Geopolitical Energy: Centered on the Caspian Sea (Part 1 of 2)

I’ve just finished reading a fascinating book authored by Lutz Kleveman entitled The New Great Game. The book is about Kleveman’s visits to all countries surrounding the Caspian Sea and to the countries involved in actual and proposed oil and gas pipeline routes required to bring Caspian Sea energy assets to the world market. He interviews an amazing cast of intriguing characters along the way.

The investigative journalist delves deeply into the geopolitical implications of world powers struggling to control Caspian Sea energy reserves - some of the largest remaining oil and gas fields in the world. It is fitting the game of chess was invented by the Persians. It is worth purchasing The New Great Game just to gaze at the maps on the inside and backside covers…each central Asian country being ruled by a government or dictator who one minute moves diagonally like a bishop, only years later to morph into a rook and move horizontally and vertically like a knight, and every once in awhile going hay-wire and imitating the unorthodox movement of a knight. Who will win the great game? What will OPEC’s response be to non-OPEC oil production in the Caspian Sea region? How will China and Russia respond to American military might in the region? Only time will tell.

The map below shows the countries surrounding the Caspian Sea which are Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan.

Most people are fairly familiar with the oil history of Baku, Azerbaijan dating back to Russian oil discovery and production in the early 1870s. Kleveman relates an interesting story of Swede Robert Nobel who was the older brother of factory owners Ludwig and Alfred Nobel who had become very wealthy producing arms and dynamite. Robert had been sent to Baku with 25,000 rubles to purchase Russian walnut to make rifle butts. Instead, he caught Baku oil fever and bought a small refinery. After only a few years, the Nobel Brothers Petroleum Producing Company vaulted over Rockefeller’s Standard Oil as the largest oil producer in the world. Later, the Nobel’s invented the first oil tanker in a story well told in Daniel Yergin’s The Prize, for which, ironically, Yergin won the Nobel Prize for non-fiction literature in 1992. And yes, the prize is named after the same Nobel family as those men seeking walnut wood for rifle butts in Azerbaijan.

Fast forward to today: Baku Azeri oil is being shipped to the Mediterranean Sea and world markets via the so-called BTC (Baku-Tbilisi-Ceyhan) pipeline. The picture below shows the pipeline’s route from Baku, Azerbaijan through Tbilisi Georgia, and finally to the Mediterranean Turkish port of Ceyhan.

This pipeline was hailed as the “Contract of the Century” by Azeri officials very much interested in getting their oil to market independent of Iranian and Russian involvement. Of course, the US was more than mildly interested in this solution as well. The pipeline is owned by a consortium of energy companies, among them:

• British Petroleum (BP): 30.1%
• State Oil Company of Azerbaijan (SOCAR): 25%
• Chevron (CVX): 8.9%
• StatOil (STO): 8.71%
• ConocoPhillips (COP): 2.5%

BP is the BTC pipeline operator.

The big question in today’s energy riddle is how to route the large energy assets of the Caspian Sea to the world market and thereby offer America an alternative to OPEC supplies. Take the giant Tengiz oil field, discovered of the coast of Kazakhstan, as an example. Estimated at up to 24 billion barrels of oil Tengiz is the sixth largest oil field in the world. It is one of the largest oil discoveries in recent history. The Tengizchevroil (TCO) joint venture has developed the field since the early 1990’s. The partners are:

• Chevron: 50%
• ExxonMobil (XOM): 25%
• KazMunayGas (Kazakhstan): 20%
• LukArco (Russia): 5%

Chevron has predicted that Tengiz could potentially produce up to 700,000 barrels of oil per day by 2010. The field also contains large reserves of natural gas. On the downside, the oil is very high in sulfur content, once reason western technology was so desperately required. Currently the oil from the Tengiz field is piped from Kazakhstan through Russia to the Russian Black Sea port of Novorossiysk via the CPC (Caspian Pipeline Consortium). The BTC pipeline is a competing option, preferred by the US to bypass Russia, but is expensive: the oil must first be tanked across the Caspian Sea from Tengiz to Baku, and then offloaded into the BTC pipeline infrastructure. French energy giant Total is interested in developing a common sense alternative pipeline through Iran which everyone knows is obviously the most economically viable solution, withstanding the geopolitical climate in Iran. Of course the US does not favor this route at all.

The US’s long favored route for Caspian Sea energy was first suggested and studied by Unocal (now part of Chevron). This countries involved in this route are highlighted in color in the picture below.

