The following is an edited transcript of the fourteenth in a series of Capitol Hill conferences convened by the Middle East Policy Council. The meeting was held on September 25, 1997, in the Dirksen Senate Office Building. The moderator/discussant was Michael Collins Dunn, publisher of The Estimate and a member of the Council's National Advisory Committee.
DR. STARR (Chairman, Central Asia Institute, Nitze School of Advanced International Studies, Johns Hopkins University)
The topic before us is the subject of near daily conferences and meetings and of loudly trumpeted positions based largely on reading Peter Hopkirk's evocative book The Great Game. However, this provides a completely inappropriate analogy and thereby greatly distorts our picture of contemporary affairs. The difference between what Hopkirk describes and our situation today is that he is writing about only two great rivals in Central Asia and the Caucasus, imperial Russia and the United Kingdom. Beyond this, the first "great game" consisted of two external powers seeking to gain control of what was virtually a political vacuum in Central Asia. In the story of that Great Game there were several weakened local emirates but no real states on the modern pattern. Now there are eight sovereign entities there, three to the west of the Caspian and five to the east.
Finally, rather than two colonial powers seeking to expand into the region, we find the breakup of a single colonial power, the USSR, and attempts by some forces within its post-colonial successor, the Russian Republic, to reconstitute the old imperium. The proper analogy is not the Great Game but Britain's yearnings for North America after 1776, Spain's attempts to regain a foothold in South America in the mid-nineteenth century, or France and Portugal fighting to keep their last remnants of empire in Africa in the 1950s and 1960s.
The question we should be asking is whether the new states in the region will succeed in becoming the masters of their own fate, or fall under the influence of their old big brother or a coterie of new big brothers. The answer will depend on many factors, including the level of investment in human capital, the quality of leadership, the progress of economic reform, etc., in the new states. Let me single out one factor that bears particularly close attention: communications and transportation. In the history of the world it is hard to find a more firmly sealed border than the southern boundary of the USSR for the entire period after the 1930s. Neither roads, railroads nor air routes crossed from the leading cities of Central Asia and the Caucasus to neighboring countries to the south. Instead, what little communications existed occurred through the single hub of Moscow. Telephone calls, air flights and even certain types of shipping passed from Tashkent or Ashkabad to Moscow and thence to their destinations abroad.
This sets the context for discussing pipelines. Under Soviet rule the transport of energy, like other forms of transportation and communications, occurred only through the single, integrated, USSR-wide pipeline grid. As with other forms of transport, this grid was firmly sealed off from linkages with all the countries to the south, creating an absolutely unnatural situation.
The challenge today is how to open up this aspect of the region's transportation system, at a time when virtually every other aspect of transportation and communications in the region is being opened up to the rest of the world. The objective in the transport of energy, as in other fields of transportation and communication, is to create a system that is direct, unmediated and pluralistic, with numerous routes defined by the demands of economic efficiency rather than political pressures. It is quite understandable that Russia, like other former imperial powers before it, should seek to preserve the old structures inherited from Soviet times. But to do so would in the end require either the threat or use of force and would, at any rate, involve Russia so deeply in the internal affairs of the new countries to its south that its nascent democracy and free market economy would inevitably be thrown off course. So the task at hand is to enable the Caspian countries to move beyond the unnatural Soviet system of energy transport and to help the Russians adjust to this reality.
With this broad geopolitical goal in mind, let us tum to what is happening today. Let us first ask, where are the likely markets for Caspian energy in the long term? First, the West. It is worth noting that Russia also seeks to supply this market, thus creating a situation in which Russia and the Caspian producers will be competing in that quarter. In the long term, however, the largest market for Caspian energy is likely to be Asia. Americans and Europeans have neglected this fact, and their analyses of the geopolitics have been accordingly distorted.
What kind of pipeline system will result from this? Obviously, there will be one or two pipelines to the north, but also others to the west, south, and east - perhaps a total of six or seven. Some will go to the West directly, others to the Persian Gulf, and still others to the Indian sub-continent and China. If the oil were allowed to flow freely in accordance with economic need, these would all be under construction today. But there are constraints. One is money. Pipelines cost a lot to build. Another is the geography. To the south at least, the terrain is difficult. And the continuing fighting in Afghanistan prevents pipelines from crossing that country. Beyond these, the biggest constraints are, first, Russia's attempt to channel all energy exports through its own northern routes, and, second, the U.S. boycott of Iran, which effectively closes off all routes traversing that country.
Given these constraints, it is natural to focus on adding western routes, whether via Georgia to the Black Sea, which is apparently the most efficient route, or via Georgia through Turkey to the Mediterranean, or on the longer-term possibility of opening up channels to China.
I would submit that in ten years' time most of these pipelines, as well as routes across Iran and/or Afghanistan, will be open. If the present regime in Iran still exists, it will be a quarter-century old, ancient by revolutionary standards, and doubtless considerably evolved from the present situation. Should this happen, U.S. policy towards Iran is likely also to evolve. And whatever the situation in Afghanistan, it is hard to imagine that at least one of the direct routes to China or Pakistan/India will not be built. Whatever the exact mixture, it is sure there will be more pipelines and more access. This is all in the broader context of the expansion of the region's communications and transportation generally, i.e., the end of the isolation which Soviet rule imposed and which the CIS aspires to maintain.
In this situation, what is Russia's role likely to be? It must be acknowledged that this region is truly Russia's "backyard," as we put it, or its "near abroad," as the Russians like to say. But the nature of the geography and cultural map of the region makes it also the backyard and the near abroad of many other countries as well, among them China; India, Iran, Pakistan and Turkey. Their reasonable concerns, too, and interests must be factored into any future security arrangements for the region.
And then there are the countries further afield with major interests in the area. The United States is now the largest trading partner of several of the countries, with Japan, Korea, Turkey, Germany and Malaysia all playing very important roles. While Washington ponders how to get Caspian oil to market, businessmen from all these countries have been building automobile and truck factories, opening hotels, and constructing roads and infrastructure there.
The plurality of interests at play in the Caucasus and Central Asia holds rich potential for conflict. But it may also contain the germ of a strategy for preventing conflict. Such a strategy might consist of two elements. First, rather than allowing any one power to dominate in the region, over time a system of consultation and cooperation that involves all the interested parties should be constructed.
Second, recognizing the fact that the greatest danger to the interests of any neighbor to the region or any investor further afield would be a power vacuum in Central Asia or the Caucasus, the various neighbors and interested parties should work to build strong market economies there and open systems of government.
In closing, let me acknowledge that the pipeline issues that have brought us here today are indeed important, but we have addressed them in a strategic vacuum, with sometimes adroit tactical steps by one side or the other but without any clear long-term strategy that embraces not only the energy industry but also the region's many "backyard" countries and other powerful investors elsewhere, and above all the fundamental needs of the eight new sovereign countries themselves.
The development of such a strategy and the construction of a consensus around it is the urgent task that the pipeline issue lays before us all. I hope today we can focus more attention on these issues and then return to the pipeline issue, rather than try to grope our way from the specifics of pipeline politics to the creation of a broader strategy.
MS. NANAY (Director, Petroleum Finance Company)
My job is to look at the competition among countries through the eyes of the oil companies. The Petroleum Finance Company advises a large number of companies; both U.S. and foreign, on diverse issues around the world, including the Caspian. I will address some aspects of my job as an oil analyst and how what I work on can shed light on some issues that are very important to the Caspian. How are global oil markets developing? What is the role of Caspian Basin oil in these markets? Why are so many oil companies now flocking to this region? Companies are suing each other over fields, over the pipeline issue; the stakes are getting rather high. .
