The world's industrial countries are facing the possibility of a new oil crisis in the next century, as the Asian economies expand and instability in the middle east persists. For this reason attention has shifted to the giant oil and gas reserves in central Asia and the Transcaucasus.
The three fledgling states of Azerbaijan, Kazakhstan and Turkmenistan have some of the world's largest oil and gas reserves, dotted in and around the Caspian Sea. But they all share a problem: the existing pipelines which deliver their oil and gas to international markets pass through Russia, which can thus threaten the economic independence of the southern flank of its lost empire.
The US and Turkey have tried to nudge the southern republics away from Russia by promoting new pipelines which take the oil westwards. The US's arch enemy, Iran, has also embarked on its own pipeline strategy, making use of its growing commercial links with Islamic central Asia. But, so far, Moscow has managed to hold its ground.
The battle for the Caspian pipelines echoes the "great game" of the late 19th century, when Britain and Russia duelled for control of trade routes to central Asia and Afghanistan. In the modern version, the glamour comes not from youthful spies disguised as spice merchants, but from flamboyant oil tycoons and bizarre politicians.
The battle for Azerbaijan
The oil war is complicated by the fact that Azerbaijan, Kazakhstan and Turkmenistan are unstable new nations run by dictators.
Baku, the capital of Azerbaijan, was the oil centre of the world at the end of the 19th century. European pioneers flocked to this remote city on the Caspian to make their fortunes. It was Baku's oil which helped Shell break the Rockefellers' monopoly at Standard Oil, and which lured Hitler to his ill-fated foray into the Caucasus.
Baku's global importance evaporated under communism, but it got its second chance after the collapse of the Soviet empire in 1991. A cluster of European and American oil companies, later known as the Azerbaijan International Operating Co (AIOC), negotiated an $8 billion contract to develop three giant oil fields.
In its early days of independence, Azerbaijan was a mess. The country was at war with Armenia over the disputed enclave of Nagorno-Karabakh and its first post-Soviet president, Ayaz Mutalibov, was toppled in June 1992. He was replaced by Abulfaz Elchibey, a nationalist dissident who wanted to renew Azerbaijan's historical links with Turkey and wriggle free of Russia.
Alarms began to ring in Moscow when the Turks and Azeris agreed to build an oil pipeline from Baku to the Turkish Mediterranean port of Ceyhan, which would bypass Russia altogether. To make matters worse for Moscow, no Russian oil companies were involved in the AIOC production deal.
Then, in the space of a few months, Azerbaijan was yanked away from its alliance with Turkey. Elchibey was due to sign the AIOC deal in June 1993 on a trip to London, but his hold on Azerbaijan was slipping. Armenia had overrun a chunk of Azeri territory; unrest was growing. A military coup, backed by Moscow, forced Elchibey from power and marked the return of Azerbaijan's most famous and crafty politician, Geidar Aliyev.
Aliyev, former head of the Azeri KGB and member of the Soviet politburo, installed his cronies in positions of power and snuffed out all traces of opposition. After his ascent to power, Azerbaijan rejoined the Commonwealth of Independent States. More importantly, Aliyev renegotiated the AIOC deal and gave LUKoil, Russia's largest oil company, a 10 per cent stake in the consortium.
The new Azeri leader had to re-establish good relations with Moscow without jeopardising those with the Turks. The pipeline issue made this almost impossible, for Russia wanted all future Azeri oil to pass through the existing pipeline which stretches from Baku to the Russian Black Sea port of Novorossiysk.
After intensive negotiations in Washington, London, Moscow and Ankara, Aliyev finally signed the AIOC deal in September 1994. But while the Azeris celebrated the "deal of the century," the Russians began to raise some awkward legal questions.
The Caspian is a completely landlocked stretch of water and, besides its vast oil reserves, produces most of the world's caviar. The Russian foreign ministry argued that the Caspian is in fact a lake, whose natural resources must be shared between the five littoral states of Russia, Iran, Turkmenistan, Azerbaijan and Kazakhstan. The Azeris and Kazakhs have argued the opposite, insisting that the Caspian is a sea, which should be split up into five separate national sectors.
