Of Note: No Borders, No Problem: Why the Lack of a Legal Framework in the Caspian Sea Is Not Affecting Energy Exploration

As a rule, regions without clearly defined borders rarely become hotspots for foreign investment. Kashmir, the Palestinian territories, and the Congo are all good cases in point. International companies legitimately worry that agreements they sign with local governments today may become obsolete if the final borders are shifted tomorrow. Typically, legal uncertainties compound already existing political and economical risks in regions with weak borders. International oil companies (IOCs) tend to be especially sensitive to these risks, as they typically make multi-billion dollar investments on projects which are not expected to yield profit for years.

Yet the Caspian Sea's maritime borders stand out as an exception to this rule. Home to the world's third largest concentration of oil reserves (with an estimated value of nearly $4 trillion), and one of the largest collections of natural gas, the region has seen a decade long legal battle over who controls these vast resources. Despite the ethno-political tension in the region and the myriad of scholarly voices predicting that the lack of maritime borders would lead to "conflicts, crises and wars in the Caspian region," the Sea has seen a flurry of activity in the post-Soviet era. IOCs led by British Petroleum (BP) and Amoco have plowed ahead, investing well over $20 billion in exploration and extraction of the regions hydrocarbons. Instead of being scared off by a pitched legal battle waged by the Caspian Sea's five littoral states—Russia, Iran, Azerbaijan, Turkmenistan and Kazakhstan—these multinational energy firms have found ways to reduce the risks of investing long-term in an area lacking short-term stability. By lobbying regional governments, developing less controversial oil fields, and relying on behind-the-scenes American support, today they sit atop one of the world's most lucrative energy deposits, leaving their more risk-averse competitors scrambling to find the world's "next Caspian." In the $8 billion "Contract of the Century," signed in 1994 between Azerbaijan and a Western-led consortium,knowledge of the area and contacts in the region separated those energy companies who received a share in the attendant deals from those that did not. Only several of the major IOCs, led by BP, took the initiative to send teams of geologists to the region, where they quickly discovered that the main hydrocarbon reserves were actually along the Caspian coastline, making it easier to determine which fields belonged to which country. By setting up oil rigs at these spots and largely ignoring the few controversial fields (which have since proven to be largely barren), the oil companies correctly wagered that the lack of a complete legal framework would not stop the emergence of a tacit understanding as to who controls which energy fields.

The IOC strategists further argued that even if there were disagreements, couldn't the aggrieved parties be paid off? Thus, when Russia and Iran caused an uproar over the "Contract of the Century" they were discreetly paid off and given small shares of the revenues. Leaders of the countries bordering the Caspian who have at one time or another doubted whether they should cooperate with Western oil companies have quickly found that it is in their personal interest to do so. In one famous case dating back to 1998, two Americans working for ChevronTexaco were accused of paying $58 million in bribes to Kazakhstan's President in exchange for oil exploration contracts. Washington has also been known to step in if tempers flare and American interests are challenged. In 2001, Washington quietly pushed the region's strongest military power, Turkey, to mediate a dispute between Azerbaijan and Iran after an Azerbaijani exploration ship entered waters controlled by Tehran. The following year, the U.S. sent 150 Special Forces and 10 helicopters to protect sabotaged oil pipelines from Baku through the Republic of Georgia. U.S. Secretary of Defense Donald Rumsfeld has also been known to travel to the region frequently at the bequest of companies worried about escalating tensions. As a result of their close cooperation with Washington...