First, when we look at oil markets, it is very important to understand that while we hear about markets in Europe and the United States and markets seem to be segmented by regions, world oil markets are unified. If supply shortages occur in one segment in the market, this affects prices worldwide. It's this unified marketplace that the Energy Information Agency looks at when it forecasts world oil demand rising from 73 million barrels a day in 1997 to nearly 105 million barrels a day by 2015. Obviously the world's appetite for oil is growing.
Where is this growth occurring? The bulk of it is not occurring in Europe or in the United States. Some 226 million Americans would use, according to estimates by The Oil and Gas Journal (January 27, 1997) about 18 mm/b/d of petroleum products, of which they will import close to 10 million barrels a day. When you move on to the Asian area, China and India, with over a billion people, are currently using less than 4 mm/b/d. And they import less than 2 mm/b/d. Obviously these countries and others in the Asia-Pacific region are going to need more oil.
Crude production in Asia today is very modest, and that's why the Asian countries, including Japan, have to reach out to oil suppliers, largely in the Middle East, for imports. Moreover, the important market for oil is transport fuels. Growth in income in countries like China and India means growth in the purchase of automobiles and an exponential growth in demand for gasoline. To meet this demand, refineries will be built close to consumer markets in China, in India and other places in Asia. In Europe and the United States, refineries are actually shutting down. The new refineries in Asia will create demand in these markets, causing import requirements to skyrocket.
What does this mean for Central Asia? If you look at recent trends in Central Asia in terms of the companies flocking into Kazakhstan, Azerbaijan and Turkmenistan, you will notice the increasing presence of Asian companies. Offshore Turkmenistan you find Malaysia's Petrolnas and Indonesia's Medco. Onshore at Kazakhstan, in a sizable area not all that far from the Tengiz Field, you find Indonesia's Medco yet again, and now China's National Petroleum Company (CNPC) in two major deals. These Kazakh projects are important to focus on, because in each case U.S. companies were also vying for them. But the U.S. companies were left empty handed as the Asians marched in with promises of sizable investments, and, more important, a solution to the exit-route dilemma.
What did the Asians promise? They promised that they would work on driving exports from these areas through Iran and China. Why? Because these export routes would bring the oil closer to where it's needed. Kazakhstan is already expanding its port at Aktau on the Caspian Sea to facilitate the tankering of growing quantities of crude to Iran. This is just a beginning, until an oil pipeline can be built via Turkmenistan to Iran.
In order to meet U.S. requirements that export routes avoid Iran, Kazakhstan has watched and waited over the last four years, as Chevron has been frustrated at every turn in trying to move oil from the Tengiz field to market. Granted, Chevron and Mobil have been touting their · successes of late. These companies are exporting about 160,000 b/d to Kazakhstan. They're exporting some through Russia's pipeline to Samara and receiving a lesser-quality crude at the Black Sea port of Novorossiysk. They've also been railing oil out through the Baltic and tankering crude from Aktau, Kazakhstan, to Baku, Azerbaijan, where it's loaded onto rail cars bound for the Georgian port of Batumi. Now, they're even talking about railing crude across Kazakhstan into China, but at what cost? Transporting crude by these methods is more than twice as costly as by pipeline.
Then Kazakhstan was told by the Russian gas company Gazprom that it would never be allowed to export gas from its giant Karachaganak field, in which Texaco is now a partner, through the Russian pipeline system. Kazakhstan has gotten the message that it had better find alternatives for both oil and gas exports, and fast. Thus, when the Asian companies arrived on the scene and said they could help, that clinched the deal. What's more, the Asian companies preferred the Iranian route, because it is the most economically and commercially viable (the cheapest and the easiest) in the near-term, and it brings the oil closer to the markets where it will be needed in the future.
The same story holds for Azerbaijan. In case you haven't noticed, the Japanese over the last year have moved into Azerbaijan in a big way, and it may soon be huge. A wide array of Japanese oil companies, trading companies, and other firms are in Baku at this very moment, negotiating to tie up deals in many areas, including oil and gas production, infrastructure projects, power, petrochemicals and agriculture. You name it, the Japanese are ready to help, and they're bringing money. The Chinese are also making overtures to the Azeris and want to do deals.
At the same time, Azerbaijan is concerned about the lack of progress on the northern pipeline route, due to fallout in Chechnya. About 500,000 barrels of Azeri oil have been stockpiled at the Chechen border since February 1997. This needs to be shipped out before any early oil from the AIOC consortium, where four U.S. companies have a 40-percent stake, can begin flowing through the Chechen route. It seems that Azerbaijan has begun talking with the Iranians, and I wouldn't be surprised if the Azeris begin to negotiate oil swaps with their southern neighbor. The story is the same in all these countries. If they don't get their resources to market, their economies will continue in a downward spiral. In a sense there is real desperation; for Turkmenistan, exporting gas to Iran is a matter of survival.
Finally, why are so many companies, including U.S., European, Saudi, Turkish, Iranian and Asian, flocking to this region? Why are all these oil companies desperate to get access to the reserves in the Caspian Basin? Why are companies so aggressively pursuing the pipeline projects through Russia, Georgia, Turkey, Afghanistan, Iran, China? For some there is the political dimension of establishing a presence, but for most there is a clear commercial imperative.
The real problem for the oil industry is that no new world-class oil deposits have emerged through exploration in the more than 25 years since the North Sea bonanza was discovered. The Caspian Basin is the only area that has the potential to be the next North Sea. It's going to be potentially much greater, in terms of reserves, than the North Sea. For the oil industry, it will be the only region capable of supporting the capital of both small and large companies, independents, majors and national oil companies. It will form a major new axis in the worldwide energy supply.
In addition, the Caspian Basin is the only region open to foreign investment, free of U.S. or multilateral sanctions, which offers companies the scale of opportunities for investment that could allow them to create new core producing areas. Other countries that could offer similar opportunities have restricted access (Russia, Saudi Arabia, Kuwait, Mexico) or have offered limited access. Iraq and Iran are two other prospective areas, but they are off-limits due to multilateral and U.S. sanctions.
In terms of world oil supplies, the Caspian Basin will not replace the Middle East. Between them, Saudi Arabia, Kuwait and Abu Dhabi have over 400 billion barrels of oil reserves. Russia has 49 billion barrels. And recent Department of Energy estimates bring the Caspian Basin up to a potential of 200 billion barrels. Thus the Caspian combined with Russia may be another Saudi Arabia. But the Caspian Basin is important for Asian countries as they seek to diversify their supply sources, and it could also be critical to helping sustain orderly global crude-oil markets. As world oil demand grows, this could become an important source of oil supply, to temper any rise in prices.
DR. STAUFFER (Consultant; former professor at Harvard and Georgetown universities)
I am going to address the mixture of economics and politics that makes the Caspian issue so very interesting. And I would like to dedicate my contribution this morning to Roger Tamraz. We owe him a debt of gratitude for awakening federal awareness of Caspian issues. We also owe him for some of the most refreshing Senate testimony in years. He has transcended, as a graduate of the Harvard Business School, the customary practice of renting congressmen and senators and has moved on to renting presidents. Reaching for excellence, I think, was the term.
