Oil on the Silk Road

By Kalicki, Jan H. | The World Today, August/September 2000 | Go to article overview

Oil on the Silk Road


Kalicki, Jan H., The World Today


From Russia and the Caspian Sea to the Indian subcontinent and the Far East, important and exciting energy developments are taking place in Eurasia - a large geographic area. There are many implications for broader Western goals. These goals fall generally into three categories: energy security; the establishment of stable, market-driven and democratic states; and expansion of new economic opportunities for US and Western investors. The Caspian region is a valuable example of how energy development bears directly on these topics.

THE CASPIAN IS DESTINED TO play an important role in future Western energy security. Although it will not eclipse the Gulf region as a prime energy supplier, it is likely to prove large enough to replace eventually some traditional western sources, such as the North Sea. Oil from there has been a major factor in moderating western energy prices over the past two decades.

The potential of the Caspian is underlined by the huge promise of the Kashagan oil field, where the Offshore Kazakhstan International Operating Company (OKIOC) consortium is undertaking exploratory drilling off Kazakhstan's coast and by the world class Shah Deniz gas field off the coast of Azerbaijan, now being developed by a consortium led by BP Amoco.

The recent instability in world oil prices underscores the importance of incremental production from new sources such as the Caspian. Members of the Organisation of Petroleum Exporting Countries (OPEC) continue to take hawkish positions in the oil market. Last Mar@h, Iran in particular was opposed to OPEC production increases which aimed to stabilise oil markets. Tehran's position underscored the logic behind US opposition to energy export routes through that country, even while limited parts of the US trade embargo against Iran were being lifted.

Energy development can also help to introduce stability, market forces and democracy into a region which continues to struggle with its communist legacy. Western energy investors in the Caspian provide much needed revenues for fledgling economies and struggling governments. They encourage the rule of law by implementing contracts and more efficient business practices.

We continue an admittedly uphill fight for democracy in this region, but the prospects for success increase with greater engagement. In addition, the development of east-west energy export corridors could foster stronger regional cooperation and encourage Caspian economic integration with the West.

Western firms are already planning investments of up to one hundred billion dollars over the next couple of decades. Granted, much of this is dependent on successfil exploration results and complex pipeline negotiations, but the sheer magnitude indicates the region's potential. Energy developments will provide opportunities for foreign investors in other sectors as well. This will require sound management of new revenues by governments, including a real effort at reinvesting them wisely and fighting corruption. There is some progress on this front, including Azerbaijan's recent establishment of a national oil fund and Kazakhstan's announcement that it will do the same.

The pace of Caspian oil and gas development is closely linked to new export routes which must be timed carefully to coincide with new volumes. Fortunately, extensive efforts by companies, regional governments, and the US and Turkey have led to significant progress in new east-west pipeline corridors.

On the oil side, the one hundred thousand barrels per day Western Early Oil Pipeline from Baku to Supsa, Georgia, has proved vital to ensuring reliable oil exports for the Azerbaijan International Operating Company (AIOC). Numerous problems have hampered the alternative northern route to Russia's Black Sea port at Novorossiysk. Fighting in Chechnya, through which the northern route passed until construction of a bypass through Dagestan, has reinforced the need for multiple export options. …

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