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. Last Updated: 07/27/2016

Eagle, Bear Spar Over Caspian

In the 19th century, Britain and Russia faced off against each other over a passage to the East through Central Asia. The "Great Game," as that rivalry came to be called, ended with the rise of the Soviet Union and its dominance in the region.

The collapse of the Soviet empire gave rise to a new great game — this time between the United States and Russia, and including an array of regional powers and local companies and administrations. The spoils are the Caspian's huge reserves of oil and gas.

While Western powers have a head start in exploration in the area, Russia has begun the process of catching up and boasts the geographical positioning and political will that might help tip the game in its favor.

Last April, top officials from China, Iran, Russia, Turkey and the United States outlined their vision for the region at a World Economic Forum in Kazakhstan, trying to curry favor with the four former Soviet states surrounding the Caspian f along with Iran f and show their chief interest in the region to be of mutual cooperation rather than economic dominance.

The representatives talked of opening borders, building new export pipelines and rebuilding old trade routes f everything but the fierce and protracted battle currently raging in the region over reserves estimated at 100 billion barrels.

Russia especially played down its traditional imperial ambitions in the region. "Those who think national interests are a throwback to Russia's imperial thinking are tragically mistaken," Reuters reported Deputy Prime Minister Viktor Khristenko as saying at the meeting.

"Irreconcilable differences is perhaps strong language," said James Henderson, an oil and gas analyst at Renaissance Capital investment bank, of the relations between the major powers interested in the region. "But there are always going to be differences of opinion because of differences in vested interests."

Pipeline Plans

A significant part of the Caspian game has raged not over reserves, but over transportation routes.

"Russia wants to see hydrocarbons moving across its territory," Henderson said. "That gives it money from transit fees and greater political influence in the region."

A complicating factor is that wrangling over transport routes is taking place while reserves are still only estimated. David Hutchinson, head of the former Soviet Union energy department at Edinburgh's Wood Mackenzie Global Consultants, said financing of pipeline plans is unlikely to finalize until the reserve estimates in the Caspian can be proven. "Pipeline financing and oil go hand in hand," he said.

Russia began way ahead of its Western competitors in the pipeline battle, having inherited a vast Soviet-era network it still largely controls. However, the economic and geopolitical decline that came with the fall of the Soviet Union battered Russia's positioning.

"Before the [1999] Chechen war, Russia's influence seemed to deteriorate quickly," said Dmitry Trenin, an expert on geopolitics at the Moscow Carnegie Center.

Local developments since 1991 have not much assuaged the instability that followed communism's demise in the region. Among other disputes, Russia, Azerbaijan, Kazakhstan and Turkmenistan f the four former Soviet states bordering the Caspian f have been arguing for the past decade about how to divide their potential booty.

One of the issues is whether to reclassify the landlocked Caspian as a lake. Russia has especially pushed for that change, which would allow mutual exploration and production of the Caspian between its coastal states. Countries such as Azerbaijan and Kazakhstan, on the other hand f intent on keeping their large reserves to themselves f are against the move. However, Russia's motives may change as a result of a recent discovery of oil by its No. 1 oil producer, LUKoil.

LUKoil's Role

LUKoil is exploring the Severny field in the Russian sector of the Caspian, where it announced a find of what it said was at least 2.2 billion barrels of crude in March. While the reserves are significantly lower than those of other projects, the discovery may help tilt the balance of power in the pipeline race in Moscow's favor, threatening plans by other countries to set up routes that would bypass Russia.

Having its own oil supply would increase Russia's leverage in disputes over future transport routes.

"The key question is whether the find is oil," said Renaissance Capital's Henderson. "If so, it is potentially significant, but LUKoil is less enthusiastic than they were initially.

"If it's gas, that is going to be another disappointment," he added.

LUKoil's strike came ahead of Russia's renewed drive to dominate the Caspian region last month by appointing a special representative to the region, former Fuel and Energy Minister Viktor Kalyuzhny. Russian oil producers predictably welcomed the news of Kalyuzhny's appointment, especially LUKoil.

LUKoil chief executive Vagit Alekperov said this month that having a single representative in the region would end the conflicts of interest between three Russian bodies f the foreign, natural resources and energy ministries f that oversee Russian interests there.

"Kalyuzhny's appointment shows Russia is taking the Caspian seriously and has upped it as a priority," Henderson said.

