Since the early 1990s, the countries of the Caspian Sea region and Central Asia (Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan) have been expected to become important players in the international oil and gas trade. Recent forecasts (1998) still assume net exports of the Caspian region to increase to 75-118 million tonnes of oil and 72-84 billion cubic metres of gas in 2010. However, the real development of the energy sector in these countries, since they gained national independence in 1991, has been disappointing. Oil production so far has hardly recovered from the post-Soviet slump (52 mt in 1998) and oil exports have remained marginal (18 mt, i.e. just one per cent of international trade flows). The region's gas production fell from 146 bn cu m in 1990 to 80 bn cu m in 1998. Net gas exports diminished from 61 bn cu m in 1990 to a mere 5 bn cu m in 1998.
This paper analyses the development of the Caspian region's energy sector over the last decade. It also looks at the reasons why the high hopes concerning its potential have so far been disappointed:
-- The macroeconomic development of all Caspian countries suffered badly after the collapse of the Soviet Union. Furthermore, the incipient recovery after 1996/97 was stifled by the fallout of the financial turmoil in Russia and the Commonwealth of Independent States (CIS) after August 1998.
-- A number of technical, legal and political obstacles has so far prevented the implementation of large investment projects.
-- The restructuring of domestic oil and gas companies is further complicated by socio-economic obstacles, e.g. overemployment, untransparent systems of governance and the need to diversify regions dominated by a single industry.
In view of the existing structural problems, the paper concludes that a major expansion of the region's energy output and exports is unlikely in the medium term (this paper was submitted to the OPEC Review in January 1999).
"Good for nothing, except maybe to grease a few wheels!"
Expert Commission's appraisal of the subsoil resources in the Baku region to Empress Catherine II, late 18th century(n1)
AFTER THE BREAKDOWN of the Soviet Union, there was a wide consensus among energy economists that the countries of the Caspian region (Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan) would become important players in the international oil and gas trade. The governments of the newly sovereign states were not alone in hoping for economic development fuelled by energy. International petroleum companies, too, spoke of the region's great "potential" when they announced large-scale investment projects. Independent institutions predicted growing energy production and export volumes for these countries (EIA, 1998; IEA, 1998a). In addition to its potential exports to European and international markets, the region's geostrategic location also attracted worldwide attention (Brezinski, 1997). At times, the Caspian Sea was even described as the "Gulf of the 21st century".
A decade after the first major involvement of a foreign company in the region (Chevron in the Kazakh Socialist Soviet Republic) and eight years after the end of the Soviet Union, the high hopes for the development of energy in the region have been dampened considerably. Recently, voices criticising the idea of an energy boom in the region have been appearing in the specialised press (Crow, 1998; Barnes and Soligo, 1998; Wyzan, 1999; Gobler, 1999). Indeed, energy production (52 million tonnes of oil and 80 billion cubic metres of gas in 1998) and exports (18 mt of oil and 5 bn cu m of gas) are small by international standards. Proven oil reserves in the Caspian region, that might be exported economically, seem to be smaller than expected. Legal conflicts have reduced the willingness to invest in the region's energy sector. Also, the problem of export channels still remains to be resolved.
This paper analyses the development of the Caspian energy sector over the last decade. It argues that the high hopes for this sector's growth have so far met with largely disappointment. Given the region's current problems, its financial instability and the glut of oil in international markets, a major expansion of energy output in the Caspian basin seems unlikely in the medium term. Section 1 of the paper reviews macroeconomic developments in the four Caspian countries since independence. Section 2 examines energy developments in the region and identifies a series of technical, legal and political obstacles. Next, three case studies highlight the complexity of energy projects in the peculiar context of post-Soviet Caspian countries (section 3): the development of Kazakhstan's Tengiz oil field; Azeri efforts to secure routes for exporting its oil; and Turkmen attempts to market its gas independently of Russia. Section 4 identifies additional socio-economic reasons why the idea of energy-based economic growth continues to dominate policy debates around the Caspian Sea and beyond. And finally, section 5 contains the paper's main conclusions.
1. Macroeconomic environment: from post-Soviet recession to financial turmoil in Russia
Caspian countries suffered badly after the collapse of the Soviet Union. Even though they were not as heavily industrialised as, for example, the Ukraine or Slovakia, they participated fully in the socialist division of labour. Thus, the Caspian economies were hit by the breakdown of socialist barter trade with other Soviet republics. Real GDP fell continuously from 1992 to 1995. Since then, it has shown only a few signs of stabilisation (except for Turkmenistan). Absolute per capita income is among the lowest in the entire former Soviet bloc. In all Caspian economies, the energy sector plays an important role. Not only is it the most important industrial sector. It also generates a large part of the countries' foreign-currency earnings. Energy is the most important export sector in Azerbaijan, Kazakhstan and Turkmenistan. Table 1 summarises the region's main economic indicators for the years from 1992 to 1998.
