How to Divvy Up Caspian Bonanza

Russia and Kazakstan hope they have found a compromise over the status of the Caspian Sea that could resolve a stubborn conflict delaying the development of its enormous offshore hydrocarbon reserves.

The resolution of the issue may well create a dependable new oil and gas industry supplying the needs of Western Europe from resources that dwarf even those of the Persian Gulf. Last week, the deputy foreign ministers of the five Caspian countries completed three days of talks on the legal status of the Caspian Sea. It will be followed by a ministerial conference in November. The fundamental issue is whether the enclosed, salt-water "sea" is a sea or a lake.

If it is a sea, then the five countries bordering its shores must be entitled to exploit individually their separate seabed resources without any say in each other's affairs. If it is a lake, they must act together in a collaborative enterprise.

Time is an increasingly urgent factor because the Caspian neighbors - Russia and Kazakstan, as well as Azerbaijan, Turkmenistan, and Iran - are anxious to exploit their seabed riches. Indeed, the latest discoveries are beyond their wildest dreams.

A seismic survey just carried out on behalf of the Caspian Sea Consortium (CSC), an oil industry group, in the seabed near the Kazakstan shore has indicated the presence of crude-oil reserves estimated at 10 billion tons, as well as 2 trillion cubic meters of natural gas.

If confirmed, these offshore reserves, overshadowed by the controversy between the Caspian neighbors, would be 10 times bigger than Kazakstan's fabulously rich Tengiz oilfield, and they would easily exceed Russia's entire proven oil reserves of 6.7 billion tons.

These and other resources in the Caspian region would be ideally suited for the hungry and prosperous energy markets of Europe.

The legal status of the Caspian, which divides the Caucasus region from Central Asia, has arisen since the collapse of the Soviet Union in 1991.

To Russia and Iran, it's a lake

Russia and Iran argue that the Caspian is a lake, as defined by international law, and its resources should therefore be jointly and equally exploited by the littoral states. The three Central Asian republics of the former Soviet Union regard it as a sea; they have invited their powerful neighbors to the north and south to mind their own business.

But this is no way to generate business confidence among Western investors whose contribution is essential to the development of the Caspian hydrocarbon reserves.

A compromise negotiated by Russian President Boris Yeltsin and Kazak leader Nursultan Nazarbayev calls on all parties to sign a convention "respecting sovereignty, territorial integrity, and political independence." The joint statement describes the completion of a Caspian convention opening the way to industrial development at full speed as a "top priority and urgent task."

A key clause in such an accord would allow all countries in the region to carry out their own exploration and production projects while allowing for cooperation in international waters.

Mr. Nazarbayev, a former Soviet Communist Party Politburo member, carefully balances his country's fragile independence between the rival forces of Russia, which would like to restore its former economic control over the region, and nearby Iran, which is intent on spreading its brand of religious fundamentalism among its Islamic neighbors.

Landlocked Kazakstan is about the size of Western Europe, but has a population of just 17 million people. About half are Turkish-speaking Kazaks, who live with a huge Russian ethnic minority.

Their plentiful natural resources and stable politics have attracted 39 percent of the committed foreign investment flow ($117.8 billion) directed to all of the former Soviet Union. The country is believed to hold more oil resources than Iran and Iraq combined and more natural gas reserves than in Norway's continental shelf.

It has a fifth of the former Soviet Union's arable land, nine-tenths of its chrome reserves, and half of its copper, lead, and zinc. It also holds substantial deposits of gold, tungsten, molybdenum, iron ore, manganese, chromite, potash, phosphate, borates, barite, fluorite, and uranium. But it cannot export much because of its long and expensive supply routes restricted by the separatist conflicts in southern Russia. Its only open outlet is the Caspian Sea - which is also landlocked.

Vyacheslav Gizatov, the Kazak deputy foreign minister, told a press conference that his country's compromise with Russia should defuse all problems affecting the CSC. The consortium, involved in the biggest offshore seismic survey in the history of oil exploration, was rewarded by the latest giant discovery. CSC comprises Agip SpA of Italy, British Gas Plc., British Petroleum Co. Plc., Den Norske Stats Oljeselskap SA (Statoil) of Norway, America's Mobil Corp., Shell, and Total SA of France.

Drilling could start in 1998

Intensive seismic work on behalf of CSC began in 1994. Drilling for oil may well commence in 1998.

Some Russian oil companies have also begun searching for hydrocarbon reserves in the Caspian, creating what Mr. Gizatov describes as separate "theoretical conflicts of interest" in the area.

Yet Moscow also seems to have put its faith in the accord with Kazakstan. Vladimir Andreyev, the chief spokesman for the Russian Foreign Ministry, has announced that an expert working group has been assembled already to see the bilateral statement through the difficult negotiating stages into a formal Caspian convention. But he insists that Russia has not altered its view that the resources of the Caspian - a lake - should be held and developed in common by the littoral states.

Moscow does not object in principle to the exploitation of Caspian offshore hydrocarbon reserves in the absence of a convention - but it would also not recognize any production contract contrary to its perception of international law. As Mr. Andreyev put it, "We view such contracts signed by non-Caspian states or even a Russian oil company as agreements concerning only their participants."

These are tough words. But analysts believe that they may have been measured to leave room for further compromise in the face of tough negotiations ahead.

*Thomas Orszag-Land is an author and foreign correspondent who writes on global affairs from London.