This is a great game. Some of the players are the same, and as Dr. Starr mentioned, the reference to Hopkirk is not ill-taken. The first thing that one must remember is that there are people here who don't like each other. There are among the players in this game people who have common enemies, many of them overlapping. There are very few players with discernible common interests. This, of course, normally leads to unstable bargaining positions.
Some of the players are the same; some are different. The Russian interest is not to see Caspian oil produced. The Russian oil companies, on the other hand, have very complex interests. And since the Russian oil companies are able to offer bribes, with slush funds on a scale that would daunt Washington, the divergent interest between the Russian companies, such as Gazprom or Lukoil, and the Russian government, such as it is, cannot be overestimated.
Second is the role of the Israeli lobby and the American Jewish community. In discussions that I had with the Iranians on this issue earlier this year on a couple of visits, it was interesting to note that practically no one at an official level talked about the U.S. government's role. They all wanted to know what the Israeli lobby was going to do. They wanted to know if I could point out what Israeli company had to be bribed to influence Washington. References to the State Department or the NSC were all but nil. So the two most important players here are the Russian companies, insofar as they can influence the Russian government, and the Israeli lobby.
The host countries are the most affected but play no real role because they have no clout. Iran and Turkey are very much involved, but they too have very little influence. Down the pecking order is the U.S. government, and I suppose that gets down to who has slept in the Lincoln bedroom most recently. But, significantly, the people who want to see Caspian oil move are minor players.
This is not an issue of oil into world markets. Any likely impact of Caspian oil on world oil markets over the next half decade (five congressional elections, transcending any planning period in Washington) is going to be minor. If you look at the plans, the available production sites and so on, this is minor as far as the world oil market is concerned. What is critically important is something that Dr. Starr touched on at the beginning: Who controls that oil? Whoever controls it controls the fate of the countries of Central Asia. That is the geopolitical question, because of the new power balance.
The question can be reduced to the five W's: Where is the oil coming from? Where is it going or likely to go? Who is involved? What are the stakes? And finally, when might this happen?
There are three sorts of sources of oil, with different geopolitical factors attached to them. First, on the Western side of the Caspian is Azeri oil, being produced for over 100 years now. This is the site of the big rivalry between the Rothschilds and Rockefellers before World War I. That oil can move really only westwards or southwestwards or northwestwards. Hence, Caspian oil is far more important, as far as one can tell from the geology, in terms of potential. The Kazak fields are extremely large in theory, but the oil is of such miserable quality and so hard to produce that it is economically somewhere between real oil and the locked-in tar sands of northernmost Canada. Turkmen oil is of higher quality, but scattered. So those two oils must move east to China, south to Iran or, least attractive from the producer's point of view, westward to Russia.
It is duck soup to build these pipelines; there is no technical obstacle whatsoever to moving the oil to the Black Sea, where there is an existing pipeline, apparently empty at the moment, that runs from the Iranian border up to Baku. That line, if it is repairable - the Iranians themselves don't know at this point - could be reversed and that oil connected down to Iran in a matter of about three months. The big Kazak fields are rather a long way from the Black Sea and from Western China. The Turkmen fields are scattered and, thus far, small. But, for Turkmenistan a little bit of oil is a lot of money. And a lot of money in a country like Turkmenistan means potential emancipation from Russian presence. So again, we're talking about volumes that are very large in terms of revenue for the local countries.
The exporters have four basic concerns; first and foremost, timing. They want to get the oil out. Some of the Kazak oil has been shut in for almost four years now. Turkmen oil is the earliest oil, and the easiest way of getting that oil out, again, is through Iran. They know it; companies know it. As Julia just pointed out, countries emancipated from U.S. pressure know it. They want to get their oil out fast. Secondly, as Dr. Starr mentioned, a multiplicity of pipelines is diversification, and for them diversification is safe.
These countries don't want to be dependent upon the Russian pipeline. One, the maintenance is terrible. Two, the Russians have exacted very large transit tariffs, way above the costs of moving the oil. Three, the Russians have a tendency to demand that anybody moving oil through the Russian pipeline system sell a certain fraction of that oil at low domestic prices, with limited possibility of cash payment, as an extra charge, in effect, of moving oil to Western markets that pay real money. So diversification away from dependence upon the Russian pipeline is critically important to the exporters, who, as I mentioned earlier, have no real say in this.
Thirdly, costs are critical. It is so expensive now to move oil through the Russian system, if you can get into it, that people will actually put oil on small tankers, move it across the Caspian into small ports in Iran, and truck it all the way to the South. That's a bargain at $7 per barrel. The "netback," the available revenue to the local government, is the difference between the world price and whomever the Russians may scalp, and what we spend for transportation costs. Finding cheaper routes, compared to the Russian routes, is vital for the exporter.
Lastly, to pick up on something that Julia mentioned, they really want to move their oil to open water. The Black Sea is a miserable place to start buying oil. Aside from any restrictions that the Turks might place upon transit to the Gulf through the Dardanelles, they may hold the trump card in all of this. Open water is the Gulf, and that means a route either gained through Iran or through Pakistan. That's their perspective, but they don't rent any congressmen, so they have no say.
Where will the oil go? Well, westward is via Russia. There's an existing line there, and a consortium that's backed by the Clinton administration is pushing an expansion of that route. Eastward is to China, which sounds absolutely preposterous. But, there is a perverse logic to it: China otherwise would have to supply the Western part of the country by moving its own oil, or imported oil, all the way from the Pacific coast and Yellow Sea into the hinterland. It's actually cheaper to bring it from Central Asia into the Xinjiang area. The third route involves going across the Caucasus. One is through Georgia, ending up in the Black Sea. It has the same problem as the Russian route. The second is through the Caucasus to Turkey, to Ceyhan, a major Mediterranean port with about 2.5 m/b/d of surplus capacity, even if Iraq resumes exports. Ceyhan has tremendous spare capacity.
And, finally, we're back to the open water via Iran. What makes Iran potentially so interesting to the Caspian exporters is its combination of geography and infrastructure (see map). The Iranians, at the present time, have oil fields south of Turkmenistan. These are connected through large diameter lines to a nodal point near Tehran. And then there's a line that goes off to the northwest of Tabriz. In order to bring Caspian oil into the Iranian network, one refurbishes this line, builds about 125 kilometers of new line, or one takes existing ports and brings feeders down. This kind of construction can be done in three to five months. It's easy; it's cheap; the infrastructure is all there.
If the Iranians were to cooperate, one would not take Turkmen oil to the pipeline in the south. That would be bloody expensive. Rather, one would bring the Turkmen oil, as they're doing now, into the Tehran refinery, and the Turkmen would get an equivalent amount, adjusted for quality, down at Kharg Island in the Gulf, where there is surplus capacity. So Caspian oil would not be imported physically by Iran; it would be displaced. And there's a capacity for roughly 1.1 to 1.2 m/b/d of it, requiring almost no new construction whatsoever, just a simple reversing of pumps and the addition of a few feeder lines. This is the compelling geopolitical attractiveness of Iran to the Caspian.
The costs are all but negligible. The first tranche of 500,000 b/d, would be all reproduction, for example, exports, at about 40 cents a barrel. The next tranche would be another 800,000 b/d, which would be the likely near- or medium-term incremental export from Kazakhstan, at 72 cents a barrel. And then the last tranche gets a little more expensive, roughly about a dollar a barrel. This must be compared to the $2 to $3 through the proposed new pipeline, over and above which is the unknown extra toll that the Russians will exact. So the Iranians have a basic economic advantage in terms of transportation costs of $2-$4 a barrel, which they can offer the Caspians and negotiate over.
