Introduction: Since the collapse of the Soviet Union, the opening of the oil-rich Caspian Sea region has presented important opportunities for the future of the international oil industry.
Estimates of proven oil reserves in the Caspian Sea and surrounding region (often referred to as the "Caspian Basin") range from 15.4 billion to 29 billion barrels of oil, which exceed the proven oil reserves of Alaska's North Slope and the North Sea.
More than 40 oil companies from 22 countries have undertaken projects involving investments of an estimated $60 billion in the Caspian Basin. These projects include the offshore fields being developed by the Azerbaijan International Operating Company (AIOC)1 and the Offshore Kazakhstan International Operating Company (OKIOC)2, and the on shore fields of Tengiz and Karachaganak and others in Kazakhstan.
In addition to its vast seabed resources, the Caspian Sea is important for its fisheries (including sturgeon - the source of caviar) and for commercial transport, both surface and underwater. In regard to the latter, a major project is already on the drawing board to construct a pipeline to transport gas from Turkmenistan and other locations to Azerbaijan and from there to Georgia and Turkey.
And there is talk of a parallel trans-Caspian oil pipeline that would connect the proposed Baku-Ceyhan oil pipeline with fields in Kazakhstan and Turkmenistan.
The vast potential represented by these opportunities cannot, however, be realized until the littoral states have agreed upon the legal regime that will govern rights of access to the sea and its resources.
Important questions such as rights to navigate the sea (including rights to use it for military purposes), fishing and mareculture rights, rights to the undersea hydrocarbon reserves and rights to energy transport must all be resolved before the projects discussed above can be realized.
Further, a regulatory regime dealing with environmental, safety transportation control and other regulations must be established. As of today, these issues are far from resolved.
The bilateral regime established by the former USSR and Iran governing the surface use of the Caspian Sea, is inadequate to address today's issues.
Over the past seven years, the five littoral states (Russia, Kazakhstan, Turkmenistan, Iran and Azerbaijan) have advanced various, often conflicting, legal theories and made various agreements and announcements regarding the rights to the Caspian Sea and its resources, but no definitive agreement has been reached.
In fact, several disputes have arisen between some of the littoral states regarding ownership of certain offshore fields.3
On July 6, 1998, Russia and Kazakhstan announced with much fanfare a bilateral agreement purporting to divide the sea into national zones. Iran and Turkmenistan immediately protested the agreement as invalid because not all littoral states were signatories.
Nonetheless, the littoral states appear to be moving towards a "national zone" approach. The hard tasks remain of defining the boundaries of the national zones, determining who will control Caspian tanker traffic and/or the planned cross-Caspian Sea pipelines and establishing a governing body to handle environmental and other regulatory issues. The question of military usage has also not been resolved.
Resolution of rights to the Caspian Sea depends upon competing regional and international governmental and private interests. Until agreement can be reached regarding these rights, full development of the region's resources will be delayed.
Despite the highly politicized nature of these issues, it is likely that economic and commercial, rather than geopolitical, considerations will dictate their resolution.
Rights to the Caspian Sea:
As noted above, prior to 1992, the Soviet Union and Iran, the two countries that bordered the Caspian Sea, had concluded several treaties governing fishing and navigation rights in the sea.4 Under these treaties, the Caspian Sea was closed to third states; only the USSR and Iran were entitled to naval and commercial navigational rights.
By agreement, each state had a 10-mile exclusive fishing zone, but otherwise the entire sea was open to fishing by vessels from either state. None of these treaties addressed ownership or utilization of submarine natural resources5 or established a boundary line across the Caspian Sea.6
The Soviet Union had established internal administrative boundaries and had engaged in exploratory activities offshore from Azerbaijan and other republics, but when the Soviet Union collapsed, there were no proven offshore fields.
Under the terms of the treaties that formally dissolved the Soviet Union, each newly independent state reserved the right to recognize or renegotiate treaties affecting its territory.
While Russia succeeded to the historical agreements between Iran and the Soviet Union regarding the Caspian Sea, the new littoral states (Azerbaijan, Turkmenistan and Kazakhstan) have not recognized these treaties and have made unilateral claims to the areas of the sea adjacent to their coasts.7
Initially, the debate regarding how to define the rights of the littoral states focused on the issue of whether the Caspian should be treated as an "enclosed sea" or an "international lake." An enclosed sea is a landlocked body of water that is subject to an international regime and is governed by international law, in particular by the 1982 United Nations Convention on the Law of the Sea (UNCLOS).
Non-coastal states have rights to use the sea8. On the other hand, the use and delineation of an international lake, which is commonly understood as an enclosed body of water bordered by two or more states to which non-coastal states have no access rights, is governed exclusively by treaties among the littoral states.
The Caspian Sea does not clearly fall within either of these definitions. Consequently, as new discoveries have been made in the sea, each of the five littoral states has developed different legal positions concerning its rights to the Caspian Sea.
Until recently, Russia insisted upon either a legal condominium9 or a "doughnut" principle10 under which the littoral states would jointly develop the natural resources under the Caspian Sea.
