The Mythology of the Munificent Caspian Bonanza and Its Concomitant Pipeline Geopolitics

When I first ventured into Caspian petroleum economics and geopolitics in the early 1990s, there was a great deal of ground to speculate on future developments. Of late, Caspian scholarship is getting increasingly difficult and unrewarding because what needs to be said has been over and again repeated in various international workshops and conferences, academic and industry journals, mass media and intelligence reports. Yet, at the expense of being repetitive at times and in the light of recent developments around Afghanistan, there is still some room to articulate the issues that are likely to determine the future geopolitical landscape of the region and have a direct bearing on major powers' strategic interests.

The Foggy Bottom's Old Caspian Tale and the Bush Administration's New Approach

Among the major issues where the Bush administration has to cope with the Clinton legacy are the Caspian area energy policy and the concomitant pipeline projects. The State Department has invested heavily in a grandiose strategy to press the Caspian countries and international consortia operating in the region to export their oil and gas westward through pipelines that would terminate in Turkey. These costly projects, the Baku-Jeyhan oil pipeline and the Trans-Caspian gas pipeline from Turkmenistan, never made obvious economic sense.

The State Department, nonetheless, has been a staunch advocate of both projects and pressed the leaders of Turkey, Georgia, Azerbaijan, Kazakhstan and Turkmenistan to sign a package of legal framework agreements in Istanbul in 1999 under American auspices. The plan's strategic objective was twofold: to reduce Russia's political influence in the Caucasus by pushing it out of the Caspian Sea, and further isolate Iran in the region.

However, instead of the politically bloated appraisal of 200 billion barrels in ostensible Caspian oil reserves (compared with Saudi Arabia's 250 billion) valued at four trillion dollars, exuberantly cultivated for years by the State Department¹ to attract American investors into the region and justify its own strategy there, we are talking today about only 20 billion to 30 billion barrels of proven reserves, most of which are confirmed under the Kazakhstan section of the sea.

Part of the problem is that what the US government says tends to be taken much more seriously outside the United States than within. Oil industry analysts reacted with skepticism to claims made by US officials concerning the Caspian Sea potential. Unfortunately, local leaders in the region take such claims at face value, concluding that the US government knows something that they do not. Similarly, when Washington tells them that the Baku-Jeyhan project is commercially viable, the local governments conclude, wrongly, that the State Department knows more about oil export pipelines than the oil companies operating in their region.

But the proposals promoting any oil or gas export pipeline that would avoid crossing Russia and Iran are based more on politics than economics, and effectively act as a source of tension between the Caspian governments and the western oil companies that are reluctant to build the new expensive pipelines mapped at the Foggy Bottom.² The problem has long been that few in the oil industry believed that the Baku-Jeyhan pipeline was commercially viable. They have repeatedly pointed out that if these pipelines were commercially feasible, then they would already have been built. The Trans-Caspian gas pipeline from Turkmenistan, for instance, has already been abandoned.

Recent studies by two independent research groups in Washington — the Cato Institute and the Carnegie Endowment for International Peace — have also criticized the economic justification for the Baku-Jeyhan project, urging consideration of Russian and Iranian alternatives.³ They calculated that the Baku-Jeyhan pipeline would need $200 million per year in subsidies from the US government to remain viable.

Rather than engage with the oil companies and take account of the independent studies that have criticized the project, the State Department has instead tried to pressure them into paying for a pipeline they do not want. There is an irony here. On the one hand, Washington preaches the virtues of the free market and privatization to former Communist countries, yet the Clinton...