Even more important, this can be done fast, which explains why the Asian companies are already negotiating their deals with Iran. The infrastructure exists. The pipelines are there. You simply need to add a few connecting links and reverse the pumps. It might take the DOE seven or eight years to do it, but competitive firms could do it quickly. The export facilities are already there and grossly underused at this point, with spare capacity. The trick is a market-based flow that puts Caspian oil into refineries in northern or central Iran. Then the oil (which the Iranians don't have to ship north) is backed out, saving extra pumping costs. And then it's exported in the south.
The Iranian link is compellingly fast and cheap. But what are the drawbacks? Implacable U.S.-Israeli opposition. Here the United States, the Israelis and the Russians all agree. The Russians don't want any competing export outlet. But their fallback position is that if there must be access to Caspian oil, then it should go through the Russian pipelines, where they can control the tap. Azeri-Iranian relations are a peculiar aspect of this. This is probably why the link to Iran from Azerbaijan has been delayed.
The third question is whether the Iranians really want to help get Central Asian oil to market. I found in discussions with the Iranians that they're not sure they're going to do this, because it fosters competitors, and its wealthy neighbors to the north might not necessarily share their interests, particularly in Azerbaijan. So it's far from clear that the Iranians want to play. In one case, I note that the Iranians hid behind the U.S. embargo in order to forestall a deal with the Turkmens.
We end up back in Washington, where U.S. senators are bought and sold or at least rented. Roger Tamraz contributed $300,000 but it wasn't enough. His rivals gave more. When one looks at this from abroad rather than from the op-eds in the U.S. media, there is the question of the Israelis. Who is influencing U.S. policy? Who is in the Lincoln Bedroom? Who is involved in these pipelines? Is Gore making deals with the Russians the way his father did? These are open questions.
As far as U.S. policy is concerned, it comes down, I'm afraid, to the great question that the Iranians kept putting to me, which I couldn't answer: What in the world is the Israeli lobby really up to? Are they trying to set themselves up once again as middlemen, as they did in the 1980s with the arms-for-hostages deals, bypassing the U.S. embargo? This is what the Iranians think about. And a number of people purporting to represent the Americans have been in Tehran promising the Iranians that they can intercede with the Israeli lobby to facilitate this opening. It is a squalid geopolitical tale.
DR. DUNN: Very often politics gets in the way of rational economic and foreign policy. To take an example from this region, the Freedom Support Act of 1992 forbids the United States to provide direct aid to only one former Soviet republic.
And that one former Soviet republic is Azerbaijan, arguably the one that is economically most important right now. The reason for that has to do with the fact that Armenia and Azerbaijan fought a war in which the Armenian and Karabakh side essentially has won. They are in occupation of 20 percent of Azeri territory. There has been a cease-fire since 1994. Notwithstanding all this, the United States is still barred from providing direct assistance to Azerbaijan's government, because of the power of the Armenian lobby in the West.
When you look at many of these pipeline routes, you begin to see all kinds of political problems. The pipeline through Georgia is itself running through a relatively narrow corridor between Armenia and occupied Nagorno Karabakh on the one side, and the Russian-occupied Abkhazian region of Georgia on the other. Those mini-wars have certainly had their impact on any future pipeline route and on the security of pipelines that may be built in the region. Similarly, the continuing Kurdish insurgency raises questions about the security of pipeline routes across eastern Turkey. Obviously, any route through Afghanistan is a problem so long as that country is locked in civil war.
This has created a curious situation in which the so-called "fundamentalists," the rather extreme conservative Pushtun Islamist "Taliban," find themselves supported by Russia and the Central Asian states, while their enemies find themselves in alliance with Islamic Iran and opposing the Taliban, who have, however, received considerable support from Pakistan, a country that obviously would like to see a stable pipeline route through Afghanistan into the subcontinent.
Almost every route involves some political problem, but almost everyone here agrees that the most economical and logical non-Russian route for Caspian oil is through Iran. Clearly, U.S. policy towards Iran is in many cases an obstacle to U.S. companies attempting to play their role in getting this oil to market. As has been pointed out by several of the speakers, Asian countries have been very proactive in this area. They are not constrained by the American reluctance to go through Iran. It should also be mentioned that the Russian pipeline routes go through Chechnya. So there are stability questions in almost every single route, including the existing Russian lines.
Q: Gas is another important ingredient in Central Asia. And it also impinges on U.S. policy, with the two exceptions to the Iranian boycott: the value-neutral oil-swap deals between Kazakhstan and Iran, and the more important allowance of gas to go from Turkmenistan through Iran to Turkey. Could you comment on that with respect to U.S. policy and the general issue of how to get gas to market? An equity interest of the United States in helping Turkey seems to have overridden an equity interest in depriving Iran.
MS. NANAY: It took many months to get the oil swaps from Kazakhstan off the ground. I think they actually did swap some oil in June, but there have been ongoing problems because of the quality of the crude and the nature of the refineries in Iran. The Turkmen gas deal was first talked about back in 1994, and it took this long to finally get that project going. The short pipeline will be completed next month that will begin shipping small amounts of gas into northern Iran from a field near the Caspian and the western part of Turkmenistan. Larger exports from Turkmenistan to Turkey will have to go through new infrastructure. Some of it will have to be from another, much bigger field in the eastern part of that country, the same field that has been designated to ship gas through Afghanistan, for the Unocal project to Pakistan. That's where the really big field is located in Turkmenistan.
The Turkmens have two options to get their resources to market. They would have a third, but Russia has made it clear over the last month that they will not facilitate gas exports from any of these countries to Western Europe. Russia has the largest gas reserves in the world. And Russian reserves are used to feed Western European markets, Turkey and the Balkans. Russia feels that its gas, which earns over $7 billion a year in hard currency, should be going to these hard-currency markets.
Russia had other plans for gas from Central Asia. Either this gas would supply the CIS, which are basically non-paying markets, or Russia would use it to supplement its own needs instead of developing the very expensive fields in Western Siberia. The Russians have decided that they have enough gas to feed these other markets, which will earn them money. The Central Asians can get stuck with whatever they have; the Russians don't care if they get it to market at all.
For Turkmenistan the issue is dramatic, but what choices does it have? Iran or Afghanistan. And as much as the United States keeps hoping that the Afghan issues will be resolved - I think the Taliban were actually firing shells over the border at Uzbekistan the other day - the situation just gets worse. There doesn't seem to be any possibility of an agreement now among all those proxy forces fighting wars in Afghanistan. It doesn't seem as though there will be enough peace for someone to finance a $2 or $3 billion gas pipeline to Pakistan and get it built in a reasonable time frame for a country like Turkmenistan, which badly needs the revenues from its exports now.
Iran has to help Turkmenistan finance the line that was built into Northern Iran. So the Turkmens are not going to be making any money off of that for the next couple of years either. This country is in desperate straits. So when the president of Turkmenistan comes here in December on his official visit, the United States is going to be trying to convince him to avoid Iran at all costs, because it wasn't the U.S. decision to put a gas pipeline through Iran. This pipeline was already being built. It was decided under former Prime Minister Erbakan. He made sure that construction started during his tenure in power, and that there was no turning back.
These deals were decided regardless of U.S. agreement. But finally the United States acted, because Turkmenistan and Turkey are important to the United States. Turkmenistan is also very close to Israel, as is Turkey. The defense alliance between Turkey and Israel has cemented the relationship with the United States. It was really to help those two countries; it had nothing to do with Iran.