The reason behind the Russian position was the lack of any known significant resources in the Russian sector. However, recent off-shore discoveries of potentially significant oil reserves in the Russian sector combined with Russian interest in controlling cross-Caspian pipelines has brought about a change in Russian policy.11
As noted above, on July 6, 1998, Russia signed an accord with Kazakhstan to divide the Caspian Sea along median lines, formally abandoning its support for the doughnut principle.
The Russian-Kazakhstan agreement provides that "the northern part of the Caspian Sea and its mineral subsoil - while preserving the joint use of the water surface, including freedom of navigation, agreed norms for fishing and environmental protection - shall be divided between the parties along the median line modified on the basis of principles of justice and accord between the parties.
" The agreement defines the "median line" as the point equidistant between the two nation's shores, taking into account islands and other special circumstances. The parties agreed that each has sovereign rights over the exploration, development and management of subsoil resources within the boundaries of its respective segment of the seabed.
In addition, the parties agreed to joint exploration and development of those structures and deposits through which the median line passes. While the nation that first discovers a structure located on a median line would control its development, representatives of the other nation would be permitted to participate in its exploitation.
The accord specifically states that future agreements will govern other issues such as pipelines or telephone cables. Reports indicate that Moscow agreed to the division of the seabed in return for a promise from Kazakhstan that a cross-Caspian pipeline will not be built without Russian consent.
The accord also calls for joint use of the water's surface, which will preclude construction of a cross-Caspian pipeline without the approval of all the littoral states. It will also assure control by the littoral states of cross-Caspian tanker traffic and of environmental issues.
In response to Iranian and Turkmen protests filed with the United Nations objecting to a definition of rights to the Caspian Sea that did not include them, Russia gave Iran assurances that the legal status of the Caspian Sea will be resolved by all five littoral states and promised that some key provisions of the Russian-Kazakhstan agreement will enter into effect only when the littoral states reach a consensus on a legal regime for the sea.
Iran, which does not have significant reserves in its offshore waters, insists that Caspian resources should be jointly developed by the littoral states under a legal condominium approach.
In light of increasing support by the other littoral states for territorial division of the sea, the Iranians have indicated that they may settle for national zones in the Caspian provided each littoral state is granted an equivalent portion of the seabed. The Iranian government has suggested 20 percent shares.12
The Iranians also want assurances that the Sea will not be used for military purposes. The other littoral states are unlikely to accept the "equal share" approach since such an approach could force them to surrender parts of certain lucrative fields already under development.
Iranians, for their part, may also be willing to soften their approach in return for a role as a major transit country for Caspian oil and gas or other concessions.13
With most of its oil reserves in offshore Caspian fields, Azerbaijan has consistently been a firm supporter of dividing the seabed, as well as the water and the air space above, based on the median line principle. Turkmenistan, on the other hand, has changed its position repeatedly over the past six years.
Initially, Turkmenistan supported the unilateral development position of Azerbaijan. Later, Turkmenistan endorsed Russia's doughnut proposal and signed a protocol with Russia and Iran to establish a company to develop oil and gas in the national zones of the three countries.
In late February 1997, the president of Turkmenistan issued a joint statement with the president of Kazakhstan calling for division of the sea based upon Soviet-era administrative delimitations14 until a comprehensive agreement can be reached. Although Turkmenistan has not officially endorsed division of the sea, it has tendered rights to over 25 offshore fields within what it has declared to be its area of the Caspian.
Despite the lack of a clear position on the division of the Caspian, Turkmenistan has opposed the strict median line principle for division of the sea proposed by Azerbaijan, Russia and Kazakhstan. Instead, Turkmenistan has proposed a different division that would result in the Kapaz, Chirag and Azeri fields falling within its national zone.
Given the fact that the Chirag and Azeri deposits are already part of the AIOC's contract area, Azerbaijan is unlikely to cede these areas to Turkmenistan.
The U.S. has promoted division of the Caspian Sea into exclusive areas in a manner that fosters development of the Caspian resources while excluding Iran.15 Although it is not opposed to joint management of the environment and fisheries, the U.S. believes that mineral resources and pipelines should be assigned to the exclusive control of one or another of the littoral states.16
As a result of the lack of resolution of Caspian Sea rights, a number of disputes have arisen regarding hydrocarbon fields that lie within the claimed waters of two or more states.
In 1994, Azerbaijan granted AOIC exploration and development rights to the Gunashli, Azeri and Chirag fields, portions of which lie more than 100 kilometers off the coast of Azerbaijan.
Turkmenistan voiced its objections to the development of the Chirag field alleging that portions of the field lay within its territorial waters. More recently, a dispute over the Kapaz field between Turkmenistan and Azerbaijan again attracted attention to the lack of a coherent legal regime for the Caspian Sea.17
Other disputes include those between Russia and Kazakhstan over the offshore Severny field in the northern Caspian and between Turkmenistan and Iran over the Lachin, Yelbars and Burgut in the southern Caspian.
