- Whither the Oil Industry? The Fate of the Caspian Hangs in the Balance (The Dilemma of Transport Routes)
Shifting Tides: The Caspian Intersects with the Middle East
The month of November 1997 began a year characterized by enormous upheavals and changes in the oil industry: at this month’s OPEC (Organization of Petroleum Exporting Countries) meeting, Saudi Arabia engineered a 10 percent increase in the organization’s production ceiling (up 2.5 million barrels per day [mmb/d] to 27.5 mmb/d). Events that have unfolded since then were unexpected. Although Saudi Arabia’s decision may initially have appeared hasty, its production increases may actually shift international focus away from non-Middle East oil and gas opportunities, which during the last decade have increasingly eroded OPEC’s power over international oil markets. In today’s energy landscape, a shift to Saudi Arabia could be at the expense of regions like the Caspian. Ironically, U.S. policy may help OPEC to recapture its former glory. Let’s look at some of what has happened since November 1997 to make this possible. [End Page 272]
Caspian Developments: The Initial Euphoria
While OPEC voted to raise its output ceiling in November 1997, one of the Caspian’s two major consortia, the Azerbaijan International Operating Company (AIOC), began producing oil from its offshore Chirag field. AIOC became the second significant foreign-led consortium in the Caspian to produce oil, after the TengizChevroil joint venture in Kazakhstan, which has been producing oil since 1994. 1 AIOC and TengizChevroil are today developing some of the world’s largest known oil fields. Between them, the AIOC and TengizChevroil consortia fields hold between 10 and 13 billion barrels of recoverable reserves. 2 Compare this to the oil reserves of Canada (5 billion barrels), the UK (4.5 billion barrels) and Norway (11.2 billion barrels). By 2010, these two consortia, operating in the Caspian, together could be producing 1.5 mmb/d or half of what Norway yields today. As 1997 drew to a close, the United States had devoted so much attention to the Caspian’s potential that it had become the most exciting oil prospect for the international oil industry since the North Sea came on the scene in the 1970s.
Just as the Caspian was making its debut, and the United States was focused on Azerbaijan, Kazakhstan, and Turkmenistan, another unexpected and “uninvited” player in this region began inching its way into the oil game. In January 1998, the newly elected, moderate president of Iran, Mohammed Khatami, held a landmark interview with CNN, in which he extended an olive branch to the “people of America.” Subsequently, Iran launched a massive public relations campaign to try to attract foreign investment to its petroleum sector, threatening to undermine U.S. sanctions that prohibited American investments and punished foreign companies for investing in that country. 3 Iran’s campaign generated considerable excitement and interest, particularly among European companies. 4 Moreover, Iran began a rapprochement with its Gulf neighbors, including Saudi Arabia, disrupting the U.S.-supported power balance in the region, which was predicated on the continued isolation of Iran and Iraq. 5
These developments—TengizChevroil pushing up production, oil exports from Azerbaijan coming on the market, and Iran opening up—occurred just as oil prices started spiralling down. The Saudi-induced production increases of last year could not have been timed worse in terms of creating a glut of oil on world markets. Not only was the Asian financial crisis not ebbing in 1998 but Russia was [End Page 273] descending into financial and political chaos as well. 6 The United States was caught with a whole series of fires that it was helpless to control, much less extinguish. 7
Rigid U.S. Policy but Changing Commercial Dynamics in the Caspian: Enter Saudi Arabia
In August 1998, BP announced a merger with Amoco. Suddenly there was a frenzied focus on streamlining and cost cutting in the oil industry. In addition, this union would submerge Amoco, the...