The situation has gotten very dramatic. They recognize that if they don't bring in companies that are ready to do projects and get their resources out more quickly than waiting for Afghanistan or Russia, then they're doomed. Their fallback position is to revert to Russian control. If you look at leaders in these countries, President Aliyev in Azerbaijan is 75 years old. He is healthy, but anything could happen to him. Russia is hoping that something might be done to put in a more pro-Russian leader there. Russia is playing a waiting game. If the economies of these countries don't start recovering, the leaders also face growing domestic opposition. So it's really in our interest to help these countries develop. But, the only way they can develop is to get their resources out. And everything seems to be stuck right now, other than maybe going through Iran.
DR. STAUFFER: Natural gas suffers from the tyranny of distance. It costs between five and ten times as much per unit of energy to move gas any given distance, compared to oil. Gas has remarkably limited economic range, unless somebody is foolish enough to subsidize it, which the Russians do. So gas from Central Asia is really a secondary consideration.
Regarding the significance of the recently announced non-rejection by the United States of the Turkmen-Iranian Turkish gas deal, let's take a look at the geography. The deal consists of three parts. The first is the line to which Julia alluded. It's a very small line that comes down through Turkmenistan to a power plant in Iran. That already is underway; there is nothing the United States can do about it. Secondly, the western part of it picks up somewhere near the border and brings Iranian gas into Eastern Turkey and ultimately into the Turkish national gas grid. Parts of that are also underway.
There wasn't much we could do about that either. The third piece would connect the Turkmen line to any line that's going over to serve Turkey. The Iranians don't want to build that because it would mean that the Turkmen gas would compete with their gas. So this intermediate step, to which we have essentially given our approval, is one that, as far as I can establish in Iran, the Iranians don't intend to build. Which brings us back to the question of, who's doing what to whom and why. This goes back to the Lincoln Bedroom.
Q: In addressing the question of pipelines, there is the fundamental question of who owns the oil in the Caspian Sea. Most recently, the Turkmens have lodged an objection with the Azeris over three of the most important fields, and unfortunately the Azeris have already granted exploitation rights to the AIOC for some fields the Turkmen claim. What is the feeling of the panel on the question of the legal regime of the Caspian Sea. In addition, what is U.S. policy, and whom do we support?
MS. NANAY: The Turkmens have challenged the Azeris in the Azeri and Chirag fields, which are part of the AIOC development. They say that the Azeri field is fully in their waters, and the Chirag field is partially in their waters. Then there is another field that is under challenge, the Kiapaz field, which the Russians gave to Azerbaijan and to two Russian companies and then revoked from them; now it's in Turkmen hands. From what I understand, the Azeris and the Turkmens are negotiating over these. These fields that are at issue create uncertainties. Russia basically doesn't want to settle the Caspian legal issue. For Turkmenistan and Azerbaijan this uncertainty is not a good thing. For Kazakhstan many of its reserves, such as the Tengiz field, are onshore. Turkmenistan's gas fields are onshore. Now they have a round of offshore bidding, but there is quite a bit of oil and gas onshore. How or whether the legal status will be resolved is a big problem.
DR. STARR: One of the discoveries of recent years is how inadequate Soviet prospecting in this region was. Once work began seriously again a few years ago, it was discovered that the energy deposits in the Caspian were unequally divided, with a lot going to areas off the shores of Azerbaijan, Kazakhstan and Turkmenistan and with very little off the Russian and Iranian shores. You don't have to be a genius to imagine that, under such circumstances, those without the big assets would say, "Let's develop this all for one and one for all." They reviewed the legal history of the situation and discovered treaties in 192 I and 1940 that seemed to take the view that this was an internal lake and gave justification for that. Iran found that a very comfortable interpretation as well. Meanwhile, Azerbaijan simply went ahead. Kazakhstan is doing the same.
Turkmenistan plans to issue tenders, I believe, for 11 of the 30 fields off its coast. And the legal resolution of this is being worked out on the ground, outside the courts; as Gorbachev is wont to say, by life itself. The area is being divided up. The example of the dispute between Azerbaijan and Turkmenistan shows that the point on which both sides agree is that whoever owns it, it's one of them and not some third or fourth party.
DR. DUNN: Does the United States have any clear policy on this issue?
MS. NANAY: It's really not the U.S. role to have a policy on this issue. It's got to be decided by the littoral states, and maybe Russia has to agree to come to the negotiating table. I don't think they will; it plays right into their hands to create ongoing uncertainty. The Russians just announced that they're going to hold a bidding round in the offshore Caspian near Kazakhstan, which Kazakhstan claims a part of. It's only open to Russian companies.
Q: Dr. Stauffer, what do you see as the interests of the Russian government and the oil companies at this point?
DR. STAUFFER: What I observe from the outside is that the interplay of power between the Russian government and various of these new state businesses is rather sordid, because of the extraordinary amount in commissions that can be collected and fed back. It's a very lucrative business, Russian officials permitting oil and gas operations. It's the biggest source of foreign exchange that they have. So the companies, which are notionally under the government, have vast latitude. I can give you examples from the relationship bet ween Statoil in Norway and the Russians. The Norwegian government has done some consulting in this on and off through the years. The Norwegian government thought the rule of law controlled Statoil, but in fact, it didn't. If you extrapolate that to the Russian environment, you can see why Lukoil and the others have extraordinary power and influence. They control cash flow. And by diverting it, they can control the permits that control that flow.
DR. STARR: This goes back to the policy of the Russian government in treating the Caspian as an internal sea, its resources to be developed collectively by all parties. The Azeri consortium didn't take that position, obviously. Two Russian firms, independently, joined - Lukoil and Rosneft. To complicate life further, Mr. Nemtsov was present at the signing. He took the view that in the long run a normal commercial relationship and marketization of relations with Azerbaijan was the best thing for Russia. Those in the government who supported the foreign ministry's view, objected vehemently. Only when President Niyazov of Turkmenistan went to Moscow and said, "Major companies are proposing to develop reserves that are in our territory," did President Yeltsin tell Rosneft and Lukoil to pull out. My point here is that this is clear evidence of two very different strains within Russian policy. It is clear that the Russian government has not yet gone over completely to viewing these things in market terms, as opposed to power-politics terms.
The result of this was that the Turkmen also cancelled the old monopoly arrangement with Russia for exporting Turkmen gas. Russia's response to this action and others by Turkmenistan was to tum off the gas spigot. This has cost Turkmenistan about 35 percent of GDP in the last eight months. While Russian policy is clearly tugging in several directions, and while it is surely true that wherever there is a lot of energy money there is a Jot of temptation, the real tension between these two sides of their policy is the great tension within Russia itself, as an evolving country. The issue is by no means resolved, but at least there are now two sides in this debate in Moscow. Four years ago there would have been only one.
MS. NANAY: I agree that there is a certain collusion between the government and the companies, even with companies like Lukoil that are primarily privately held. Rosneft is still a government company; it hasn't been privatized yet. It's not clear to me that Lukoil is only a purely commercial entity. Lukoil's presence in Azerbaijan is pervasive. When President Aliyev went to Moscow in early July, one of the deals he struck was that Russian companies would have roles in most of the projects offshore in the Caspian. That's developed in sort of an odd way. President Aliyev came to the United States and began this alliance with the United States and U.S. companies. If you look at the transition on the Kiapaz field, Lukoil, which feels Kiapaz should be theirs and have been studying it for well over a year, first signed a memorandum of understanding with the Azeris and now may be negotiating with the Turkmens. Russia first acknowledged the field as being in Azeri waters and now says it is in Turkmen waters.