Economic recovery in Caspian countries has been further hampered by the absence of an institutional framework conducive to the development of a capitalist market economy. So far, no stable legal framework has been adopted to provide stable conditions for business activities. Due to the lack of liquidity in the economies, as well as the absence of functioning banking and financial systems, barter is the dominant form of trade. Inter-enterprise arrears are still high and make it difficult to determine the economic value of enterprises. The pace of privatisation is slow. The energy sector, in particular, remains largely state-owned. The slow progress of institutional reform is reflected in the low indicator of market reforms calculated by the European Bank for Reconstruction and Development (EBRD) (1998). It is about the same as that for European Commonwealth of Independent States (CIS) countries (Russia, the Ukraine and Belarus). By contrast, the Central and Eastern European candidates for European Union membership have practically accomplished their institutional reforms (table 1).
Financial turmoil in Russia and throughout the CIS, which followed the devaluation of the Russian rouble in August 1998, has destroyed hope that the Caspian countries might embark on a path of sustained growth. Financial instability has spread throughout the region. Lending by private banks and international financial institutions has been reduced. It will take years before international capital markets regain confidence in the region. Thus, the Caspian countries' systemic transformation process still faces a number of difficulties, while macroeconomic developments are likely to remain erratic in the medium term.
2. Development of the Caspian oil and gas sectors in the 1990s(n2)
2.1 Hope versus reality: stagnant energy output and exports
The development of real energy output contrasts sharply with the optimistic forecasts made by Caspian governments themselves, as well as by international analysts (e.g. IEA, 1998a; EIA, 1998). The latter assumed that Caspian oil production would increase from 47 mt (1997) to 69-79 mt by 2000, and then to 138-194 mt by 2010. Net oil exports were even expected to increase five-to-eightfold, or, in other words, to 29-33 mt by 2000 and 75-118 mt by 2010 (IEA, 1998, p. 3). According to these scenarios, the Caspian region would, indeed, play an important role in international oil markets early in the next decade. The development of gas was forecast to be slightly less dynamic but still significant: gas production was to rise from 96 bn cu m (1996) to 164-201 bn cu m (2010), and net gas exports from 24 bn cu m (1996) to 72-84 bn cu m (2010).
In reality, the situation looks very different. The region's countries have remained rather small producers of oil and gas (table 2). Oil production has hardly recovered from the post-Soviet slump. The 52 mt produced in 1998 represent no more than about one-tenth of Saudi Arabia's, or one-third of Norway's and Great Britain's, output. Although oil exports have increased steadily to about 18-20 mt, they still account for just one per cent of international trade flows. Kazakhstan is the only relevant exporter.
Gas production in the region fell from 146 bn cu m in 1990 to 80 bn cu m and net exports from 61 bn cu m to a mere 5 bn cu m. This was also due to export restrictions imposed by Russia and the subsequent collapse of the gas industry in Turkmenistan, where production fell from almost 90 bn cu m in 1990 to a mere 13 bn cu m. The other medium-sized producer of gas is Uzbekistan, where consumption keeps rising roughly in step with output, so that net exports remain insignificant.
Figure 1 compares the hopes for Caspian oil with its real development. Although most forecasts have been predicting a sharp increase in production and exports, the actual level of output has remained more or less constant, which is to say rather low.
2.2 Obstacles to sustained development
What are the reasons for the stagnation in the Caspian energy sector? Here, technical issues related to physical availability and costs (a and b) must be distinguished from the legal and political issues of resource ownership and export routes (c and d).
a) In fact, little is known about the precise amount of reserves that can be exploited economically in and around the Caspian Sea. So far, resources have been appraised neither comprehensively, with regard to the criteria applied in a market economy, nor according to international technological standards. Discrepancies remain between national estimates and those of international analysts. The latter tend to converge, however. Crude oil reserves, classified as "proven", amount to about 2 bn t. Over half of this is accounted for by Kazakhstan, and most of the rest by Azerbaijan (table 3). Known natural gas reserves are put at between 4.5 and 7 trillion cu m. On top of this, between 23 and 28 bn t of oil, and approximately 8 tr cu m of natural gas, are thought to be deposited in the region, but it is far from clear whether these can some day be recovered economically. Thus, the region accounts for only about two per cent of global oil and 3-5 per cent of global gas reserves. The Caspian Sea, therefore, is not, as is often claimed, the "Gulf of the 21st century". Oil reserves are not even as large as those in the North Sea, and gas reserves are only slightly bigger.