It is no coincidence that LUKoil also has interests in Azerbaijan f Alekperov is an Azeri himself f and in Kazakhstan, further boosting the company's desire for increased Russian diplomatic presence in the region.

LUKoil has huge political clout. New Energy Minister Alexander Gavrin is a former LUKoil employee and mayor of Kogalym, a LUKoil stronghold. And the head of Transneft, the state-owned monopoly oil pipeline operator, Semyon Vainshtok, was a LUKoil vice president before Kalyuzhny helped squeeze him into the Transneft job.

LUKoil recently formed the Caspian Oil Co., or KNK, a consortium, with gas monopoly Gazprom and fellow oil major Yukos to develop projects in the Caspian.

Russia's main plan for exporting oil out of the Caspian involves using its old Soviet network from Kazakhstan to the Russian port of Novorosiisk. In accordance with the scheme, Moscow is trying to push Kazakhstan to export its own oil to local ports through pipelines on its territory.

The Caspian Pipeline Consortium, or CPC, in which LUKoil has a 12.5 percent stake, is already building links to the Soviet-era system. But the route is opposed by other countries interested in keeping Russia's influence over a pipelines routes to a minimum.

Rival Plans

Despite Russia's aspirations, foreign companies control most of the Caspian's oil development.

BP Amoco leads the largest project in Azerbaijan f which has been developing its reserves more actively than its neighbors f while U.S. Chevron spearheads the development of Kazakhstan's massive Tengiz field, which has estimated reserves of 8 billion barrels to over 50 billion barrels. The field holds 6 billion barrels to 9 billion barrels in proven reserves.

The Azeri International Oil Co. controls around 4 billion barrels.

In its drive to weaken Russian influence in the Caspian, the United States is pushing for a $2.4 billion, 1,737-kilometer pipeline that would bypass both Russia to the north and pariah-state Iran to the south, instead running from the Azerbaijani capital of Baku through Georgia to the Mediterranean port of Ceyhan in Turkey, a U.S. ally.

"The U.S. is against Russian influence because it is interested in security of supply," Renaissance Capital's Henderson said. "It is also against it in case there is another Cold War."

The Caspian states are also interested in reducing their dependence on Russia for export routes.

Azerbaijan has backed the Baku-Ceyhan project, and last November, Turkey, Georgia and Turkmenistan joined to pledge support for the route during a much-trumpeted ceremony attended by U.S. President Bill Clinton.

But pipeline plans change on an almost monthly basis, with high costs and disputes between participants seriously hampering progress. And that was even before Russia struck potential oil itself.

In another blow to U.S. positioning, Turkmenistan said last month that it would sell more natural gas to Russia instead of backing U.S. plans for a Trans-Caspian gas pipeline that would run from Turkmenistan to Turkey.

Analysts also say more reserves must be found to make the proposed Baku-Ceyhan oil pipeline f capable of carrying 1 million barrels a day f economically viable.

Meanwhile, the United States has ruled out pipeline participation by Iran, which insists that a route south across Iran is the best and the cheapest means of getting oil out of the Caspian and onto Western markets.

Meanwhile, China has also moved in on the region, signing energy deals worth $9.5 billion with Kazakhstan in 1997. But the much-heralded agreements, including a planned 3,000-kilometer pipeline running east, have so far been largely held up.

Turkey also wants to sign deals with multiple suppliers, and plans to import gas from Turkmenistan and Russia and oil from Azerbaijan.

Big, Bad Brother?

While Russia hopes recent developments may help its drive to come out on top in the Caspian, the country's Byzantine tax system and bad record of protecting investors' rights poses a problem for raising cash.

"Russia isn't worse than other countries in the region such as Kazakhstan," Henderson said, "but the tax system and investors' rights are issues that have to be resolved for capital investment on Russian territory."

Meanwhile, brute force in Moscow's campaign in Chechnya has made no small contribution to Russia's interests in the region.

"As a whole, the Chechen war showed Russia is ready to use all instruments f including force f to strengthen its position in the region," said the Carnegie Center's Trenin. "That will make countries such as Azerbaijan and Georgia more careful and more likely to take Russian policy into consideration."

Wood Mackenzie's Hutchinson said the amount of the Caspian's reserves can allow for more than one main pipeline route. "At the end of the day, there's enough oil and gas in the region to make room for pipelines going east to west and north to south," he said. "With U.S. backing, the [Baku-Ceyhan] pipeline will be built in time."