With a marvelous enduring potentiality for the Central Asian oil industry, the global geopolitical environment has been influencing national development, regional cooperation, and global energy trade including foreign aggression and raising unrest in Asian countries. Starting from the cold war era, the Central Asian oil industry has drawn the hungry sights of the USA and western countries, through Central Asia Oil industry has its obstacles from its production to transportation, pipeline, exporting, and access to new markets. Moreover, the Central Asian oil industry is facing dilemmas in terms of investment, regional conflicts, and political influence (Dorian, 29). This paper will examine these problems and prospects facing the central Asian countries, such as Azerbaijan, Kazakhstan and others.
The purpose of this chapter is to design a research methodology to formulate this paper. The researcher of this paper will use a descriptive approach as the descriptive research method tries to answer the questions regarding who, what, when, where, and how (Zikmund 55). Descriptive research is research, which designed to describe a characteristic of a population or a phenomenon. Here, the phenomenon is the oil industry of central Asia. In this research, the data will gather from secondary sources and mainly from the internet. The researcher will also use published journals, books, articles, and other research papers. It is necessary to mention that the researcher will not use the quantitative method. However, the information from secondary data sources will also help to find out the research problem and recommend a solution.
Talwani, Andrei & Daniel argued that Central Asia is the most ancient oil-producing region of the world and the particular oil-rich region of Central Asia is the Caspian Sea area. As per history, Azerbaijan was famous for the oil industry as the soldiers of Alexander (the great) collected oil to use in their shallow hand-dug wells. The modern oil well-digging history has also related with Azerbaijan, where a Russian engineer F. N. Semyenov in the Bibi-Eilat area of Apsheron Peninsula drilled the first oil well in 1848. Again, the first offshore well had drilled in 1924 in Azerbaijan (Talwani, Andrei & Daniel).
Another oil-producing country in the central Asian region is Kazakhstan. It has the largest recoverable crude oil reserves. Every day about 1.4 million barrels of crude oil are recovered in Kazakhstan, which is almost half of the total production of oil in central Asia. This oil is exported to different countries in the world, which is the basis of the economy of the country. With the help of the oil, in export, Kazakhstan has enjoyed a GDP growth of 9.5 percent. This is almost 30 percent of the country’s total GDP and approximately half of the country’s export revenues (Eia 1).
Apart from these two countries, there are many other central Asian countries where there is a strong reserve of oils. The Gulf Rentier states are amongst those. The term Rentier state refers to those states, which have their revenues coming from external sources or rents, like the income derived from oils. These countries are mostly dependent upon the oil reserves rather than the surplus productions of the domestic population. These nations are the forerunner of the collapsed Soviet Union. In these countries, after the collapse of the Soviet Union, socialism has abandoned, as most of them were part of the Muslim world. These rentier states have some good reserve of gas and oil, which embedded them with the world’s energy politics (Kuru 51-52).
The maximum oil reservoirs are in central Asia and there is a blessing over the countries near the Caspian Sea, which is the largest inland sea of the world. It divides Asia and Europe. There are five independent states termed the Caspian countries. These are Iran, Azerbaijan, Turkmenistan, Kazakhstan, Dagestan, and Kalmykia. As the Caspian Sea has economic importance from the ancient time, these countries are imperative too. The first-ever oil industry established in this region was in Baku, in the late nineteenth century. Later this territory became famous for its gas and oil reserves (Akiner 1-3).
At present, there are two main routes to transport oil from central Asia. The first route is through the Dagestan and Chechnya to Novorossiysk and the second route is the west to the Georgian port of Supsa. However, Chechnya has been suffering from war, and the transport fees work as insurance in this case. Nevertheless, the pipelines today are not capable enough to get a satisfactory amount of oil and gas to the outer world. In the modern oil-reliant world, where Americans, Europeans and Russians want more oil to purchase; Saudi Arabia and the United Arab Emirates want to transport their oil ignoring central Asia; the Central Asian countries, therefore, are having problems selling their oils to the outer world. (Worldpress).
Central Asian Oil Industry
The geopolitical consequences
The energy resources of central Asia have an overburdened consequence over its political and geological attributes. The oil reserves in these countries have triggered the rise of intense political and commercial competition, which mainly targets control over the energy sources. Thus different types of problems like intra-regional divergence, political volatility, aggressive competition between the multinationals, and the decrease in the commercial expertise and regulations occur. The basic importance of this area lies in the fact that it has oil reserves and for this, different forces always try to capture these countries. Evidence shows that in the time of World War II, Hitler tried to capture Baku for its oil wells as he thought it was important to dominate the world. Nevertheless, the actual emergence of the oil domination by Central Asia started after getting independence from Soviet Russia. All the countries started to explore their natural resources including the Central Asian countries, Gulf Rentier states and Caspian countries. The major countries that came out with explicit efforts to have enough oil reserves are Azerbaijan, Turkmenistan, and Kazakhstan. Thus, the other Arab countries like Saudi Arabia, Kuwait, and UAE lost their domination over the oil industry of the world (Arvanitopoulos 1).
