Ever since the collapse of the Soviet Union, mineral resource rights in the Caspian Sea and who owns what portion of its international waters has been the subject of much consternation between the countries surrounding the basin – i.e. Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan.
Given that it is the World’s 11th-largest drainage basin by area (over 3.5 million sq. km), and holds an estimated 48 billion barrels of oil and 8.7 trillion cubic meters of gas in proven or probable reserves, explains why all of the parties involved wanted a piece of it and more.
However, two decades of haggling was brought to an end of sorts on Sunday (August 12), after the presidents of the five states inked a landmark convention on the legal status of the Caspian Sea at the 5th Caspian Summit in the Kazakh city of Aktau predicated on “shared usage.”
Russian President Vladimir Putin said: “The agreement fixes the exclusive right and responsibility of our states for the fate of the Caspian Sea and establishes clear rules for its collective use.”
He added the necessary regulatory base for the settlement of the legal status of the Caspian Sea will be provided by “six agreements” in the spheres of economy, transport and security, to guarantee the use of the basin for “peaceful purposes” following on from a draft proposal made in December 2017.
So what can the oil and gas markets expect? For starters, regional tensions will go down a notch or two, with the dominant power Russia agreeing with its Caspian partners on various technical matters including route access.
Secondly, another long-term issue that has been resolved relates to the authority over cross-border pipelines in the Caspian. Under the new agreement, pipelines now only require the consent of the affected states.
Turkmenistan has always proposed plans for a Trans-Caspian gas pipeline, potentially supplying its gas to the European market via Azerbaijan and Turkey, and this can in theory now become a reality.
However, beyond these points, the new convention has little “material impact” on the prospects for oil and gas developments in the Caspian, says Will Scargill, Senior Analyst at data and analytics firm GlobalData.
“Production in the Caspian Sea is forecast to grow by around 500,000 barrels per day (bpd) in the next five years, but this will come from undisputed areas. The text [of the agreement] fails to resolve disputed boundaries for subsoil resources, merely stating that they will be the subject of further agreements.”
Let us not forget that Russia and Kazakhstan already have a bilateral agreement in place on the division of Caspian mineral resources. The main areas of dispute are the boundaries between the Azeri, Turkmen and Iranian sectors.
“In the Russian sector, Lukoil has already benefited from significant tax incentives and has upcoming developments set to boost production. In Kazakhstan, the operators of the giant Kashagan field are evaluating satellite developments, while improved tax terms have spurred new exploration agreements with Eni and Lukoil,” Scargill adds.
“Azerbaijan is set to grow production, but this will come from the BP-operated Shah Deniz and Total-operated Absheron fields, which lie in undisputed areas. Boundary delimitation agreements could open up a significant new area in the southern Caspian for exploration for oil and gas resources, but any such agreements still require further negotiations.”
Finally, despite the new agreement removing legal hurdles for Turkmenistan, the Trans-Caspian project still remains little more than a pipe dream.
“Aside from the commercial challenges of securing the significant investment required, recent reports of shortfalls in Turkmen gas exports to China raise questions of whether Turkmenistan could supply new export markets while fulfilling existing commitments,” Scargill concludes.