b) Even if reserves were as large as assumed, there would still be the question of the international competitiveness of Caspian oil. Although the production costs of existing Caspian oil fields are, on average, modest (circa $35 per tonne), transport and transit costs are higher than those of producers in competing regions. This is due to complex transport schemes and low transport volumes. Konoplyanik (1998) estimates that the cif price of Caspian oil (excluding taxes) on the European market is between $60/t (Baku-Supsa-Genoa) and $100/t (Tengiz-Aktau-Baku-Supsa-Genoa), while the price of the Kazakh CPC project (Tengiz-Novorossiysk-Genoa) hovers around $70/t. This calculation already assumes full economies of scale, that is 30 mt a year, which is unlikely to be reached soon. With regard to the costs of adding extra daily peak crude oil production capacity, the Caspian countries also seem to be rather expensive. In Azerbaijan, marginal investment costs for additional capacity are supposed to be about $12,000 per barrel and day, and in Kazakhstan about $13,000 per barrel and day (Konoplyanik, 1998).(n3) This puts the total investment costs of potential suppliers in the region above those of comparable countries, such as Venezuela ($5,000) and Gabon ($6,000).(n4)
c) Legal questions concerning property rights further complicate the picture (IEA, 1998a; Gregory, 1998). Following the dissolution of the Soviet Union, the distribution of the rights to the waterways and the resources beneath the seabed became a contentious issue among the Caspian's new littoral states. Russia, for example, insisted that the Caspian was a land-locked lake and, therefore, that the condominium principle was to be applied, whereas Kazakhstan took the view that the Caspian was an open sea and should, therefore, be divided up according to the equidistance principle. In the spring of 1998, Russia, which up to that point had been unwilling to compromise, conceded ground and signed a bilateral agreement with Kazakhstan. According to this deal, the seabed will be divided up between the two countries, while the sea waters will be used jointly by both. However, this compromise between Russia and Kazakhstan was not endorsed by the other countries involved. In particular, the Islamic Republic of Iran, which wants to implement the very condominium principle initially propagated by Russia, refuses to join the bilateral treaty and insists on an agreement between all Caspian countries.
d) Although the debate over export routes has been very intense throughout the last decade, it has not yet produced any result.(n5) Given their one-sided reliance on Russia's pipeline network, the Caspian countries are keen on developing alternative routes skirting Russia. Figures 2 and 3 indicate the major existing, as well as planned, pipelines for oil and gas. Concerning oil, the most intensely debated issue is a link between Azerbaijan and the Black Sea and/or the Mediterranean. As of today, though, the only fully operative route is still the one to the Russian port of Novorossiysk, to which Kazakhstan also wants to be linked. Fewer options are being discussed concerning the transport of gas, as Turkmenistan is the only potential exporter. Many of the routes under discussion run through crisis-prone regions, such as Chechnya, Dagestan, Georgia, Kurdistan and Afghanistan. Geopolitical motives have also decisively influenced the composition of the international consortia set up in recent years to build or modernise the transport infrastructure. Foreign companies, many of them based in the United States of America (USA), increased their presence in the region until 1997. For the time being, only small, and thus less costly, projects have succeeded, such as the reconstruction of the Baku-Supsa oil pipeline, or the short gas pipeline linking Western Turkmenistan to Iran (Crow, 1998).
3. Case studies on major energy projects
The following case studies highlight the complexity of key Caspian energy projects, which has so far delayed the hoped-for dynamic developments. They also point at the specifics of post-Soviet systemic change, which these countries are currently experiencing. In the early 1990s, their problems looked similar to those encountered in other regions of the world. Now, however, it seems that it will take much longer to solve the Caspian problems.(n6)
3.1 The Tengiz oil field in Kazakhstan
Development of the Tengiz field attracted the highest interest in the region, even before the break-up of the Soviet Union. Already back in the Soviet era, Chevron, an American corporation, pledged to invest $40 billion in order to develop what was considered to be one of the largest unexplored oil fields, with estimated reserves of up to 1.5 bn t. As soon as Kazakhstan became independent, it promoted the creation of "Tengizchevroil" (created in April 1993), a joint venture between Kazakhstan and Chevron to develop the field under a 40-year production-sharing agreement. In the first euphoria of independence, Tengizchevroil even refused to join the Russian-led Caspian Pipeline Consortium (CPC), which sought to export Kazakh oil via Russia, and tried to develop alternative outlets, e.g. direct sales to Azerbaijan across the Caspian Sea (Aktau-Baku), transport by rail to Latvia and Estonia, and swaps with Iran (Uzen-Turkmenbashi). The Kazakh government considered Tengiz to be its most important project involving foreign direct investment and the cornerstone of its efforts to develop an independent domestic oil and gas industry. Production was to rise to 35 mt per year by 2010.