The Russians themselves are divided over the Caspian issue. The foreign ministry's ambitions are opposed by the powerful oil and gas lobby, led by prime minister Viktor Chernomyrdin and by LUKoil, whose president Vagit Alekperov is a native Azeri involved in most of his country's major oil projects. For the moment, the latter group appears to have the upper hand.
The Chechen question
US companies hold over 40 per cent in the AIOC consortium and Washington has refused to allow the Iranians to join them. Iran's exclusion has embarrassed Azerbaijan, which is eager to maintain good relations with its Muslim neighbour. Despite warnings from the US, Azerbaijan has allowed the Iranians a share of its oil wealth: in May 1996 they acquired a 10 per cent interest in the development of the Shah Deniz oil field, in which no American companies are involved.
"We control our own destiny and possess our own natural resources," Aliyev said last year in a veiled warning to Russia. But Moscow was having other problems with its oil routes. The invasion of Chechnya in December 1994, showed its determination to prevent the breakaway Caucasian republic from controlling a stretch of the Baku to Novorossiysk pipeline. It proved a disaster. Two years and thousands of casualties later, the Russians have in effect conceded Chechnya's sovereignty.
Future oil production in Azerbaijan still depends on stability in Chechnya. Transneft, the Russian pipeline operator, has a contract with the AIOC group to pump significant volumes of oil via Chechnya from August and is now negotiating directly with the Chechen authorities. The recent election of Chechen president Aslan Maskhadov improves the pipeline's longterm prospects.
More Azeri oil is supposed to be transported via another pipeline which will run westwards to the Black Sea in Georgia. The Georgian route is backed by the US, which last year strongarmed Azerbaijan and the AIOC into choosing it as a supplement to the Russian route. In a 40-minute telephone conversation, underlining its importance for Washington, Bill Clinton personally urged Azeri leader Aliyev to use the pipeline. Work on the Georgian pipeline is due to begin in March, with the required $300m to come from the AIOC. Provided the Russians do not interfere with the project, the pipeline should be operating by the end of next year.
Georgia has been offered a large chunk of aid by the US. But Russia, which still has troops stationed in Georgia, has kept a close eye on Washington's diplomatic overtures. Eduard Shevardnadze, the Georgian head of state, has to tread carefully.
Turkey also supports the Georgian route, which it sees as the first step towards the construction of its coveted Baku-Ceyhan pipeline. And the Turks have one ace up their sleeve: the Bosporus strait, the only outlet from the Black Sea to the Mediterranean. Future Caspian oil exports-as well as Russia's existing Black Sea exports-have to pass through the Bosporus and Turkey has threatened to restrict tanker traffic for environmental reasons.
The tangled tale of Tengiz
Like Azerbaijan, Kazakhstan, the largest of the central Asian republics, is both dependent on Russia and unstable. At the end of the 1980s it was the best hope of western oil companies and Chevron had its eyes set on Tengiz, one of the largest oil fields in the world.
After Kazakhstan gained independence in 1992, John Deuss, a Dutch businessman, developed a plan for a pipeline connecting Tengiz to Novorossiysk. (Deuss made his first fortune in 1977 with over $100m worth of Russian oil belonging to the Soviets.) His involvement with Kazakhstan began when the Sultanate of Oman provided a $100m loan to the central Asian republic to promote friendship between the two countries. As president of the Oman Oil Company-Oman's investment arm-Deuss had the funds he needed.
By the end of 1992 Deuss had created the Caspian Pipeline Consortium (CPC), which was to build the Tengiz-Novorossiysk pipeline at a cost of over $1 billion. The three members of the group were Oman, Kazakhstan and Russia, each of which held a 25 per cent interest; the remaining 25 per cent was put aside for Chevron, which was still negotiating a contract with the Kazakh government to develop Tengiz.