The oil industry of Azerbaijan
The presence of oil in Azerbaijan is the key issue of relationship among the other countries of the world. As a country of the Caspian Basin, onshore oil preservation and exploration is one of the major concerns for Azerbaijan since the 1980s, as seventy percent of wells of Azerbaijan has been used up for more than thirty years. Moreover, in the last 15 years, no well had been discovered in the country; and as a result, the oil production of this country is falling steadily. For example, in 1980 this country produced about 14.7 million tons of oils per year, which decreased to 11 million tons in 1992 and 9.16 million tons in 1995 and 9.1 million in 1996. However, the observers are optimistic as most of the wells have substantial quantities of oil. There are some other wells, which has oil reserve but do not have the proper infrastructure to utilize. These are all onshore estimations, whilst the offshore reserves, which are accountable for 80 percent of the national production, have proven about 27,500 million barrels and have the potentiality to have more than 40,000-60,000 million barrels. Associations like ACG and AIOC are also trying to use oils from different sources.
Despite these aspects, the issue of transportation of oil from Azerbaijan to other countries creates barriers to the export of oil. Azerbaijan is suffering from the overlap of commercial, political, geopolitical, and practical decision-making problems regarding pipeline issues. It largely depends on the neighboring countries for transportation of oil, as it is a fully landlocked country. Many states near Azerbaijan have created border-level impediments, which prevented the country from connecting with the pipeline. Thus, the country has to rely on the pipelines of the Soviet era or the rail tankers. Various steps like regional integration had taken numerous times, but still, Azerbaijan has pipeline-related problems. (Hemming 1-15)
Another key problem for Azerbaijan regarding the oil industry is corruption. The corruptions include oil larceny, illegal tax reduction, construction and supplier level corruption and malfunctioning of the regulatory bodies concerning the oil industry. Because of these corruptions, the Azeri people do not get the proper taste of economic independence and the environment of the country is deteriorating day by day. It lessens the high amount of income that could have come from the oil sector, and consequently, the actual income of the government. As a result, the government does not get the tangible benefits for which they have invested a lot. The central organization for oil exploration, the State Oil Company has become the key centre of corruption. Mainly the top managers, subcontractors, have committed the corruption decision-makers related to oil price and the employees in subdivision level. The massive scale corruption took place in the equipments used in oil exploration. (COIWRP)
Oil well drilling had started in Azerbaijan in 1844 and since then this sector has been regulated for the betterment of the industry. Thus, the policy and strategy regarding oil exploration are consistently changing. Azeri government is placing a good amount of financial resources for oil exploration. Already they invested $22.0 billion for the expedition, development, and extraction of oil and gas wells within the period of 1995 to 2005. The strategic move triggered the crude oil exports and it expects to be 50 million tons in 2010; while it was zero in 1995 and 12.5 million tons in 2005. It is using outsourcing oil companies and it has agreements with 23 international oil companies. In the case of oil, it is following the multi-dimensional strategy and trying to ensure diversified, reliable, and cost-effective sources of supply. As a part of strengthening the industry, the government is continuously liberalizing the market (Huseynov).
Kazakhstan Oil Industry
Kazakhstan is holding the biggest oil wells in the Caspian Sea. It has a reserve of about 9 to 40 billion barrels of hydrocarbons. It is exporting about 1.2 million barrels per day and it has already consumed 250,000 barrels. In 2008, the production of oil was 1.54 million which increased by 1.71 in 2009. The production of oil is coming from small oil fields while 1 million barrels is coming from different established large companies. Source: EIA 2
From the above graph, it has been seen that the consumption is very less compared to the production, and for this, Kazakhstan is one of the best exporters of oil. This stimulation in oil production is the result of foreign direct investment in Kazakhstan’s oil industry. Different large joint ventures accompanied by different international projects triggered the oil boom in this country. The four major oil fields are Tengiz, Karachanganak, Kurmangazy, and Kashagan, which has expected to experience good growth in upcoming years. Various obstacles are also hampering the growth rate of the oil industry like government restrictions, bad weather, malfunctioned field maintenance and lack of integration with the pipeline that slows the growth rate between 2005 to 2007.
In the main four oil fields of the country, the maximum utilizable is crude oil. There is a barrier imposed by the government that goes against the flaring of associated sour natural gas. For this, production in the Tengiz field has been hampered. Another key difficulty was the repetition of mechanical problems. The government’s strict rules in concern of the environment have also been considered a major problem; many key companies have penalized for about 609 million USD from 2006 to 2007. In addition, the unavailability of proper technology has long-term consequences like Kazmunaigaz, which cannot be fully productive until 2013. Though different established multinationals are operating in Kazakhstan, it is not possible to make out full-scale production from any of the fields. Source: EIA 4
Moreover, Kazakhstan is using the facilities of other countries like Russia for cost-effective production. There are new expeditions in recent years within the premise of Kazakhstan but mostly it has been done by different foreign organizations.