However, field development has so far proceeded anything but smoothly, because of the difficult political environment, transport restrictions and the low quality of Tengiz crude oil, which requires additional treatment before shipping. The search for alternative outlets turned out to be too expensive, so that Tengizchevroil had to join the CPC in 1996. Yet political quarrels over the composition of the consortium and the financing of the $4 bn pipeline project (for shipping 67 mt/y to the Russian port of Novorossiysk) have delayed construction thus far.(n7) Tengiz output has only reached 7 mt, with investment of around $500m.
Thus, almost ten years after Chevron first arrived at Tengiz, initial plans have not been fulfilled. Instead, prospects for the envisioned large-scale investment keep deteriorating. The fact that Chevron gave up its pole position and accepted other consortium partners in Tengizchevroil shows that it no longer considers the Tengiz project to be of strategic importance. As of early 1999, no less than eight international energy groups are represented in either Tengizchevroil or the CPC.(n8)
3.2 Azerbaijan: unresolved transport issues
Much of the Caspian energy hype is based on the hope that Azerbaijan can resurrect its "glory days" of the early 20th century, when, for example, the Nobel brothers made it the world's number one oil producer. After peaking in 1940, output has declined steadily ever since. Nonetheless, the offshore fields near Baku have attracted great interest since they were re-opened to foreign investment in the early 1990s.(n9) They are said to offer the lowest production costs in the Caspian region (less than $2/b). Foreign companies were grouped together in the Azerbaijan International Operating Company (AIOC). Exports of so-called "early oil", which, in fact, continued traditional oil flows, started in late 1997. However, additional pipeline capacity was considered necessary for the 25-30 mt of "main oil" expected per year. Since 1992, a variety of options has been discussed: i) to expand the capacity of the existing pipeline from Baku to Novorossiysk (Russia); ii) to expand the pipeline to Supsa (Georgia); and iii) to build a new pipeline to Ceyhan (Turkey), in order to gain direct access to the Mediterranean.
However, the glory days of Baku and Azerbaijan have not come back so far. Until early 1999, the hoped-for discovery of large oil fields in the Caspian Sea has not occurred.(n10) Oil production and exports are increasing only marginally (table 2). The problem of new pipelines for Azeri oil exports is further complicated by the potentially high costs of building a new line.(n11) The October 1998 decision was not to invest in any of the three routes at all. Given the low production and export volumes available, additional capacity was no longer regarded as necessary.
3.3 Turkmenistan: gas revved up with no place to go
In Soviet times, the Turkmen Socialist Republic had been a medium-sized gas producer. It was, therefore, not unreasonable to expect newly independent Turkmenistan to continue its role as a supplier of gas to Eastern Europe. In addition, growing demand for gas in Asia (Pakistan, India) seemed to bode well for the country's gas industry. After a variety of cooperative projects had been concluded between 1992 and 1996, the Turkmens thought that their economy could move from depression to growth based on the development of its gas sector.
These hopes were dashed, though, by the collapse of the Turkmen gas industry. Once the supply of know-how and technology from other republics had stopped, the infrastructure necessary for the production and transport of gas gradually fell apart. Since 1992, practically no maintenance work has been carried out. Nor has the equipment been upgraded. Exploration activities and new field development were stopped. And the small-scale production that still continued was hampered by constraints on export capacity. Russia, now the country's main competitor in the Eastern European and Turkish markets, limited access of Turkmen gas to its grid by raising tariffs and introducing strict quotas. The Pakistan-India project did not get under way at all.(n12) Thus, the only successful project was the gas pipeline to northern Iran, carrying some 2-4 bn cu m to a power plant.
Another factor holding back Turkmen gas development may be the untransparent governance structure of the industry. Largely state-owned, the industry depends on personal decisions made at the highest political level. Turkmengas, the body responsible for exploring, producing, processing and transporting natural gas, operates under the Ministry of the Oil and Gas Industry, to which it reports directly. According to the IEA (1998a, p. 248), the Ministry continues to exert considerable managerial control. Private capital, be it foreign or domestic, is not actively sought for this strategic sector. In the absence of an established legal framework, contracts with foreign investors are negotiated on a case-by-case basis; they are not very consistent over time and must be renegotiated when political powers change.
4. The socio-economic issues at stake: energy independence, unemployment and local restructuring
Why has the "myth" of Caspian countries' energy wealth survived thus far, even though the performance of most countries and companies should have been a rather sobering experience? Aside from technical and economic factors, the discrepancy between official forecasts and real-world developments can also be explained in terms of socio-economic factors, that are important in connection with the restructuring of the energy sector. Although they are discussed less often and are harder to quantify, they should not be underestimated. While the specifics vary from country to country, the following socio-economic aspects generally apply to all the newly independent republics of the former Soviet Union.
