Summary Of A Symposium On The National Security Dimensions Of The Emerging Crisis In The Caspian Basin

The ANA Hotel
Washington, D.C.
13 March 1996

I. Strategic Overview — The International Politics of
Energy in the Caspian Sea Basin

The lead discussant for the first part of the morning’s
proceedings was Senator Jon Kyl (R-AZ), who sits on the Energy
and Natural Resources, the Judiciary and the Intelligence
Committees of the Senate. The following points were among those
raised during his presentation and the discussion that followed:

• The oil in the Caspian Basin has motivated people for a
  century to attempt to control the area. This is certainly
  true today.
• The main geopolitical question in the region today is
  whether a neo-imperialist Russia, aided and abetted by
  Iran, will dominate the development and export of this
  oil, or will Moscow prove to be an equal and fair player
  in the region, working cooperatively with the other
  states in the region — notably, Turkey, Georgia, Armenia
  and Azerbaijan.
• Unfortunately, Russia’s desire to dominate the region’s
  oil resources is clear and manifests itself in the
  Kremlin’s instigation of — or other involvement in — a
  number of the conflicts occurring in the region now. For
  example, one of the pipelines that would transport
  Caspian oil passes through Chechnya, a
  breakaway region of Russia that the Russian government is
  desperately — and brutally — trying to keep from
  escaping Moscow’s sphere of influence.
• Another part of this pipeline passes through Azerbaijan,
  an independent state suffering from ethnic conflict
  between Azeris and Armenians fomented, many believe, by
  Russia in an effort to retain control of that part of the
  region. Unfortunately, the United States has tended to
  support the Armenians — who are in turn supportive of
  Russian goals in the region — rather than the secular
  Muslim, Western-leaning government of Azerbaijan, which
  has shown itself much more supportive of the United
  States’ interests in the region.
• Russia has also used heavy-handed tactics in Georgia
  in order to have its way concerning pipeline routes. In
  fact, Georgian President Eduard Shevardnadze believes
  that the recent assassination attempt against him was
  hatched in Russia and was a direct response to his
  decision to support a pipeline route that would not pass
  through Russian territory, and that does not therefore
  enjoy Moscow’s support.
• As part of its effort to dominate militarily the Caspian
  Basin region, Russia has violated the Conventional Forces
  in Europe Treaty by keeping troops, tanks and other
  military equipment in the region in excess of levels
  permitted by the treaty.
• As these events indicate, the Kremlin clearly understands
  the importance of its domination of the region’s oil
  supply and has taken steps to maintain hegemony in the
  area. Unfortunately, the United States has thus far
  failed to appreciate the interrelationship between all of
  these events which Russia, in many cases, may have been
  directly responsible for fomenting.
• The United States must continue to support
  secular Muslim regimes — such as Turkey and Azerbaijan
  — which can act as a check on Russia’s intentions in the
  region. Also, the United States should
  demonstrate that it is in Russia’s economic interests to
  develop the region’s resources cooperatively, rather than
  by attempting to dominate those resources and deny them
  to the West.
• Regrettably, the Clinton Administration has largely
  neglected the Caspian Basin in favor of trouble spots
  like Haiti and Bosnia. Both the executive and legislative
  branches need to start paying more attention to the area.
• Of particular concern is the difficulty experienced in
  educating policy-makers about the fact that Azerbaijan
  has proven far more supportive of America’s geopolitical
  interests in the region than has its neighbor and
  adversary, Armenia. This is due to a number of factors.
  Not least is the disproportionate political power
  exercised by Armenian-Americans and the absence of any
  comparably influential ethnic constituency speaking out
  in the United States on behalf of Azerbaijan. As a
  result, many legislators have been supportive of the
  Armenian point of view; the rest have largely been
  unaware of the strategic significance and stakes for the
  United States of maintaining a stable, secure and
  friendly Azerbaijan.

II. Caspian Sea Oil — U.S. Economic Dimension

The lead discussant for this portion of the symposium was Dr.
T. Don Stacy, Chairman and President of Amoco Eurasia Petroleum
Company — the lead player in the Azerbaijani International
Operating Committee (AIOC). His presentation and the ensuing
discussion included the following main points:

• It is sometimes difficult for Western companies to make
  commercial deals in this region because the
  newly-independent governments have very little experience
  with basic economic practices, such as borrowing money
  from a bank. When the region was dominated by the
  communist economic system, money was borrowed from the
  central bank and was paid back in-kind with product, with
  no expectation that the cash would actually be repaid.
• The breakup of the Soviet Union created opportunities for
  companies in the West, especially in Azerbaijan, for both
  energy producers and energy contractors.
• Much of the coverage of the Caspian region in the world
  media today treats it as a subset of the larger issue of
  the future of Russia. However, due in no small part to
  its rich hydrocarbon resources, the Caspian region
  deserves to receive careful international attention in
  its own right.
• The hydrocarbon resources from Azerbaijan, Kazakhstan and
  Turkmenistan will most likely be transported from the
  region elsewhere. Although Russia has few hydrocarbon
  resources in the region, it will play a crucial role in
  the transportation of the resources and in the
  geopolitics of the Caspian Basin. Other nations likely to
  experience the benefit of development and transportation
  of the Caspian Sea’s resources include: Turkey, Georgia,
  Armenia and Uzbekistan.