Kazakhstan has been experiencing a good amount of export of oils throughout the world. It has the appropriate infrastructure for the oil export, which has a base on differentiated technologies. It has access to the most attractive export ways through the black sea, via Russia, the Persian Gulf and in the north-using rail. Now it has also access to the pipeline of the east to China. In 2007, there was export of 408000 barrels per day via Russia, 620,000 barrels via the Caspian Pipeline Consortium, 70000-80000 barrels via Iran and almost 85,000 barrels via China. Kazakh oils have been used as proxy oils for some countries as it has connections from the Black Sea and the Persian Gulf. The most significant benefit of Kazakhstan is the Caspian Pipeline Consortium (CPC), which is the actual strength of Kazakhstan. The CPC has about 980 mile-long connections, which connects Kazakhstan’s Caspian Sea area along with the black sea area of Russia.
The policies and strategies taken by the government of Kazakhstan are also the strength of the oil industry, although the government also creates problems by imposing some rules and regulations. To facilitate the export of oils during the next decade, the government is developing an internal transportation system, which is termed as “Kazakhstan Caspian Transportation System” which will transfer about 500000 barrels of oil per day. Government initiatives also ensure the doubling of the present Trans Caspian shipments. The government is also working together with the governments of Russia and Oman to make a consortium along with the established key foreign companies. To ensure the best revenue from the least investment, the government is now reviewing all the contracts. Along with this, the foreign investment structure has been redesigned to ensure proper investment in the oil sector. The government also taking the initiative to encourage the FDI in the refining sector as this sector is not getting enough concern (EIA 1-7).
The era of Post-Soviet, exploration was reserved oil and gas for Central Asia. However, Caspian countries are having more reserves on oil and gas than in the Persian Gulf, far from the North Sea. From 1050 billion barrels, Caspian countries can only recover 4-6% oil reserves, about 40-60 billion barrels as recoverable and usable. Although gas is important rather than oil, the process of evaluation of oil is reserved for worldwide uses in transportation and other projects. The development of Central Asian countries would be possible because of having huge oil reserves during the recent global recession. The following table shows the differences between oil and gas reserves and their productions in Central Asia:
Turkmenistan has motivated by loyalty to the “Sultan”, who is arbitrary in making decisions of his region. The usable resources, like oil, gas, etc. are monopolistic businesses. These have been operated by a few enterprises. This country has also been supported by Iran in the mid-time of conflict between Azerbaijan and Turkmenistan, because of expected development and exploration of oil fields. According to portfolio, the ownership of these fields belongs to Turkmenistan, which is in the Azeri and Chirag fields. The oil reserves have proven modest with 500 million barrels of oil. Compared to total oil reserves in Caspian countries, it has relatively small reserves of oil, but gas reserves are in a lucrative position. The reserves of this country are sustainable and considerable according to western standards. From the data of the Ministry of Oil and Gas in 1999, it has been seen that there are 2.1 billion tons of oil reserves, which are not recoverable. Therefore, the country is reserving a lot of oil compared to other countries worldwide.
Xingjian of PRC
Xingjian, the province of China is also another region of central Asia with huge natural resources and for its tremendous production of cola. Xingjian has a border with Kazakhstan, and it has extended cooperation with Uzbekistan by setting too many thermal power plants. China kept its keen eyes on the oil industry of Central Asia and gained some advancement through the electricity sector, water-energy management, and economic cooperation. Xingjian has a smooth GDP growth of about 12 percent per annum with its flourishing construction, manufacturing projects, agriculture production, trade, and services-oriented sectors with almost nil unemployment rates but seeking new markets for its products in surrounding central Asian countries and Beijing has taken its strategy to flourish its influence in this region.
Russian in Central Asia
At the end of the old war and fall of the Soviet Union, it is quite difficult for Russia to keep previous long-lasting influence on central Asian Oil industries but there is some unbreakable heritage of relationship that central Asian Countries are bound to sustain that relations. Such indissoluble segments are the transportation of oil gas to central Europe Russian federation and sharing Moscow bay has been counted as a top priority. Due to such a geopolitical situation, Russia has turned again unrepeatable power for the Central Asian oil industry (Laruelle 2).
US presence in Central Asia
US eyes on the Central Asian Oil industry have demonstrated its long-term vision to dominate and capture by any means. Some researchers have pointed out the gulf war, aggression in Afghanistan and Iraq all are the US route to capture the Asian Oil industry. The twin tower attack of nine-eleven is just an issue to legalize its unwanted interference in the Middle East and Central Asia under the banner of anti-terrorism. Through ethically Moscow and Begging were not likely to favor the presence of the US army in Central Asian countries, but they were bound to conform to the US arms presence in central Asia for their trilateral interest (Brill 15).