a) As these countries have only recently escaped from decades of Russian and Soviet domination, their economic policy debates are largely determined by the issue of national security and energy independence. After the loss of additional cheap energy imports from Russia and the decline of traditional domestic supplies (e.g. coal in Kazakhstan, gas in Turkmenistan), these countries are trying to develop new national energy sources, no matter what the cost. Thus the hope for the development of the domestic oil and gas sector reflects the policy priority of national energy independence.(n13) Kazakhstan provides a case in point: during the Soviet era, it largely depended on its domestic coal industry. As its coal reserves are being depleted, the development of indigenous oil and gas reserves is the only way to avoid becoming dependent on energy imports from Russia (including the proposed purchase of Russian nuclear power plants).
b) The Caspian oil boom also benefits those foreign powers that are not yet well established in this geostrategically important region, in particular the USA. Indeed, the political, military and business interests of the main foreign operators are closely intertwined (Brezinski, 1997; Gumpel, 1997; Bolukbasi, 1998). In this context, promises of large investment and reiterations of the region's "potential" can be seen as attempts to establish a foothold in this corner of the world.(n14)
c) Employment considerations are always at the core of economic policy-making. This is particularly true for countries facing an unprecedented recession and turmoil in the labour market. Not only were energy industries in Caspian countries massively overstaffed, but they also provided indirect employment, e.g. in mechanical engineering, construction and services.(n15) In this context, the expansion of activities and the creation of new employment in the oil and gas sector are best understood as an attempt to avoid social distress, the consequences of which are well known from coal miners' strikes in Russia.(n16)
d) Closely linked to the problem of employment is the issue of structural change at the local level, i.e. at the level of former industrial cities or entire oblasts (regions). Indeed, many regions in Caspian countries are dominated by a single industry. These industrial monocultures depend heavily on the energy sector (e.g. the Baku-Sumgait strip in Azerbaijan, the Aktyubinsk-Karachaganak area in Kazakhstan, and the Mary and Chardzhou areas in Turkmenistan). As it should be clear to policy-makers that the structure of industry will have to change in step with the transformation towards a market economy, their calls for energy-based development can best be understood as an attempt to delay the inevitable structural change at the local level. As long as innovative conversion policies are not implemented at the local level, the political pressure for additional investment in oil and gas will be considerable.
e) Last but not least, certain individuals also have an interest in maintaining the hype concerning the alleged "Caspian boom", because they personally benefit from it. The governance structure of the Caspian energy industry is anything but transparent.
5. Outlook: much ado about ... little
This paper has tried to show that the Caspian oil and gas sector is rather small by international standards. Any hopes that the volume of production and exports will grow substantially are, therefore, unlikely to be fulfilled. Although foreign investment has increased over the past year, a major expansion of the Caspian region's energy output should not be expected. A number of smaller production and pipeline projects may, indeed, succeed; however, any big new projects face much economic and political uncertainty. The optimistic forecasts made by Caspian governments and a few international analysts diverge from real-world developments over the last decade. Under the conditions of a capitalist market economy, the Caspian region should no longer be considered as "energy-rich".
Does this mean that the Caspian energy boom was just a "Caspian dream" (Crow, 1998)? Not necessarily. Should international energy prices pick up again, financial markets throughout the CIS regain confidence and the macroeconomic situation of Caspian countries improve, there may be some room for a slight expansion of energy production and exports. It does mean, however, that the myth of energy-based growth in the region should no longer dominate policy debate there. The main obstacles to the development of the oil and gas sector are to be found in the region itself, i.e. in the difficult transformation of Soviet-style industries into market- and profit-oriented business enterprises. Therefore, policy debate should shift its focus from technical issues (such as reserve estimates, export routes and potential exports) to the "soft" factors important for development, i.e. the socio-economic factors discussed earlier. They must also be taken into account when the over-optimistic forecasts are revised.
Peter Jaschner provided editorial assistance.
Footnotes
(n1.) Quoted in Frederick P. Helbin (1966), Pipelines in Europe, Vienna, Europa-Verlag, p. 65.
(n2.) This section draws upon earlier research -- see: Engerer and von Hirschhausen (1998), "The energy sector in the Caspian Sea region", in Economic Bulletin, Vol. 35, No. 9, September, pp. 21-33; and Dittmann et al (1998), "Disenchantment in the Kazakh and Caspian oil and gas sectors", in Kazakhstan Economic Trends, third quarter.
(n3.) Of this, infrastructure costs alone are likely to amount to between $3,500 and $7,000 per barrel and day.
(n4.) By way of comparison, the investment costs for additional capacity of one barrel per day are around $500-1,000 in Iraq, $2,500-4,000 in Saudi Arabia and $8,000 in Iran (IEA, 1996).
(n5.) The most detailed description of projects is provided in IEA (1998a). See also Konoplyanik (1998).
(n6.) The case studies are based on personal interviews, national sources and the works cited in this paper.