The lack of agreement regarding legal rights to offshore Caspian fields has slowed development of these fields and may inhibit future investment. In addition to the current low price of oil, the difficult investment environment in the Caspian Basin countries and new opportunities in the Middle East, lack of a Caspian Sea legal regime could be used by international oil companies to justify delaying investment obligations that they might otherwise want to delay for capital efficiency reasons.
Over the past few years and increasingly during the next several years, as exploration efforts intensify and production moves forward, the scope of the Caspian Basin reserves will be more clearly defined as will the costs of production.
Assuming that international demand for oil increases and that the basin's reserves are proven to be in the range of current estimates, pressures will increase to clarify ownership rights to Caspian seabed resources and to finalize decisions regarding control over cross-Caspian pipeline routes and tanker traffic.
In regard to the former, significant disagreements exist among the littoral states regarding ownership of the oil reserves already discovered under the Caspian Sea; these conflicts must be resolved in accordance with international legal standards and treaty agreements before the funds necessary to complete development of the disputed fields are invested.
Some observers have commented that investments in fields located in zones clearly under the control of a partner littoral state are relatively risk free; however, this is not clear-cut because the Russians (and other states) will claim the right to control surface and underwater transportation, the environment and other activities. These claims can be used as leverage to delay or halt development efforts.
1 AIOC consists of Amoco, Unocal, Exxon, Pennzoil, British Petroleum, Statoil, SOCAR, Lukoil, Turkish Petroleum, Itochu, Ramco and Delta-Hess.
2 OKIOC consists of Agip, British Gas, British Petroleum, Statoil, Mobil, Shell and Total.
3 For example, Azerbaijan and Turkmenistan are each claiming the rights to four off shore fields - Azeri, Chirag, Kapaz and Araz (Azerinemes) that lie almost equidistant between the two countries.
4 The primary treaties governing the Caspian Sea are the Treaty between Soviet Russia and Persia of February 26, 1921 and the Treaty of Commerce and Navigation between the Soviet Union and Iran of March 25, 1940.
5 In 1946, Persia and the Soviet Union executed an agreement granting the Soviet Union oil concessions along the Iranian coast of the Caspian Sea; however, the agreemetn was never properly ratified by the Persian parliament.
6 Although a land boundary was established by a 1881 Border Commission created under the Convention on the Regulation of the Boundary to the East of the Caspian Sea between Russia and Persia of December 9, 1881, no maritime boundary was established. Beginning in the 1920s, the USSR Ministry of the Oil Industry arbitrarily divided the Soviet zone of the Caspian Sea along the "Astrakan-Gasankuli" line. This was never formalized by treaty.
7 For example, pursuant to the Law on the State Border of October 1, 1993, Turkmenistan was the first Caspian littoral state to establish a 12-mile territorial sea and a "maritime economic zone" in which it purports to have exclusive jurisdiction over resources. According to the law, the boundaries of the maritime economic zone are to be established by treaties with the other Caspian states.
8 Under UNCLOS, if the Caspian Sea were treated as an enclosed sea, the sea would be divided into exclusive territorial zones in accordance with UNCLOS principles with each littoral state having the sole right to develop natural resources therein, including oil and gas deposits.
9 Under a legal condominium, the littoral states would jointly develop the Caspian Sea and share equally in its resources.
10 At a November 1996 meeting in Ashgabat, Russia modified its legal condominium approach in favor of what has become known as the doughnut principle. Under the doughnut principle, each littoral state would have the right to an exclusive 45-mile zone, and the resources beyond the exclusive area would be treated as a legal condominium.
11 In December 1997, Russia opened the offshore Severny field with estimated reserves of 500 million tons of oil, which exceeds those in the offshore Azeri fields being developed by AIOC.
12 Under the median line principle, Iran would receive substantially less than 20% of the seabed, most of which does not contain any known oil reserves. Whereas under an equal division approach, the Iran zone would be more likely to contain natural resources.
13 Plans are already underway to build a natural gas pipeline from Turkmenistan to Iran, which may be extended to Turkey to supply gas under the 23-year gas supply agreement between Turkmenistan and Iran. 14 While there was no treaty or law dividing the Caspian Sea, Soviet cartographers more or less arbitrarily divided the sea among the Soviet republics for administrative purposes.
15 The joint use arrangements proposed by Iran could preclude U.S. participation in developments of offshore Caspian fields due to U.S. legal restrictions.
16 The U.S. cites similar solutions adopted for 13 ocean areas (including the Black Sea, Persian Gulf and the Mediterranean).
17 In 1997, in response to Russian pressure, Azerbaijan cancelled a deal for Kapaz (Serdar) signed by Rosneft and Lukoil. Subsequently, Turkmenistan awarded Mobil the right to develop the field, but Mobil will not begin work until the legal status of the field is settled. A joint Azerbaijani-Turkmen commission to resolve the dispute has made little progress.
By Sarah Carey and David Wack
Steptoe & Johnson, LLP
© 2000 Mena Report (www.menareport.com)