This so-called Central Asian pipeline was to begin with a natural gas pipeline from huge Turkmenistan gas fields through western Afghanistan to the Pakistani deep water port of Gwadar on the Gulf of Oman (Indian Ocean). The natural gas pipeline was to be followed by an oil pipeline along the same route, serving not only the energy starved countries of Pakistan and India, but the world energy markets as well. The US believes this route, bypassing Russia and Iran, as well as the congested Straits of Hormuz, is in the strategic interest of the US as a secure non-OPEC source of oil.

But the key word in the last sentence was “secure”. Unilateral policy decisions by the US in Iraq and elsewhere have instigated a tide of central Asian anti-American resentment. The Taliban, once supported and funded by the US, are now in control of the pipeline’s route. The pipeline project has been delayed until “control” and “security” has been established. Anti-American opposition in Pakistan is also a problem, regardless of that countries dire need for the energy and potential income the pipeline could deliver.

For Part 2, click here.

Comments

[longoil:]

Happy New Year Fitzman !

I liked Yergin's book "The Prize". It is one of the most detailed historical accounts of the oil industry I have read. It is the anti-"Peak Oil" crap he advocates at CERA that annoys me.

I agree with you on avoiding auto makers and financials. I am wary about investing in incompetently run businesses that feel they are entitled to government bailouts. None of oil companies asked for bailouts when oil was in the $10 to $20 range prior to 2000, but Obama feels their profitability needs to punished with proposed windfall taxes.

I like gold coins, but silver coins are more practical. If you are buying stuff in a post-apocalyptic world, I doubt there is many individuals that will be to provide change for a 1/2 or 1 ounce gold coin, silver coins are easier to barter with.

Jan 05 08:36 AM

[john s. gordon:]

a lot of meat to digest here.
> jack

Jan 05 08:38 AM

[long_on_oil:]

Great article, I will bookmark it and send to my friends. I agree 100% with the author. And longoil is right about silver. We will need coins that can be easily traded and a 1 oz gold coin is not the answer when you want to buy a $20 item.

Jan 05 09:13 AM

[GMiki1:]

Jim Puplava interviewed the author and the interview is still available at Financial Sense Newshour. I'm long coal, long nat gas, and long oil and gas juniors. Long gold and silver, hold physical--gold and silver eagles and some silver rounds.

Jan 05 11:04 AM

[Michael Fit...:]

longoil: thank you and back at ya! yeah, the prize is a fascinating book and one of the best books i have ever read. as you mention, the thing with yergin is that he used to be a peak oil believer...then he got hit with prudoe bay and the north sea, and he bailed on it because big oil laughed at him. now, he apparently thinks the world is swimming in cheap oil, and he could not be more wrong.

yeah, for bartering and such, i can't argue with your silver comments. that said, for storage of wealth... you can't beat gold, unless you can store a boat load of oil somewhere :)

john s: drink some wine...it helps digest meat....

long_on_oil: thanks for your compliment. please forward my energy policy document along with it will you? wrt the coins, i agree with you guys. that is why i am also a big fan of the 1/4 oz american eagles (gold). that said, as my article sometime ago said, these havent been available on apmex or kitco in months and months (i didn't check today, hope they don't make a liar out of me). however, as a storage of wealth, not sure you can beat 1oz gold coins.

GMiki: thanks for that! i will google and see if i can catch the interview.

geolog: thanks, and hny back at ya. thanks for your message...i'll investigate the techology further and perhaps get back to you.

Jan 05 06:39 PM

[Michael Fit...:]

GMiki: i found the interview, and there is a link to it on this page if others want to listen to it:
www.financialsense.com...
thanks again!

Jan 05 07:41 PM

[Ferdinand E...:]

Really valuable article that deserves the widest circulation.

Jan 06 02:16 AM

[User 332028:]

Yergin won the Pulitzer Prize, not the Nobel.

Jan 06 09:56 AM

[k45:]

Thanks for the eye opening explanations regarding Afghanistan.

I agree, oil (and well managed oil companies) is probably the most solid hedge for whatever comes down the pike. Gold seems more manipulated and not as solid of a hedge. (Yes, I say that fully realizing how much manipulation is done to the oil market.)

Jan 06 11:48 AM

[Michael Fit...:]

F. Banks: thank you.

User 332038: of course you are absolutely right...i got the Prize's prize confused. thanks for the correction.

k45: thanks. keep your eye on gold in the years ahead.

Jan 06 12:45 PM

[Shaggieman:]

Thanks Michael, I ordered the book.

Jan 06 04:49 PM