(n7.) The Kazakh and Russian governments contribute the land and existing pipelines, while the investment is to be fully paid for by the foreign companies. The Russian regions (Astrakhan, Kalmykia, Krasnodar, Stavropol and Novorossiysk) have refused the right of way, unless some capacity is reserved for their local oil traders. Russia's Transneft provided only 3 mt of export capacity in 1996, while the remainder had to be shipped by railway.
(n8.) Aside from Chevron, these are Lukoil and Rosneft (Russia), Amoco, Arco, Mobil, Onyx (USA), British Gas (UK) and Agip (Italy).
(n9.) As early as June 1991, Amoco was negotiating a contract for the development of one field, followed by BP, Ramco (UK), Exxon, Pennzoil, Unocal (USA), TPAO (Turkey), Lukoil (Russia), Itochu (Japan) and Delta-Nimir (Saudi-Arabia).
(n10.) After significant amounts of oil failed to be discovered in the offshore Karabakh and Absheron fields, hope is now focused on the deepwater Shah-Deniz field, which is being developed by a BP-led consortium.
(n11.) Estimates for the Baku-Ceyhan pipeline vary from $1 bn to $4 bn. This means average transport costs of $2.80/b from Baku to Italian ports, which exceeds the cost of existing routes by $1.40/b (this calculation assumes capacity of 0.8 mb/d, cf Barnes and Soligo, 1998). Once hailed as a realistic option for the transport of "main" oil, the Baku-Ceyhan route is now generally considered to be "bad economics, bad politics, bad idea" (Barnes and Soligo, 1998).
(n12.) In 1995, a first, but unsuccessful, foreign investor was replaced by a US-Saudi Arabian consortium that promised to market the gas itself. But it, too, was discouraged by political upheaval in neighbouring Afghanistan and uncertain levels of solvent demand in Pakistan and India, as well as the Turkmen bureaucracy. The project was cancelled in late 1998.
(n13.) These ideas are illustrated, for example, by E.A. Utembaev, a Kazakh minister and current chairman of the Agency for Strategic Planning and Reforms (Utembaev, 1998): "Strategic planning and control in the Republic of Kazakhstan", in Kazakhstan Economic Trends, second quarter, April-June, 17-25). Utembaev identifies national security and national unity as the two top long-term priorities. In other words, they are more important than economic growth or social issues. The priority of energy policy is "to rapidly increase the production and export of oil and gas, earning revenue which will stabilise economic growth and improve the life of the people. The development effort will focus on meeting local market demand and establishing an export-oriented fuel and energy industry" (p. 23).
(n14.) In the years following the Soviet collapse, i.e. in the early 1990s, it seemed that "the flag followed trade". Since then, the situation may have been reversed, with governments beseeching companies to maintain and extend their business commitments in the region, the modest outlook for profits notwithstanding.
(n15.) In 1996, for example, the Uzbek oil and gas industry alone employed 90,000 people. This number was even higher than the Russian employment average, which itself was thought to represent three-to-fivefold overstaffing. In all Caspian countries, oil refineries employ thousands of people, even though they operate at very low utilisation rates.
(n16.) Azerbaijan represents a special case with regard to the redeployment of its labour force. In addition to its oil production and refining industries, Azerbaijan had, in the Soviet era, built up a huge oil and gas equipment industry. As a result, it supplied some 65 per cent of the USSR's well service, production and work-over equipment. Yet only six per cent of Azerbaijan's output of equipment was for the republic's own needs (IEA, 1998a, p. 189). As the demand from former Soviet republics for Azerbaijan's oil and gas equipment has declined, the entire industry must now redirect its activities, establish joint ventures and adjust to international quality standards.