The Caspian Basin’s Hydrocarbon Resources

• The first oil well in the region was drilled near Baku in
  1848, starting the first generation of the region’s oil
  industry. This area actually provided 75% of the Soviet
  Union’s oil production from the early 1920s until the
  start of World War II. And nearly one hundred years ago,
  the region provided about 50% of the world’s oil
  production.
• The oil in and around the Caspian Sea is referred to as
  the fourth generation of Soviet oil, with the previous
  generations being Baku, the Volga Urals and Western
  Siberia.
• The countries in the Caspian Sea region possess both oil
  and natural gas in great abundance, but in order
  effectively to exploit those resources, they need
  technology, investment and proper business procedures.
  The typical reaction from former Soviet countries when
  told that the West is interested in helping them develop
  their resources is “all we need is money. Please
  give us your money, and then go home, because we don’t
  really need you.”
• In fact, these governments do need the West,
  because at present they have no concept of what it takes
  to run a business, remain profitable, be efficient and
  compete in a free economy. They have an educated and
  well-trained work force and they do possess much of the
  technology necessary effectively to develop their
  resources, but they lack fundamental expertise in modern
  business practices.
• The Caspian Sea has a total of about 70 billion
  barrels of proven oil equivalent reserves (this includes
  both oil and oil-equivalents of gas). For the
  sake of comparison, the Middle East has about 800 billion
  barrels and Russia has about 450 billion barrels. Most
  other oil-producing regions of the world have been
  heavily explored, whereas the Caspian Sea has not. In
  fact, the Soviet Union actually exported oil from Siberia
  into the Caspian region — due, in part, to the Soviets’
  reluctance to operate off-shore in the deep waters of the
  Caspian as opposed to the more accessible, on-shore
  Siberian fields. As a result, all of the oil pipelines in
  the region currently flow into the Caspian
  Basin. One of the major challenges now facing companies
  wishing to export Caspian oil is reversing existing
  pipelines to allow oil to flow out of the
  region.
• The Caspian Sea is believed to rank third in the world in
  terms of undiscovered hydrocarbon resources (including
  both oil and gas) and second in terms of undiscovered
  oil. Some estimates of the region’s resource potential
  put the Caspian Sea in close competition with the Middle
  East. The Caspian region could eventually replace Norway
  as the fifth largest oil producer in the world.

Developing the Caspian Sea’s Hydrocarbon Resources

• The great economic potential for states in the region
  arises from the prospect that the Caspian Sea will allow
  them both to provide for their own domestic consumption
  needs and to export the sizeable surplus.
• Russian cooperation — that is, non-interference — is
  absolutely crucial for the economic development of the
  region, and for the importing of critical construction
  materials that will be used to build pipelines.
• Most oil production in the Caspian Sea has been done in
  the very near-off-shore, in water that is no more than
  about 15 meters deep. But the vast resource potential of
  the Sea will require advanced deep off-shore technology,
  similar to that used by American companies to drill in
  the Gulf of Mexico.
• U.S. companies are currently competing with British firms
  to design and construct the off-shore drilling
  facilities. The British expertise comes from their
  experience in the North Sea, an extremely hostile
  environment compared to the Caspian. The Caspian Sea is
  more similar to the Gulf of Mexico, where U.S. firms have
  experience.
• The Azeri-Chirag and the Gunashli fields are currently
  being developed. These fields may contain 3.5 to 4
  billion barrels of oil resources. An eleven-company
  consortium — with significant U.S. representation —
  signed a contract with Azerbaijani President Heydar
  Aliyev in September 1994 to develop these fields. To its
  credit, the Clinton Administration actively encouraged
  President Aliyev to sign on. And Mr. Aliyev has
  preferentially tilted the playing field towards Western
  companies, even going so far as to turn his back on
  historical allies such as the Iranians who were very
  anxious to be part of the deal.
• Other promising fields in the Caspian Sea include the
  Caspishelf region, an off-shore region bordering
  Kazakhstan. There has been very little American
  involvement in the production of this oil as of yet.
• In addition to Azerbaijan, Kazakhstan shows great
  potential as a developer and exporter of the Caspian’s
  resources. In order to exploit the resources, however,
  Kazakhstan desperately needs relevant technology and
  money. The Kazakhs desire Western investment, but
  investors have found that in addition to the high
  taxation and excessive bureaucracy that is so common in
  the region, they are also subjected to some critical
  challenges dealing with transportation out of the area.
• Kazakhstan has received the full benefits of the Freedom
  Support Act, including cash loans, access to the Overseas
  Private Investment Corporation, and all other programs
  under the Act passed by the United States Congress. Azerbaijan
  — even though it is allowing American companies to have
  significantly more access to the region’s resources than
  is Kazakhstan — has been systematically excluded from
  any help under the Freedom Support Act, and has even been
  excluded from receiving humanitarian aid. Such
  restrictions are embodied in Section 907 of the Act.
  [Subsequent to this Roundtable Discussion, legislation
  was considered in the Congress which would have made
  matters still worse. ⁽¹⁾
  While this initiative was ultimately rejected in the
  closing days of the 104th Congress, the unbalanced and
  self-defeating effects of the original Section 907 are
  still governing U.S. policy toward Azerbaijan.]
• There are several challenges to doing business in the
  Caspian region. One of them is the influence that Russia
  and Iran are attempting to exert there. There
  are also environmental concerns.