Lukoil also wanted the offshore Caspian Inam structure, which they thought they had a deal for in 1996, but President Aliyev awarded it to Amoco on August 1. So it has become this tug of war between Lukoil and the United States. Lukoil is going ahead with the Turkmens now to take the Kiapaz field, because they are determined to keep it as their project. They're probably upset also at the way they've been treated in Azerbaijan, not getting the project for Inam, which they thought was theirs.
Q: What would be the impact of Caspian oil on the Gulf oil-producing states, if any?
MS. NANAY: There is so much demand growth that the Middle East will also grow with it in supplying the world's energy needs. The Caspian does reduce the share of growth of the Middle East and other areas. It doesn't displace it; it doesn't mean that more Middle East oil isn't going to flow. It just means that some of the growth will be taken up by Caspian oil.
Q: The issue of Iran's nuclear program has been discussed in Moscow. What kind of a concern is that for oil analysts and policy makers?
DR. STARR: Of course it's a serious concern. It has to be, just as issues of terrorism have to be. I'm not here to challenge the genuine and serious concerns underlying U.S. policy with regard to Iran. However, it is worth noting that that policy was devised over a number of years, following 1979, during which time various opportunity costs that we now recognize were not on the boards. Before 1992, you did not have to calculate, for example, the opportunity cost to Central Asia and the Caucasus of U.S. Iran policy. Now we are aware not only of the huge resources of the Caspian region but also of their potential for instability. Yet these new states of Central Asia and the Caucasus bear the brunt of our Iran policy to an inordinate degree. When one country, Turkmenistan, takes a 35-percent GDP hit because it cannot export its products after Russia turns off the spigot, that's serious.
I'm not here to say that outcomes should be X, Y and Z, but rather to say that we should factor these opportunity costs to the Caspian countries into the consideration of our Iran policy. One might ask whether we need the elements of the policy that were added in 1994-95 when we seemed to be able to get by without them during the most radical phase of the Iranian revolution.
Now we have to think of the broad Caspian base, Central Asia, the Caucasus, as a serious factor requiring a policy of its own that is not simply a corollary of other policies. I'm concerned that the discussion of oil and pipelines and energy carries with it a kind of conspiratorial thinking, a kind of muscular style that causes us to lose track of the main strategic issue: to assure long-term stability in the region. This region has a potential for conflict that could hurt all its neighbors and us.
DR. STAUFFER: I think there are a couple of issues here. One is the attempt to prevent the spread of nuclear and other nonconventional weapons and the economic impact of that. We seem to be dealing with Iran based almost purely on our particular feelings about these specific areas of disagreement. Iran is an absolutely crucial piece of the jigsaw puzzle in its region, whatever else you may think about it. If you exclude Russia as a way of getting gas out of Turkmenistan - and Kazakhstan and the Caspian - then you are left with Afghanistan and Iran. And Afghanistan is not likely to become stable in the short term.
There are issues in U.S. policy that are driven by political considerations, and there are issues driven by higher principles - controlling the spread of nuclear weapons and so on. But very often our policies have been predicated on a knee-jerk reaction to provocation or to political pressures at home rather than on Iran's place in the broader strategic context. Iran isn't going to go away. It will have to be dealt with in developing any kind of infrastructure for getting oil and gas out of Central Asia in the longer term.
I think the United States has been bringing the nuclear issue up recently because of Vice President Gore's visit to Russia and trying to put clearly visible pressure on the Russians on this issue. But these things are all interlinked. No one is saying, just ignore the nuclear issue or any of the other issues that separate the United States and this Iranian regime. At the same time, we can't ignore the other strategic issues involved in getting oil and gas out of Central Asia in a way that encourages the stability and growth of the new nations in that area.
DR. STARR: There is no clear border to Central Asia. It wasn't in our geographical consciousness just a very few years ago. But I want to emphasize how artificial that hard southern border of the USSR was for a brief period in human history, three-quarters of a century. If you take a longer view, it's an intellectual challenge, it's not just a political challenge. This broad culture zone lying between these other great civilizations embraces a vast territory, practically into Mongolia and Xinjiang, China, with its large and ancient Turkic population and culture, extending through the northern areas of Pakistan and Afghanistan. And for 3,000 years, an absolutely central part of Central Asia has been eastern Iran.
We're only groping toward some consciousness of what this broader region is. What's going on in a kind of semiconscious way is a rediscovery of relationships that were there all along but were suppressed during the short-term of Soviet rule. Iran has always been a regional power. To think that would cease to be, after '79, is absurd. Iranian culture in some generalized sense has been felt as a presence throughout Central Asia and the Caucasus. Georgia has ancient relations with Iran. And Central Asians and those in the Caucasus have not been pushed around. On the contrary, one of the great centers of Iranian civilization is, in fact, Central Asia and the Caucasus. As often as not, it has been rulers from there who have reigned in Iran rather than vice versa. So they feel rather confident in how to deal with Iran today. Two or three millennia of history have accustomed them to that. Our worry may be somewhat patronizing.
DR. DUNN: We have to remember that some of the international borders in this region are leftovers from the original Great Game. Some of the borders within the former Soviet Union were part of Stalin's divide-and-rule nationalities policy. He built those when he was commissar of nationalities, and after he took over the country. There are all kinds of irredentist and ethnic issues between these countries and sometimes between them and other countries.
Tom Stauffer alluded briefly to some of Iran's concerns about Azerbaijan. One issue here is that the entirety of northwestern Iran is legalistically Azeri and is called Azerbaijan. The Iranians have been a little nervous about what that might mean in the long term now that there is an independent state of Azerbaijan. Yet, historically, we have tended to subdivide this region so that Iran is treated as part of the Middle East. Iranian Azerbaijan, therefore, is a Middle Eastern issue, while former Soviet Azerbaijan was a Soviet issue and was handled by Russian specialists, while Turkey is part of Western Europe, officially. Obviously the real world doesn't divide according to the categories that are still used by some of our agencies or according to the historical boundaries. When you look at the present situation in Afghanistan, which is tending to flow back and forth across the Tajik and Uzbek borders, it is because the people involved in the Afghan civil war are, on one side, ethnically Tajik and Uzbek. We talk about external involvement in the Afghan war, but very often this is based on tribal and ethnic allegiances that go back before the colonial borders were drawn.
Q: Why should the oil in this region be of any urgent interest to us? The world has plenty of oil. Are we looking to create a supply of oil because we want to reduce the role of the Persian Gulf as the principal supplier for the incremental barrels over the next 10 years?
MS. NANAY: Oil developments don't happen overnight. Chevron first began negotiating to develop the Tengiz field in 1988. It didn't conclude its negotiations until 1993. Where is Chevron since then? Basically they are producing 160,000 b/d, and they're lucky to be able to produce that. There is no way to get it to market. Pipelines take years to be built. This is not going to threaten the Persian Gulf.
In Azerbaijan, you have one development, the AIOC. Early oil flows next year may yield 20,000 b/d. If they're lucky they'll get up to 100,000. It's going to take a number of years before the pipelines get laid to carry that 700,000 b/d. There are about eight other deals that have been signed since, in Azerbaijan. These are exploration projects. The only known development in Azerbaijan is the AIOC development. These other awards are still structures; they're still drilling. They may find what they think they'll find. But they may find all gas. 2001 is the projected production date on the next project, if everything goes as planned. Everything beyond that is 2004 and then 2008, 2010.
