Kazakhstan.

There are three candidates for "early oil" routes. The leading Western choice is now through Georgia to the Black Sea port of Poti, requiring closing only a 62-mile gap in an existing pipeline system. Georgian officials are lobbying hard for this, arguing they can offer both an economical and a secure route.

Through Grozny?

Russia is pressing instead to use an existing pipeline that would take oil to the Russian Black Sea port of Novorossiysk. But that line goes through war-torn Chechnya, although the Russians claim they could build a new route around that hot spot if needed.

A final option is to ship the oil to Iran, swapping it there for Iranian crude picked up in the Persian Gulf. The US government, locked in a confrontation with Iran, does not prefer this choice, though its recent embargo declaration against Iran pointedly allows such swaps to take place.

Georgian officials are hopeful that Moscow will allow the early oil to come their way. They point to a recent agreement to allow Russian military bases in Georgia for 25 years as a guarantee that Moscow will retain influence there. That plus the lure of money may work, the officials say.

But the more strategic problem for Russia is that the Georgia route could lead easily to running the major oil pipeline from there into Turkey and down into the Mediterranean, something Russia strongly opposes.

The major oil also could go through Armenia to Turkey, but that requires settling the war between Armenia and Azerbaijan over the disputed region of Nagorno-Karabakh, which is in Azerbaijan but populated and controlled largely by Armenians.

"Armenia believes that a pipeline which links Armenia, Azerbaijan, and Turkey would be an important stabilizing factor, a factor for peace," Armenian President Levon Ter-Petrosyan told the Monitor. But he said the pipeline issue should not be linked to settlement of the Karabakh conflict. And, he added, the interests of Iran and Russia, both allies of Armenia, "should not be forgotten."

For these reasons, both Georgian and Armenian government officials argue that the Caspian oil project will not be realized without some Russian consensus. They say US oil and government officials have until recently failed to appreciate the depth of Russian feeling on this issue.

But no one knows what Moscow really wants. Some fear that Russia will put military-strategic interests ahead of any mutual economic gain. "Russia is trying to block early oil, big oil, everything," says Georgian official Gegeshidze. "They are waiting for better times and for now, they don't want to allow Central Asia and the Caucasus to escape their control."

* The first three parts of this series appeared May 30, June 1, and June 2.