The Caspian Basin’s Logistical Challenge and Its
Strategic Implications

• Transportation is one of the most complex issues
  to resolve. The existing oil pipeline system was
  designed to move crude oil and refined products from
  Russia to the Caspian region. Even if the existing
  pipeline flows were reversed, there still would not be
  enough pipeline capacity to transport the potential 3
  million barrels of oil per day from the region.
• The existing pipeline travels from Baku in Azerbaijan
  through Grozny, the capital of Chechnya, to Tikhoretsk
  and finally to the Black Sea port of Novorossisk, the
  main Russian oil export point. All oil that would flow
  through this pipeline to Novorossisk must transit through
  the Bosporus Strait, an extremely
  environmentally-sensitive area in Turkey. American oil
  companies and Turkish citizens alike are worried about
  the effects of an oil spill in the Straits and would
  therefore prefer an alternative to the existing pipeline.
• A second pipeline is being planned that will help
  transport the so-called “early oil” — the oil
  being exported from the region immediately while the
  larger fields are being developed — from the Caspian,
  which will total between 90,000 and 150,000 barrels per
  day. This pipeline, dubbed the “western route,”
  will travel from Azerbaijan through Georgia, to the
  Georgian Black Sea port of Supsa. This pipeline has the
  advantage of not traveling through the very unstable
  areas such as Chechnya that the existing pipeline does.
• Having two pipelines also improves the chances that the
  early oil will still have a transit route even if one
  pipeline is shut down due to political instability or
  other factors. As long as both pipelines are in operation
  to transport early oil, the oil from the second pipeline
  would be used for Turkey’s domestic consumption needs,
  thereby making it unnecessary for it to be transported
  through the Bosporus. Both pipelines have been approved
  by the Azerbaijan International Operating Company, and
  Georgia has agreed to have the western route pass through
  its territory.
• The decision about where to build the main exporting
  pipeline — which will carry the three million barrels of
  oil that will eventually be exported from the Caspian —
  has yet to be made. It will be a very difficult
  decision to make politically. The extra capacity
  provided by the second pipeline for early oil will allow
  for more time for this decision to be made.
• The most economical route for the main pipeline would be
  for it to parallel existing pipelines in Turkey which
  lead to its Mediterranean port of Ceyhan. Of course, the
  route that the main pipeline will eventually take will
  depend on both geopolitical as well as economic concerns.
• There is currently a dispute over whether the
  Caspian Sea is a sea or a lake. If it is a sea
  — as Russia and Iran maintain — then its resources
  belong to all of the littoral states. Each state would be
  able to lay exclusive claim to only a narrow band near
  its coastline. If it is a lake, as Azerbaijan and
  Kazakhstan claim, then every part of the Caspian would be
  assigned to a specific country, and that country would
  own the rights to the mineral resources in its zone. Such
  a division would leave Russia and Iran with a very small
  share of the Sea’s resources. These two states submitted
  in January of this year a joint letter to the United
  Nations expressing their view that the Caspian Sea is a
  sea, and therefore the states bordering it should reach a
  collective agreement on the development of its resources.
  Experts in international law agree that there is no
  clear-cut solution to this dispute.
• Azerbaijan’s President Aliyev has allowed the National
  Iranian Oil Company to help develop the Shakh-Deniz oil
  field. He has also allowed Lukoil, a Russian firm, to
  help develop Azerbaijani oil fields in hopes of softening
  the dispute about Russian and Iranian involvement in the
  exploitation of the region’s resources.
• To date, the investor-friendly governments of Azerbaijan
  and Kazakhstan have ratified a total of six
  production-sharing agreements. The first oil is expected
  to flow in the second half of 1997.
• The hydrocarbon resources of the Caspian Sea region
  present a great opportunity for western investment, while
  providing alternative sources of oil and helping to
  enhance the development of sound and independent
  economies in the region.
• Some have accused American companies of bending to
  Russian pressure in deciding to go with the
  “two-pipeline” option for exporting the
  Caspian’s early oil since one of those two pipelines is
  supported by Russia. Industry responds by noting that the
  Russian-favored pipeline is already built, so oil can
  begin flowing through it relatively quickly and
  relatively cheaply. Therefore, American industry did not
  “bend” to any Russian pressure: Russia and
  industry both agreed — albeit for different reasons —
  that the existing pipeline through Chechnya and Russia
  should be used to transport early oil.