Legend for Chart:
B - 1992
C - 1993
D - 1994
E - 1995
F - 1996
G - 1997
H - 1998
A B C
D E F G H
Azerbaijan (population: 7.6m)
Annual real GDP growth (%) na -23.1
-18.1 -11.1 1.3 5.5 8.5
GDP per capita ($, PPP) na 730
1,345 1,665 na na na
Inflation (CPI, year-to-year, %) na 1,130
1,664 412 20 4 6
Share of energy in industrial 16 25
production (%, current prices)
32 41 na na na
Trade balance ($ m) na -122
-163 -275 -549 -619 -967
Indicator of market-oriented reform[1] na 1.3
1.6 1.8 2.0 2.3 na
Kazakhstan (population: 15.9m)
Annual real GDP growth(%) -5.3 -9.2
-12.6 -8.2 0.5 2.0 -2.5
GDP per capita ($) 3,827 3,316
2,569 2,426 2,510 2,713 2,645
Inflation (year-to-year, %) 1,519 1,571
1,900 170 39 17 7
Share of energy in industrial 21 21
production (%, current prices)
22 22 26 29 na
Trade balance ($ m) -1,117 -1,560
-1,453 -572 -603 -777 -1,801
Indicator of market-oriented reform[1] na 1.7
2.1 2.6 2.6 2.8 na
Turkmenistan (population: 4.7m)
Annual real GDP growth (%) -5.3 -10.0
-18.8 -8.2 -3.0 -17.0 -1.0
GDP per capita ($) 2,674 2,413
1,929 1,626 1,592 na na
Inflation (year-to-year, %) 494 3,102
1,748 1,005 992 87 25
Share of energy in industrial 25 27
production (%, current prices)
26 26 n/a na na
Trade balance ($ m) 1,141 1,101
486 404 159 -477 -386
Indicator of market-oriented reform[1] na 1.2
1.1 1.1 1.5 1.5 na
Uzbekistan (population: 23.8m)
Annual real GDP growth (%) -11.1 -23.0
-4.2 -1.2 1.6 5.2 4.4
GDP per capita ($) na na
na na na na na
Inflation (year-to-year, %) 528 857
1,314 305 64 28 22
Share of energy in industrial 13 18
production (%, current prices)
27 37 na na na
Trade balance ($ m) na na
na 827 -131 -136 -140
Indicator of market-oriented reform[1] na 2.0
2.3 2.4 2.4 2.3 na
[1.] Source: EBRD. Values can vary between 1 (no reform) and
(4) (market reforms accomplished); the average for the European
Union accession countries in 1997 is 3.3 and for the European
CIS countries 23.
n/a Not available.
Sources: National statistics, EBRD, IEA (1998a), BMWi
Dokumentation Nr. 420., Nr. 459.
Legend for Chart:
B - 1990
C - 1991
D - 1992
E - 1993
F - 1994
G - 1995
H - 1996
I - 1997
J - 1998
A B C D E
F G H I J
Crude oil (mt)
Kazakhstan
Production 25.8 26.6 25.8 23.0
20.3 20.5 23.0 25.7 25.9
Net exports 1.7 3.9 3.9 7.2
6.3 10.2 16.5 16.5 14.6
Domestic consumption 27.5 22.7 21.9 15.8
14.0 10.3 6.5 9.2 11.3
Turkmenistan
Production 5.7 5.4 5.2 4.9
4.4 4.7 4.4 4.5 6.3
Net exports 2.6 2.1 0.2 0.8
0.7 0.3 0.3 0.3 1.3
Domestic consumption 3.1 3.3 5.0 4.1
3.7 4.4 4.1 4.2 5.0
Azerbaijan
Production 12.5 11.7 11.1 10.3
9.6 9.2 9.1 9.0 11.4
Net exports 3.1 2.5 4.0 2.8
2.1 0.9 1.2 1.5 4.1
Domestic consumption 9.5 9.2 7.1 7.5
7.5 8.3 7.9 7.5 7.3
Uzbekistan
Production 2.8 2.8 3.3 3.9
5.5 7.6 7.6 7.8 8.0
Net exports 9.0 8.4 6.1 5.4
2.6 1.0 1.4 1.4 -1.6
Domestic consumption 11.8 11.2 9.4 9.3
8.1 8.6 9.0 9.2 9.6
Total Caspian
Production 46.8 46.5 45.4 42.1
39.8 42.0 44.1 47.0 51.6
Net exports -5.1 0.1 2.0 5.4
6.5 10.4 16.6 16.9 18.4
Domestic consumption 51.9 46.5 43.4 36.7
33.3 31.6 27.5 30.1 33.2
Natural gas (bn cu m)
Kazakhstan
Production 7.1 7.9 8.1 6.7
4.5 5.9 6.4 6.1 6.2
Net exports -5.9 -5.9 -6.0 -4.2
-4.4 -4.4 -4.5 -4.5 -4.7
Domestic consumption 13.0 13.8 14.1 10.9
8.9 10.3 10.9 10.6 10.9
Turkmenistan
Production 87.8 84.3 60.1 65.3
35.7 32.3 35.2 17.0 13.2
Net exports 71.9 70.0 51.8 48.1
27.2 25.7 24.0 7.0 3.7
Domestic consumption 15.9 14.3 8.3 17.2
8.5 6.6 11.2 10.0 9.5
Azerbaijan
Production 9.9 8.6 7.9 6.8
6.4 6.6 6.3 6.3 5.6
Net exports -8.4 -8.4 -3.8 -2.3
-2.0 0.0 0.0 0.0 0.0
Domestic consumption 18.3 17.0 11.7 9.1
8.4 6.6 6.3 6.3 5.6
Uzbekistan
Production 40.8 41.9 42.8 45.0
47.2 48.6 49.0 51.2 54.8
Net exports 2.9 2.9 1.5 1.4
3.9 4.4 4.2 4.2 6.2
Domestic consumption 37.9 39.0 41.3 43.6
43.3 44.2 44.8 47.0 48.6
Total Caspian
Production 145.6 142.8 118.9 123.8
93.8 93.4 96.9 80.6 79.8
Net exports 60.5 58.6 43.5 43.0
24.7 25.7 23.7 6.7 5.2
Domestic consumption 85.1 84.2 75.4 80.8
69.1 67.7 73.2 73.9 74.6
[1.] Excluding changes in inventories.