With Deuss's assistance, Chevron finally set up the Tengizchevroil joint venture with the Kazakhs in April 1993. Chevron thought it had struck gold, but several unforeseen problems then arose. The Russians decided to exploit their control of the pipeline which pumps Kazakh crude to western markets. Transneft began to impose all kinds of restrictions on Chevron, forcing it to pay for special plants to remove foul-smelling compounds from its oil. Even then, Transneft still restricted Chevron's output.
As Chevron was haemorrhaging dollars, Deuss himself began to turn the screw. Realising that the Americans were desperate to join the CPC group, he demanded Chevron stump up most of the cost in return for a non-voting 25 per cent stake. The turning point came in 1995, when Deuss's main Omani backer, deputy prime minister Qais al Zawawi, was killed in a car crash. The Omanis became less tolerant of Deuss's behaviour and the two sides have now parted company.
In April 1996 a new-look CPC was formed, in which a number of international oil companies, including Chevron, feature prominently. Russia and Kazakhstan are the largest shareholders, while Oman's share has been whittled down from 25 per cent to 8 per cent. With a final contract now signed, construction will begin by mid-1997, with completion scheduled for 1999.
The Kazakh government was relieved, as it had suffered a sharp drop in foreign investment as a result of the CPC deadlock. Western oil executives now throng the capital, Almaty, and a new class of wealthy Kazakhs drives around in flashy German cars. The Kazakh president Nursultan Nazarbaev is no democrat, but he has created a stable legal environment for foreign companies. He has also managed to strengthen relations with Moscow despite his country's often restive Russian minority.
the cult of niyazov
Turkmenistan, the southernmost central Asian republic bordering Iran and Afghanistan, has yet to emerge from the dark ages. The all-powerful president and former head of the Turkmen communist party, Saparmurad Niyazov, has built up a rigid personality cult. His white hair and chubby face adorn most public buildings in Ashkhabad, the capital. Niyazov, the "Father of all Turkmen," has staked Turkmenistan's future on its gas reserves which, some estimate, are the third largest in the world.
But Russia's most powerful company, Gazprom, controls Turkmenistan's gas exports. It picks up Turkmen gas at the border with Uzbekistan and then sells it at a handsome profit to Ukraine and other former Soviet republics. The only way Turk-menistan can wriggle free of Gazprom is to build a pipeline which bypasses Russia. The US and Iran are promoting rival pipeline schemes, both of which have the support of Niyazov.
Iran recently started work on a relatively small pipeline running from southern Turkmenistan to northern Iran. The Iranians have agreed to finance most of the project, with Turkmenistan to pay them back in gas. But Iran cannot be counted on to complete the project, as no international banks are willing to fund it. On a much grander scale, California-based Unocal and its Saudi partner Delta are planning a $2 billion pipeline running from a giant gas field in southern Turkmenistan, down through western Afghanistan and ending up in Pakistan. The US/Saudi group has carried out studies of the route, but has not set a construction schedule.
Afghanistan's long history of conflict makes it an unsuitable place to plan a pipeline. The takeover in Kabul by the Isla-mic militant Taleban movement has not improved the situation. The US has found itself in a tricky position. Its allies, Pakistan and Saudi Arabia, are both suspected of providing military assistance to the Taleban, and have welcomed the events in Afghanistan.
Washington's main priority is to weaken Iran's influence in central Asia. But the central Asians see Iran as a natural trading partner. For example, it shares a long border with Turkmenistan and can now send in goods along the recently completed railway linking the two countries. The Taleban are perceived as a far greater danger than Iran.
A Russian victory?
All three energy-rich republics around the Caspian remain politically unstable, as the big powers compete to control their production and pipelines. The US has so far failed in its bid to steer these republics away from Russia and Iran. Its alliance with Turkey has become shaky, with Ankara's Islamist government signing huge gas pipeline deals with the Iranians and the Iraqis. Russia still holds most of the trump cards in the pipeline wars. Its Achilles' heel has been Chechnya, but if, as now seems likely, Moscow can reach a lasting pact with Grozny, then the bulk of future Caspian oil will flow across Russia after all.