III. Defining and Defending American Interests in the
Region

The lead discussant for the final portion of the day’s
proceedings was Hon. Richard Perle, former Assistant Secretary of
Defense for International Security Policy. Among the points
raised during this discussion were:

• The United States, as a great power, has interests
  virtually everywhere in the world. It is a mistake to
  discount those interests that may not be an immediate
  matter of life and death. It is dangerous to ignore
  interests until they become vital and to defend only
  those interests that are vital.
• It is generally recognized that the United States and its
  allies — as modern industrial societies — have a broad
  interest in the sources of energy upon which they depend.
  It does not require much work, then, to develop the idea
  that the United States has an interest in an area as rich
  in energy resources as the Caspian Sea region.
• The United States has an interest in discouraging and
  retarding the re-emergence of a hegemonic center on the
  Eurasian land-mass, which some elements in Russia
  undoubtedly would like to see. Unfortunately, those
  Russians who would favor the re-establishment of the old
  Soviet sphere of influence — such as Foreign Minister
  Yevgeny Primakov — are being brought back into positions
  of influence in the Kremlin.
• The United States has an interest in encouraging
  modern and secular democracies in parts of the world
  where it is by no means a foregone conclusion that
  democracy is the form of government that will emerge
  after so many years of communist rule. Countries
  in the Caucasus region with large Muslim populations are
  trying to decide whether to have a Western-style
  government — or one structured more like Iran’s. If the
  United States does not pay close attention to the
  countries in the Caucasus region, it runs the risk of
  driving those countries toward dangerous fundamentalism.
• The United States has an interest in diminishing its
  dependence, and that of its allies, on the sources of
  energy in the Middle East that have been enjoyed — with
  occasional interruptions — for decades. The likelihood
  that the Middle East will become relatively stable in the
  near future is not particularly high. And such dependence
  creates opportunities for entities that wish to exploit
  that dependency.
• Based on these interests, some conclusions can be drawn.
  For example, the United States should support
  those countries that are both a source of energy and a
  battleground between secular democracy and fanatical
  fundamentalism. Turkey — which is squarely on
  the side of democracy, secularism and free markets, is
  one such country. An alliance between Turkey and the West
  — led by the United States — can enhance the
  effectiveness of Turkey as a model for development in the
  region.
• One of the ways that the United States could enhance its
  standing with Muslims in Turkey and throughout the region
  is by taking a more aggressive stance in assisting the
  beleaguered Bosnian Muslims. Many in the Muslim world saw
  the arms embargo against Bosnia as a desire not to assist
  a predominantly-Muslim country like Bosnia. Another way
  is to stop acquiescing to Russia’s war in Chechnya.
• The United States should take a more balanced
  view of the conflict between Armenia and Azerbaijan, and
  it should end the legal discrimination whereby the
  Azerbaijanis are denied American assistance. The
  United States has taken sides in this conflict for
  reasons that have nothing to do with the merits of either
  side’s arguments.
• It is understandable that Americans might have a soft
  spot for the Armenian people. But it is possible to feel
  friendly toward Armenia without at the same time
  punishing everyone who has a dispute with the Armenian
  leadership. American industry is quite lucky to be doing
  so well in Azerbaijan, considering the unkind treatment
  that the Azeri government has received at the hands of
  American diplomacy.
• Although the American people can be excused for having
  little knowledge or interest in the complex Caspian
  Basin, the people who are elected and paid by the
  American people to look after American interests cannot.
  The legislative and executive branches must take a more
  active role in defining and defending American interests
  in this region.
• Although industry is correct in stating that the
  decisions about where pipelines will be built should be
  dictated primarily by economic concerns, it is nearly
  impossible in this situation to separate economics from
  politics. It is the responsibility of the United
  States government to assist American companies by
  ensuring that the geopolitical environment in the region
  is one that will foster a stable climate for economic
  success. Doing so will require sufficient American
  military strength and leadership to deter anyone tempted
  to affect adversely American interests in the region.

1. See the Casey Institute’s Perspective
entitled Meltdown in Armenia Demands Reassessment,
Redirection of U.S. Policy in the Caspian Basin ( href=”index.jsp?section=papers&code=96-C_94″>No. 96-C 94, 1 October 1996).