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. Last Updated: 07/27/2016

Oil Slump Dampens Caspian Boom




Slumping world oil prices and pipeline wrangles have hit the predicted boom in the Caspian basin, a region that was once hailed as the next Persian Gulf.


When the firms making up the Caspian International Pipeline Co., or CIPCO, pulled out last week after spending millions of dollars on three fruitless probes, it became clear that oil majors' ardor for the region was cooling.


"Some of the enthusiasm has definitely waned," said a London-based analyst, who declined to be identified.


Dismally low prices for world oil are the biggest reason.


"People are definitely rethinking their spending," said James Henderson, an oil analyst at MFK Renaissance. "They are much more reluctant to put money into the riskier ventures."


But if a near-term boom is unlikely, in the long run the area's oil fields should bring big benefits to investors, including Russian ones, industry experts say.


LUKoil is the Russian oil company best poised to capitalize on the Caspian region, with a hand in many of the major consortiums, including the Azerbaijan International Operating Co., or AIOC, which is building a pipeline from the Azerbaijani capital, Baku, to Supsa on the Georgia's Black Sea coast. Another pipeline from Baku through Chechnya to Novorossiysk is already pumping.


Even after the collapse of CIPCO, in which it had a hard-won stake, LUKoil is continuing to explore the still unproven Russian region of the Caspian Sea.


Another potential boon for Russia is the Caspian Pipeline Consortium project, which envisages a pipeline to pump oil from Kazakhstan's Tengiz field to the Russian port of Novorossiisk. If it goes ahead, the project could generate a total of $24 billion in taxes and dividends for Russia. The $2.2 billion project is in the early stages, but Russia and Kazakhstan both approved design plans last week, paving the way for construction to start.


The Caspian has huge oil reserves - estimated at 13 billion to 15 billion metric tons - but much of it is difficult to extract.


Kazakhstan's oil fields, for example, will require $160 billion to develop, Aidar Demeuov, a spokesman for the Kazakhstan Power Engineering Ministry, said Friday, according to Interfax.


The Kazakh shelf's potential alone is estimated at 12 billion metric tons of oil. However, 86 percent of predicted oil and gas resources are hard to extract since they lie deep beneath the Caspian Sea, Demeuov told a workshop in the country's commercial center, Almaty.


Last year, when bench mark Brent crude was trading at about $17 a barrel, the Caspian was all the rage with oil majors as they rushed in to claim a piece of the pie, with the wholehearted support of the United States and other Western governments, which saw an opportunity to further free themselves from reliance on the politically unstable Middle East.


Now, as Brent crude heads ever lower - January futures hit $9.60 a barrel on Friday morning - the U.S. and the oil companies are at cross purposes.


The demise of CIPCO hardly came as a surprise. The Pennzoil-led development of the Karabakh field just offshore from Azerbaijan had suffered nothing but troubles since it began. In September, CIPCO announced it had come to an agreement with Azerbaijani state oil company, SOCAR, a member of the consortium, to dig one final well after two earlier tries had struck only gas.


"We do not want to ruin our relationship with the Azerbaijanis, with SOCAR, and we hope that we will discover oil," was how CIPCO vice-president Pavel Kaufman described the decision at the time.


It was not to be. The third well did strike oil, but not in sufficient quantities to be profitable, leading to last week's announcement.


The CIPCO pullout was just one of a number of setbacks for Caspian development this year. In September, the Amoco-led North Absheron Operating Co. came up empty on its second drill test and the AIOC pipeline ran into major cost overruns. The project was originally slated at $315 million but got pushed to $590 million when the state of the base Soviet-era line turned out to be much worse than expected.


The drop in oil prices may also have undermined the ambitious plan for a pipeline from Baku to Ceyhan, the Turkish port on the Mediterranean.


Despite an agreement this week to carry out a $20 million feasibility study funded by U.S. oil firms, the project looks way too pricey. Oil companies operating in the region estimate that the pipeline will cost $6 billion.


"The economics of the route through Turkey don't work unless you're pumping a lot of oil through there," said MFK Renaissance's Henderson.


Low oil prices may have companies cutting back, but the area's oil reserves are too large for them to stay away.


"[We've] always cautioned about the need for realism on Caspian reserves until the sea is fully explored and so we see it in long-term context," said a representative for one of the major oil companies investing in the region.


"The Caspian is still one of the largest untapped areas in the world," seconded the London-based oil analyst. "It's not going to go away."