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. Last Updated: 07/27/2016

Oil Firms Lay Out Terms for Caspian

It has even more reserves than is presently known. U.S. foreign policy has a significant effect on companies operating there. But to justify further development, the price of a barrel of oil has to average over $19 over the next year and a half.

These are some of the results of a recent survey of 25 senior executives from international and domestic oil companies currently operating in the five-nation Caspian region, the hottest piece of real estate in the industry.

The survey, conducted by global accounting major Arthur Andersen, included executives from top Russian producers, LUKoil and Yukos, Shell Azerbaijan Exploration and Production B.V., Offshore Kazakhstan International Operating Co., Penzoil Caspian Co., Japan Azerbaijan Operating Co. and Kazakhoil. Other major players in the region, such as Chevron, ExxonMobil and BP Amoco declined to participate.

The area in and around the Caspian Sea — bordered by Kazakhstan, Russia, Azerbaijan, Turkmenistan and Iran — has about 16 billion barrels of proven oil equivalent, according to the U.S. estimates, and some estimates have put the figure 10 times higher.

All but one of the survey's 25 respondents said they believed that there are still "significant" oil and gas reserves yet to be uncovered. And 20 of the 25 polled said they expect the amount of capital investment in the region to increase in the next five years, with equity being the major source of capital.

Kazakhstan and Russia were rated as the most promising of the five countries for new oil finds, while Turkmenistan was rated as the most promising for new gas reserves.

Asked what they would change to facilitate their work in the region, the majority of companies said they desired a more investor-friendly tax and legal environment, as well as the reduction of transportation costs and corruption.

The main problems respondents identified were access to crude oil markets, uncertain oil prices and incoherent governmental energy policies. Although U.S. policy in the Caspian Region came last on a list of nine factors, 43 percent of respondents still said that it had a significant effect on their operations in the region.

The United States has pressed hard for an alternative to the 1,580-kilometer Caspian Pipeline Consortium line, of which the Russian government is the major shareholder. It runs from the giant Tengiz field in western Kazakhstan to Russia's Black Sea port of Novorossiisk and will begin exporting oil to Western markets later this year. The United States has been a strong supporter of a different, more costly route that runs from Baku to Ceyhan, Turkey, and bypasses Russia altogether. The Kazakh government has proposed its own pipeline through Turkmenistan to Iran.

Survey participants rated the CPC route as the most viable.

Industry analysts agree on the presence of the U.S. government influence in the region but say it's not overwhelming.

"The influence is there undoubtedly," said Gennady Krasovsky, oil analyst with NIKoil brokerage. "With oil prices at $12 per barrel in 1998 the construction of the Baku-Ceyhan pipeline could not be justified, and only the insistence of the United States kept it from falling through."

Renaissance Capital oil analyst Steven Allen said that the effect of U.S. foreign policy is tangible, but not overwhelming, given the fact that Chevron, a U.S. oil major, is involved in the CPC pipeline.

The fact that Chevron and ExxonMobil opted not to participate in the survey left it incomplete and slightly less valuable than it could have been, Allen said.

Both Allen and Krasovsky said that the estimate of the oil price needed to justify further development looked realistic and proved that the companies plan to go ahead with the development.

"In the main [the results] were pretty much what we expected," Collin Brown, head of oil and gas for the CIS at Arthur Andersen, said in a telephone interview Thursday.