Can The Caspian Still Become A Hydrocarbon Hub?

The contract of the century will most likely last just about a quarter of a century as Russia's appetite for Caspian crude and gas has been put on the backburner amid US sanctions and the failure of Iran's forgotten giant, Sardar Jangal, once touted to contain 10 billion barrels of oil, to meet expectations. This is a seemingly hopeless predicament for the Caspian littoral nations that finally agreed on the principles of their border delimitations last year, only to realize that the swift developments in international oil trade and politics might render Caspian volumes largely irrelevant. Evidently, there are some positive developments, too, but they are too few to outweigh the adverse ones.

The Caspian's most contradictory story has been unfolding in Azerbaijan. It is no secret that Azeri crude output is gradually declining, dropping down from its all-time peak of 1.037mbpd in 2010 to the current level of 0.8mbpd. SOCAR, Azerbaijan's national oil company, has been readying to embrace a new capacity for some time already, building up the foundations of its transition from a crude player to a predominantly gas-relevant company. These shifts did not go unnoticed with US oil majors ExxonMobil and Chevron, who were involved in Azerbaijan from 1993 and are one of the last members of the old guard who actually signed the "contract of the century". Both US firms have approached several potential buyers, declaring their interest to sell their stakes in the ACG fields as well as the Baku-Tbilisi-Ceyhan (BTC) crude pipeline.

To contextualize it, let me state that the Azeri-Chirag-Guneshli fields, often abbreviated as ACG, represent roughly 75 percent of Azerbaijan's oil production. By leaving ACG, large-scale American business interests are leaving Azerbaijan altogether, since all the other projects are incomparable in scope. Both Chevron and ExxonMobil would remain in Kazakhstan, where the former would maintain its operator status of the Tengiz development project, whilst the latter intends to keep its 25-percent stake in Tengizchevroil. Speculation abounds on what did compel Exxon and Chevron to opt for the exit - most probably annoyance with Azerbaijan leading an increasingly assertive policy vis-à-vis the foreign majors. However, this leaves only BP with a substantial position in Azerbaijan out of all the once-involved giants.

Azerbaijan's crude prospects have been further weakened by Turkmenistan's sudden decision to export its oil via Russia, giving up on the BTC stream. This has dealt a double blow to SOCAR as Turkmen crude, of which roughly 200 000 tons were supplied through the Baku-Tbilisi-Ceyhan pipeline, has generally improved the quality of BTC due to its being lighter and sweeter than traditional Azeri light and also brought in much-needed transit revenues from using the pipeline. Pretty much all of the Turkmen crude is marketed by top trading house Vitol, which collects production from the Emirati-based ENOC and the Italian ENI. Apparently, the decision to reroute exports to Russia is based on a long-standing tariff dispute, yet a politically motivated lead-up should not be excluded.

Russia is a completely different story - there from day one, only one big oil player wanted to give exploration drilling a go in the Caspian area, the largest private company LUKOIL. To be frank, even LUKOIL wanted to get into Azerbaijan but due to the Azeris' concerns about a Russian company controlling a bulk of its production LUKOIL was forced to concentrate on blocks in its own territory. In a very fortunate twist of events, LUKOIL went on to discover a swath of oil and gas fields - the 1 Bbbl V. Filanovskiy, the 240MMbbl and 2.3 TCf gas-containing Yuri Korchagin, the 287 MMbbl Rakushechnoye and others. State-owned companies Rosneft and Gazprom concurrently tried their luck with respective Caspian projects, yet all the wells they have drilled turned out to be dry or commercially unattractive.

Thus came about one of the worst decisions in modern Russian energy history - to limit access to hydrocarbon projects on the continental shelf to state-owned companies (of which there are two, Rosneft and Gazprom with its oil subsidiary Gazprom Neft). Ever since, LUKOIL has only concentrated on its already discovered blocks and brought two fields onstream, whilst the state-owned companies receiving preferential treatment focused on other projects instead, either in Eastern-Siberia or abroad. Thus, there has been little to no proper discovery in the Russian Caspian over the past 10 years. This has been exacerbated by US sanctions against Russia which prohibit foreign majors from participating in offshore projects in Russia. As a consequence, even LUKOIL is now looking to Kazakhstan to give its Caspian strategy a new boost, signing up with KMG to jointly develop the Zhenis block, relinquished by Total in 2012.

Despite squeezing more and more out of international investors, Kazakhstan is the only bright spot on the Caspian crude map, the one country whose production is destined to increase over the coming years. Kashagan is finally producing as it should, without any controversies, and several projects are currently in the pipeline. ENI has finalized its accession to two very promising blocks - Abay and Isatay - located a couple dozen kilometers to the south of the supergiant Kashagan. Oil in-place reserves for the Abay block, according to preliminary data, amounts to 5.7 BBbl, whilst Isatay is estimated to contain 1.8 BBbl. This is not to say ENI, which also heads the Kashagan project as its operator, will be inevitably successful with its drills - the Satpayev block adjacent to Abay, ONGC Videsh's bet to get into Kazakhstan's offshore, was abandoned after two exploration wells did not find any commercially exploitable hydrocarbon reserves.

Iran's endeavors to tap into its Caspian Sea hydrocarbon reserves turned out to be as short-lived as they were ambitious. In December 2011, Iranian authorities declared that they have discovered a giant field, the first offshore discovery in Iran's territorial waters, Sardar-e-Jangal ("Jungle Commander", the nickname of an early 20th century freedom fighter), with proven reserves reportedly reaching as much as 50 TCf (since downgraded to 5 TCf by KEPCO, the upstream subsidiary of the national oil company NIOC and operator of the project). Not only did Iran lack the equipment to develop its Caspian riches - up to the present day it has only one FPSO there, Amir Kabir, it also lacked the technological expertise to do it efficiently. LUKOIL, the champion of the Russian part of the Caspian, expressed interest in developing Iran's deepwater offshore (the least developed and surveyed part of the Caspian Sea) jointly, yet with the onset of US sanctions all the previous progress went down the drain.

It would be unwise to declare that oil production in the Caspian Sea has started its gradual decline for good. Yes, the five littoral states are producing less than they could have if conditions were better. Yes, Azerbaijan is focusing on natural gas developments and Russia has grown disinterested in the Caspian following inexpedient political maneuvering. And yes, politicians nowadays rarely mention the Caspian as a key conduit for hydrocarbons to Europe, that narrative has been supplanted by the arrival of US crude to the continent, leaving the Caspian agenda marginalized. Yet according to geologists' estimates, the Caspian Sea still contains up to 20 billion barrels of oil and its revival will undoubtedly come - the question is when and under which circumstances would it happen.