Source: DIW database on East European energy
Legend for Chart:
B - Estimates of international analysts US Dept of State (1997)
C - Estimates of international analysts IEA (1998)
D - Estimates of international analysts BP (1998)
E - National estimates[1]
A B C D E
Azerbaijan 0.5 0.5-1.5 1.0 2.5
Kazakhstan 1.4 1-3 1.1 2.1-3.1
Turkmenistan 0.2 0.15-0.2 na 6.7
Uzbekistan 0.0 0.03 0.1 0.6
Total 2.2 1.7-4.7 2.2 12.9
[1.] As cited in lEA (1998) and national sources.
GRAPH: Figure 1; Hope versus reality in Caspian oil million tonnes
MAP:Figure 2; Major oil fields and pipelines in the Caspian Sea region
MAP: Figure 3; Major gas fields and pipelines in the Caspian Sea region
References
Barnes, Joe, and Soligo, Ronald (1998), "Baku-Ceyhan pipeline: bad economics, bad politics, bad idea", in Oil and Gas Journal, 26 October, 29-34.
Bolukbasi, Suha (1998), "The controversy over the Caspian Sea mineral resources: conflicting perceptions, clashing interests", in Europe-Asia Studies, Vol. 50, No. 3, 397-414.
Brezinski, Zbigniew (1997), The Grand Chessboard, American Primacy and First Geostrategic Imperatives, Basic Books, New York.
Crow, Patrick (1998), Caspian dreams, Oil and Gas Journal, 26 October, 32.
EBRD (various issues), Transition Report: Economic Transition in Eastern Europe and the Former Soviet Union, London, European Bank for Reconstruction and Development.
Energy Information Administration (1998), International Energy Outlook [www.eia.doc. gov/oiaf/ieo98/oil.html].
Gobler, Paul (1999), "Where reforms trump resources", in RFE/RL Research Service, Vol. 3, No. 4, Part II (7 January).
Gregory, Paul R. (1998), "Developing Caspian energy reserves, the legal environment", paper prepared for the Conference, "The Caspian Energy Resources: Implications for the Arab Gulf", The Emirate Centre for Strategic Studies and Research, Abu Dhabi, October.
Gumpel, Werner (1997), "Caucasus, Turkey and the oil problem", in Global Economic Review, Vol. 26, No. 1 (Spring), 19-27.
Hirschhausen, Christian von, and Hella Engerer (1998), "Post-Soviet gas sector restructuring in the CIS -- a political economy approach", in Energy Policy, vol. 26, no. 15, pp. 1113-1123.
IEA (1996), Oil, Gas and Coal Supply Outlook, Paris.
IEA (1998a), Caspian Oil and Gas, the Supply Potential of Central Asia and Transcaucasia, Paris.
IEA (1998b), World Energy Outlook, Paris.
Konoplyanik, Andrei (1998), "Middle East, Russia and Caspian region --new geopolitics for oil and gas flows in the Eastern Hemisphere", paper presented at the Fourth European Conference of the International Association of Energy Economists, Berlin, September.
Seck, Andrew (1997), "Oil and gas finance and investment in the former Soviet Union", PhD dissertation at the University of Dundee, Centre for Energy, Petroleum/Mineral Law and Policy.
US Department of State (1997), Report to Congress on Caspian Region Energy Development, Washington, DC.
United States Energy Information Administration (US-EIA) (1998), Country Economic Profile (various countries) [http://www.eia.doe.gov/emeu/cabs/"country".htn].
Walede, Thomas, and von Hirschhausen, Christian (1999), "Regulatory reform in the energy industry of post-Soviet countries: the third way?", in Seidman, A., Seidman, R.B., and Waelde, T. (eds), Making Development Work: Legislative Reform for Institutional Transformation and Good Governance, London, Kluwer Law International.
Wyzan, Michael (1999), "Oil and gas: no panacea for Caspian countries' economic woes", in RFE/RL Research Service, Vol. 3, No. 1, Part I (4 January).
~~~~~~~~
By Christian von Hirschhausen and Hella Engerer
The authors are both Research Associates at the Department of International
Economics, German Institute for Economic Research (DIW), Berlin, Germany.
Research assistance was provided by Katherina Dittmann, Axel Schumacher,
Wolfgang H,rle and Grit Hannemann. The authors wish to thank Paul Gregory (sen.)
and Petra Opitz for comments on an earlier version, as well as the participants
at the Fourth European Conference of the International Association of Energy
Economists (IAEE, Berlin, September 1998).