By the time these pipelines are put in place, energy demand will have grown. The long-term EIA estimate is that energy demand is going to be up from 73 m/b/d to 105 m/b/d by 2015. Some of these projects are not going to flow in large quantities before that. These are long-term developments. And gas is even more long-term. If you look at some of these LNG projects, for instance in Qatar, they began in the early '80s. This stuff sits there for a long time before it ever gets to market.
DR. STARR: In addition to blunt commercial interest, there are two dimensions, the short- and the long-term, that have to be added to the list of reasons why we should attend to this part of the world. Overriding in both cases is the need for peace and stability in this vast area between huge powers. In the short run, the absence of development truly threatens the tranquility and smooth development in the region. These countries were quite bereft at the end of the Soviet period, with very distorted economies, even Kazakhstan, which is huge geographically, and Uzbekistan, with the largest population by far of the region. The energy income is a crucial factor in their development.
However, taking a longer view, suppose all these pipelines come on line. What happens in 20 years when vast wealth is pouring into these countries? Then a new kind of problem emerges, and it might not be 20 years out, but 10. The problem of what Ann Krieger, the former chief economist of the World Bank, called the "curse of energy wealth." The Asian tigers have not built economies with energy wealth. Look at Nigeria; look at the problems in Venezuela.
The mere fact of energy wealth tends to foster just what these countries don't need: governmentalization, reduced participation in government, underinvestment in human capital, overinvestment in defense to protect energy facilities. These very countries whose stability and smooth development are important to us all could be getting into a very dangerous zone, not just from absence of wealth in the short run, but the presence of a specific kind of wealth in the long run. So we're going to be concerned about their welfare, long into the future. We ought to get used to it.
DR. DUNN: If I heard in the question an implication that development of Caspian oil is somehow a means of reducing dependence on the Gulf, the petroleum industry is going to develop fields anywhere it can, particularly anywhere that there are large reserves such as those which seem to exist in the Caspian Basin. That's just the market at work. Secondly, this region is, if anything, far less stable than the Gulf, so they're not really developing a more stable oil-supply region.
Q: Could you elaborate more about why Iran might be ambivalent about serving as a conduit between Central Asia and the Gulf? The U.S. media have simply assumed that Iran wants this in order to expand its interests and break out of whatever isolation the United States has put it in.
DR. STAUFFER: The Iranians are ambivalent about becoming a transit route for Caspian crude because, first of all, there's not much money in it for them. The most that they could get would be a dollar or two a barrel on oil that is ultimately competing with their own oil in world markets. A rather straightforward cost benefit calculus shows that the net economic gain is pretty close to zero. It's also a bit of a nuisance, because in order to go through this displacement exercise, which is the only one that makes any economic sense, they have to modify their refineries to take a crude oil that's somewhat lower quality and extremely poorly monitored. The Kazaks will deliver crude that varies widely in quality and type and is contaminated with salt. There is no clear economic interest when you look at the direct and indirect effects. And they are very much aware of that.
On the other hand, opposing this leaves an official vulnerable to being accused of being a lackey of the Israelis and the Arabs. It's very difficult for Iranian officials to speak out too strongly against something that the United States or the Israelis are opposed to. The one advantage is that by seeming to spite us, they could play some kind of role vis-a-vis those local governments, giving them what they think is their due as a geopolitical player in Asia. But, that's a rather diffuse interest in the foreign ministry. It certainly isn't an active interest among those in the oil industry. From Iran's perspective, it isn't necessarily bad for the United States to bear some of the blame for any obstruction to these pledges.
This oil is flowing. The deal with Kazakhstan is held up on the Iranian side because of objections to quality. There's a capacity for I 00,000 barrels a day. They've already reversed the pipeline, and more oil is trickling in by tanker, and the terminals are being expanded. It may well be by the end of this year that more oil will be moving through the illegal, nonexistent Iranian route than through any of the routes that have been discussed publicly elsewhere. It's not clearly in their interest to get involved. It would be a political consideration, outweighing economic indifference or a negative economic benefit.
Q: If we looked at the growth of Iran's population, Iran would like to use more gas domestically. In addition, its oil fields are mature. They need increasing amounts of gas just to produce more oil. Do you see the population pressures as potentially facilitating this avenue for oil exports from Central Asia, because they will need more of the resources for themselves?
DR. STAUFFER: Yes, on the gas side it's madness for the Iranians to make it easier for any other competitors. The fact that they have to worry about vis-a-vis moving gas west is that in northeastern Iraq, east of Mosul and southeast of Kirkuk, are very large gas fields which the Iraqis have known about but which have only become public knowledge in the last year or two. The Iraqis are in a much better position to supply Turkey and the Balkans than Iran. So the Iranians really do have to worry about gas competition. It's inconceivable for them to help anyone.
But in oil their domestic consumption is rising. Unless they rehabilitate their oil fields, their net exports, and therefore net oil revenues, will fall. This is something which is underway now. But, I don't see how that would make deals with Central Asia more attractive to the Iranians.
MS. NANAY: It's not as much competition for them on the oil side, given that, if they can keep exporting what they're exporting now and maybe a little bit more, they'll be doing well. So in a sense, I don't know whether there is an argument there, whether they might be willing to facilitate oil exports, because Kharg Island has a pretty large capacity, 6 m/b/d.
DR. STAUFFER: There's actually 8 m/b/d of export capacity. The one deal that could make sense is already in the first stages of negotiation. The Iranians have a shortage of oil products up in the northeast. And the idea of bringing Turkmen oil in through a short pipeline, not through these little tankers in the Caspian, to service northeastern Iran, which would save the Iranians the problems and costs of putting in a much longer pipeline from their system, does make economic sense. That is being negotiated at the present time. That one deal clearly makes sense to both parties.
Q: When President Aliyev was here, he expressed interest in Baku's becoming the oil hub of that region. They're planning for Kazak's oil to go under the sea by pipe to Baku. Is that economically feasible? The Iranians were also talking about making an overland canal between the Caspian Sea and the Persian Gulf.
MS. NANAY: On the pipeline issue, I know that President Aliyev and President Nazerbayev of Kazakhstan have agreed that they would look at this issue of constructing a pipeline and both Amoco and Chevron have been asked to get involved. I don't know what they've done to study it. There are two versions, one from the Port of Aktau down to Baku, which would be much longer than a pipeline offshore down to Turkmenistan and then under the sea. But, frankly, unless the legal issue is resolved, I don't see a Caspian Sea pipeline being developed. It sounds good, maybe it's feasible. I don't know what the economics of it are. The Caspian Sea bed is another problem. It's a volcanic structure, so there would be some issues involved. I know Brown and Root probably have looked at it as well. But it's the legal issues that I think are primary. And I don't think Russia would view the project with any sort of enthusiasm.
DR. STAUFFER: The canal idea, I've heard on and off, over the years. It reminds me very much of a debate in the U.N. in the 1950s, after Iran had nationalized the British company, the old Anglo-Iranian Oil Company. The Iranian ambassador made an impassioned speech showing how much. the British had extracted out of Iran. He was off by about three decimal places in the calculation. The British ambassador stood up and pointed this out. Then the Iranian ambassador stood up again and won the day because he simply shrugged his shoulders and said, gentlemen, you must understand, we are a nation of poets.