Both Moscow and Begging have taken the opportunity of the ever more undecided attitude to becoming regional leaders in consideration of the US involvement in economic and security issues. Previously the central Asian countries are involved with China through Shanghai Cooperation Organization, they have taken a strategy to improve relations with Moscow, and Beijing considering US presence is more dangerous for their independence (Tart 4).
From the estimation of BP, it is seen that Uzbekistan has reserves of 0.6 billion barrels in present days. However, in 2000, the Government had reserved 5.78 billion barrels of oil. Thus, the recoverable oil cannot demonstrate, but this country is now reserving in place with much greater independent analysis as seismic survey work and drilling. It has oil and gas reserves with excellent resources utilized in a systematic approach.
There are four regional parts in Russia, which are the onshore republic of Kalmykia, Dagestan and Chechnya and finally, the offshore regions of the northeast Caspian Sea. From the information of US Energy Information Administration, Russian Caspian has reserved 2.7 billion barrels of oil. According to Soviet-era data, there is a minimum of 14 billion barrels of oils reserved as recoverable sources.
From the above discussion based on the comparison between the Central Asian countries and Gulf Rentier countries, there can be four indicators. These are:
- Role of government: In central Asian countries, the government is directly influencing the oil industry but in the Gulf region, the government has leveraged control over the operation of oil. In central Asian countries, the government is sometimes creating problems too.
- Amount of production: The countries of gulf rentier state has heavy production amount every day compared with the central Asian countries. Iran and Iraq have the highest among them.
- Help of developed countries: The Central Asian countries are getting technological and infrastructural facilities from foreign countries like the USA, Russia, or the UK. However, Iran and most of the other Gulf countries are not taking any help from these countries.
- Export: The gulf rentier states mostly export their oils to Asia, Africa and a small amount in Europe but the Central Asian countries export mostly in the USA, Canada, Mexico and other American countries.
From the history of Post-Soviet Caspian energy investment, it is seen that the investment has generated misinformation and misunderstanding among these countries. These conflicts have reduced when the private sector investment process was considering analyzing the oil industry of Caspian countries with the help of various political powers. Some of them have recognized these countries as an alternative suppliers of oil and other natural resources to the Middle East and global market. Others have considered the conflicts among these countries for large-scale oil development for the benefit of the West. There are three confirmed and undeveloped Soviet Oil fields, which are Tengiz, Karachaganak, and Azeri-Chirag-Guneshli. Caspian Energy Development dominates these fields in recent days. According to Soviet resource predictions, Western exploration activity has extended to recover oil and gas. Two new oil fields are also found, which are Kashagan and Shah Deniz; far away from South Caspian offshore and downgraded according to future expectations for new oil.
From this paper, it has been observed that exploration failure costs are high; on the other hand, the success of exploration finding costs is comparatively low. Development costs of unrecoverable oil barrels are high, but it can be easier by building up new technologies and lowering transportation costs in the international market.
The oil of the Caspian region is competitive in global context, but it needs to exceed per barrel oil price to maintain commerciality and investors’ expectations from their investments in this oil business. Therefore, Caspian oil can suit multinationals in international portfolios and risk investment for a longer period.
- The central Asian countries should be recommended to expand regional cooperation with the neighboring countries rather than US or G8 to protect any aggressive interference to exploit their oil and natural resources. There are some Asian and European countries like Turkey, Iran, and India that can assist the Central Asian countries for their smooth growth rather than power practice. Leaders of Central Asian countries should extend relations with such countries.
- The oil industry of Central Asia should try to develop its routes, as the existing pipelines are only able of getting a small portion of the area’s oil and gas wealth to global market;
- In addition, the demand is very high and Central Asian republics are eager to trade more oil, the countries of these regions should contract with each other to increase new routes and it has to develop secure pipelines;
- From the above discussion, it can be said that the Caspian region has a brighter future to become market leader in the oil and natural resources sector within a short or medium period. However, some other factors are present in Caspian to hamper the oil industry, such as the cooperation between Russia and the EU, geopolitical events created by the United States and Europe in Central Asia, and the energy supply strategy between Russian and European Union. To improve the Caspian oil industry, the risks of business should be minimized. Moreover, Europe should give importance to the Caspian oil producers as global oil producers. These can bring actual success to the oil industry of the Caspian region.
The views of political economy would support to have the sovereignty of Central Asian countries and self-control upon their oil industries but the great powers are washed-out their own views of central Asian Leaders for several years and have taken aggressive attitude to this region, which is unethical to the humanity and united nations viewpoint.
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