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Oil resources in the Caspian are located primarily in Northeast and East-Central Kazakhstan and off-shore Azerbaijan. The two projects that are of highest importance, are the Azerbaijan International Operating Company (AIOC) and TengizChevroil. The AIOC, a huge consortium of ten foreign companies from seven nations, is the largest operator in Azerbaijan with about 4 billion barrels of reserves. The AIOC is currently producing about 75,000 barrels per day (b/d) and exporting through a Russian route via Dagestan and Chechnya to the port of Novorossiysk, Russia. The other large project in the Caspian is TengizChevroil, a joint venture between the Kazakh government and Chevron first formed in 1993. LukArco (5%) and Mobil (25%) now also have shares in the project. The Tengiz field is one of the largest in the world, with 6 to 9 billion barrels of reserves. The project is currently producing 180,000 b/d of oil, much of it exported through the Russian pipeline system to Novorossiysk.

Overall estimates for reserves in the Caspian Basin vary dramatically, largely due to lack of exploration. Proven reserves are probably about 20 to 25 billion barrels, with estimates varying between 15 and 40 billion barrels. Estimates of additional potential reserves vary from 70 to 150 billion barrels, most likely on the lower side. The most accepted estimate is a total of about 90 billion barrels of recoverable reserves. With these levels, exports from the region should reach 2 million barrels per day by 2010.

To offer some comparison to other major oil producing regions, the Caspian Basin’s 90 billion barrels pale in comparison to the Middle East, which contains nearly 700 billion barrels of reserves, 65% of the world’s proven oil reserves, and supplies over 40% of internationally traded oil. The Caspian Basin is certainly not another Middle East; the most common comparison is with the North Sea, which has about 38 billion barrels of reserves and is currently producing 5.6 million b/d. This is a dangerous and potentially misleading comparison to make. While the reserves in the Caspian exceed the North Sea, the North Sea does not have any transit difficulties, is located close to major oil consuming countries, and controlled by highly developed and stable governments. Also, although North Sea oil is costly to extract, the industrial base necessary to support oil development is nearby and offshore platforms can be manufactured and simply towed out to sea. The North Sea’s role as a secure oil-producing region to supplement the Middle East is unlikely to be duplicated by the Caspian.

As Soviet efforts were directed almost completely towards onshore fields, there are very limited resources in the Caspian for offshore drilling. Furthermore, the landlocked nature of the Caspian presents an especially difficult problem for offshore drilling. There is currently no shipyard capable of producing offshore drilling rigs in the Caspian, and drilling ships cannot access the region due to draft limitations on the Soviet canal network. Therefore all rigs must be disassembled and barged down the Volga from the Baltic or through the Volga-Don canal from the Black Sea. The rigs are then reassembled and towed into place. Costs for rigs in the region have been very high. Refurbishing costs for the only functioning rig in the region were originally estimated at $40 million and ended up totaling $72 million. British Petroleum is currently refurbishing another rig at an estimated cost of $200 million dollars. Companies have formed rig-sharing clubs, but given the large number of contracts already signed, some firms may have trouble meeting drilling deadlines. Also each failure to find oil lengthens the waiting time for other projects. AIOC’s Karabakh field is planned to begin oil production in 2001, but recent drilling has only found gas. Further failures to strike oil could fundamentally change the direction of the AIOC project.

The existing pipeline network in the Caspian region was designed during the Soviet era, with no regard for ethnic or political borders. Most pipelines in the area flow north to Russia’s industrial centers. The few East-West pipelines that do exist were designed to bring Siberian or Ural crude into the region for refining. The Soviet pipeline system is also in very poor shape. The pipelines were not originally designed to Western standards and years of poor maintenance have allowed the pipeline to deteriorate and have resulted in heavy leakage. The assumed loss rate for the Caspian exports through Russian pipelines is 8% compared to 4.5% in OECD countries . There is a significant risk to the environment at this level of leakage. Upgrading the Soviet pipeline system to meet Western standards is likely to be more expensive than running new pipe in many areas, especially when additional volumes are involved .

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