Q: Dr. Stauffer, you said that Iran is reluctant to become "the lackey" of the United States and Israel by not developing the resources in Central Asia, but it seems that Iran is more likely to be looked upon as the lackey of Russia by opposing the quicker, cheaper line southward. It's in the U.S. interest to see the Central Asian states develop their resources so they can become more stable independent states. It's in the U.S. interest to see Russia become a modern, more normalized regional power, and not to reestablish its own new empire in the entire Eurasian block of land. Therefore, why can't the United States try and play a role in engaging Iran and maybe even China with Iran, in realizing that it has an interest in helping the Central Asians stabilize themselves as independent states?
DR. STAUFFER: That's the kind of question that should be put to Senator D'Amato (R-NY) and his sponsors. But, back to this question of the role - whether or not somebody is getting a commission on the Caspian pipeline. The United States is pushing that very strongly, and the vice president was involved in trying to set up a front company to push that project. The United States is pushing those countries right into the hands of the Russians. If we wanted to maximize their revenue and give them as much political latitude as possible, our interest then would be to try to provide at the very least two outlets, so that neither party could undercut the other. But that's exactly what we are not doing. Our policy doesn't make much sense, unless it's a question of the commissions.
Q: Does Iran take more or less the same position on the status of the Caspian Sea as does Russia? I understand from your presentation that the U.S. oil companies are somewhat low on the totem pole of influence. But I assume they are lobbying for certain things. To what extent do you feel they are capable of affecting U.S. policy in the region?
MS. NANAY: Iran takes the Russian position unless it's a question of the Iranian companies getting the benefit. Then they're okay about it. They're looking for these two projects to flow the oil out through Iran. These are long-term projects, though. It may be that by then all this stuff will be off the books in the United States and everything will be fine.
DR. STAUFFER: Historically, at least since, say, the '30s, and certainly since World War II, the American oil companies have had remarkably little influence on American policy, on the American government. This is tied to the restrictions on campaign contributions. When I was in the government it was not the large companies that got an unofficial hearing, it was the little ones, whose dominant stockholders could personally make large contributions. So companies that Americans probably have never heard of would have far more influence than Exxon or Gulf of any the big seven. And I can't see that that has changed very much. Now, the interesting question is, who from the Caspian pipeline consortium has been contributing, because the Clinton administration is pushing that project so heavily.
DR. DUNN: In fairness, our policy has been in a state of flux. It's been dynamic, changing. Our government has spoken quite directly about the nature of the CIS, concerned that it not be used as a vehicle for restricting the sovereignties of these countries in the south. We have participated, as would have been very unlikely just a while back, in discussions regarding both Karabakh and Ossetia. And we have increased our trade in the area. This isn't a policy issue, but the U.S. government has been supportive of it, to the point that the United States is the leading trading partner of several of the countries in the region. And we have a security relationship growing up through the partnership for peace. I think one can reasonably ask, where it should go now? What are the new issues for it to address, and is it going fast enough?
With regard to Russia there is reason for concern, though not out of any particular fear of Russian behavior. But these are problems that every post-colonial country has faced. In the last year or so there has been a dramatic withdrawal of Russian presence in the region. It's an insignificant investor in every country. It couldn't stop a lot of the deals that it tried to stop in the region, on the energy front. It has not prevailed, so far, with its legal notions on the Caspian Sea. And with regard to both Georgia, where it's pushed its troops in and taken advantage of the Ossetia situation, and Tajikistan, where it's been actively leading a peace-making effort, in neither of these areas has it endeared itself to the local people.
DR. STAUFFER: Yes, there is one potential spoiler to the Caspian pipelines that we haven't actually mentioned: Turkey. If the northern pipelines come to exist, they're going to go with the Georgian pipeline. This brings oil into the Black Sea. In order to get to market, that oil has to pass through the Bosporus and the Dardanelles in relatively small tankers, which adds to the cost and makes it less attractive economically. The Turks guarantee passage under the Treaty of Montreux, but, there are some reasons now to believe that the Turks are getting ready to play an environmental card, arguing that the doubling or quadrupling of tanker traffic represents a major environmental hazard. That's an issue just tailor-made for Greenpeace. Any significant increase of movement of Caspian oil into the Black Sea may in fact get bottled up by environmental moves by the Turks, which I think would have broad international resonance.
MS. NANAY: I think Tom is right on that one. Everything the United States has tried to do to direct energy flows from that area has been through anywhere but Iran - even through Afghanistan, the Taliban notwithstanding. And suddenly there is a reassessment. I think the way the oil companies have been lobbying this issue has to do with sanctions. It's sanctions on everything now. And, unfortunately, oil and gas are often found in countries where there are serious human-rights issues, for example. So companies are coming under fire in many different places. And there are few places oil companies can invest and get the size and scale of opportunity that they could get in Russia or the Caspian. Saudi Arabia is not open to foreign companies for investment. This anywhere-but-Iran policy is now coming under review because the United States sees itself being challenged, specifically by the Asian companies, which don't care about this policy and will direct supplies in the most commercially efficient and cheapest way. If ifs Iran, so be it. As the United States sees its interests being threatened, maybe it will discover that it should take a closer look at Iran.
Q: There is a story that is brought up periodically in the Turkish press, about the existence of a considerable amount of oil and gas in Turkey that foreign companies can't detect or pretend doesn't exist. Somehow they keep it for the future. What's the truth about this story?
DR. STAUFFER: That seems awfully unlikely, based on the geology, unless these are awfully deep deposits. The seismic work isn't very interesting and that now reaches down for 5,000 meters. Second, it's very hard to keep such a secret. The world is too leaky. One would have heard from reasonably reliable sources. And there's no indication, other than what one sees occasionally in the major media.
MS. NANAY: Oil companies go where there is oil and gas. They would rather go to Turkey than to some of these other areas that they're forced to go into to find supplies.
DR. STAUFFER: As an example, would companies be exploring the Central Sudan, or Chad for landlocked oil if there were any reasonable chance of a discovery in Turkey?
Q: What considerations may be relevant to Israel or the Israel lobby here?
DR. STAUFFER: This is a bit of a mystery. Again, the history is important. In the early 1980s, the Israeli lobby was extremely active in supporting sanctions against Iran, and at the same time the Israelis were extremely active in selling American weapons to the Iranians at typical markups of 300-400 percent. The reaction in Iran was that the Israeli lobby would seem to be involved in increasing pressure on Iran in the last few years - a repeat performance to extort some kind of a deal out of Iran. In the discussions I had with Iranians, this is what they brought up all the time: What do the Israelis want from us? What do we have to do to get them off our backs, to get D'Amato off our backs? They wanted to know whether they had to offer an oil concession to an Israeli company. They had some small deals of this sort already, trying to see whether it worked.
Why the Israeli lobby is so active against Iran isn't entirely clear to me. Logically, the old policy under the shah and, strangely, under Khomeini made sense: that one could use Iran as a conquered force against the Arabs in the Gulf. This was done during the Iran-Iraq War, for example. There was an earlier version of this under the shah, starting with an accord back in 1961 or '62.
It's more logical for the Israelis to be supporting Iran or at least not so actively opposing it. Of course, there's a fissure within the lobby. There is now a debate as to whether or not it might make more sense, from Israel's perspective, for the United States to back off. So there is a dynamic here that indeed may change.
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