Caspian Region Energy Politics

ENERGY POLITICS
CASPIAN REGION ENERGY POLITICS ‘Except Russia’
Ece DINCASLAN

One significant geopolitical and geo-economic consequence of the collapse of the Soviet
Union was the rise of an intense political and commercial competition for control of the
spacious energy resources of the Caspian Region. Both international players, states and oil
companies, became involved in a serious competition in the fields of oil, gas and pipelines. In
order to understand the complexity of Caspian Bonanza firstly, control of production of the oil
and gas, and secondly, control of the pipelines that will transfer the hydrocarbons the world
markets should be examined.
However, there is an emerging question: Can the Caspian Sea be our savior in the energy
deal? or Is it worth for the compelling missions? Thus, The Caspian Sea is an newly emerged
region of potentially big oil resources. The situation of this region could relief problems that
would result from a cutoff of oil imported to the U.S. and European Union thereby giving
them especially U.S search in its oil imports while it tries to create a less oil dependent nation.
The Caspian Politics changed especially since the breakup of the Soviet Union. Azerbaijan,
Kazakhstan, and Turkmenistan are no longer part of the Russian Federation and have now
opened up their fossil fuel expectations to foreign investors. Despite this, geopolitics,
pipelines, oil dependence from other countries and the lack of desire to look for alternative
means are the arising questions.
In the assessment of geopolitics and pipelines; five border countries in the Caspian Sea and
their own agendas regarding the politics in the region - Turkmenistan, Kazakhstan, Iran,
Azerbaijan ‘which are evaluated and examined in this paper’ and Russia- especially when it
comes to the pipelines are formed the main pillars. Moreover, there are players include in the
politics of Caspian Region except the Five Caspian Sea Neighbors; United States, China,
Turkey, other Regional Neighbors like Pakistan, Afghanistan, and India and the Oil
Companies.
It’s not just only the United States who is seeking more and more oil to meet its needs.
What’s more, other countries, especially Asian countries, are going to have additional oil
needs in the coming decades. China and India with their large populations and related rising
energy hungers are going to exceed the U.S.’ demands for oil in the coming years. Benefits
coming from the Caspian Sea, provides a safety net while other energy alternatives are being
researched and developed and the U.S. would be less dependent on the Middle East and the

fragile political structures that control that region’s oil. There are only estimates as to the
reserves; no one really knows how much oil exists (Can the region stand in the 2nd rank after
Middle East or not?, Are the reserves sufficient or abundant enough?) Also the political
instability exists in the region. Hence, pipeline security is questionable and getting the oil out
has become a political issue. China and the United States have their own agendas as to who
should get the oil and where the pipelines should go.
Pipelines are a big deal in the Caspian Region. Because, “In landlocked central Asia there is
no point in pumping oil and gas if you cannot get it to market. All the pipelines in the area
run over Russian soil and, until now, the Kremlin has been playing hardball limiting the
access to pipelines and charging usurious tariffs.”1
The behaviors of other players, such as The U.S., China, and the Oil Companies should be
estimated. The United States is trying to create ties with some of the former Soviet countries
in order to contain Russian dominance in the region. Moreover, the U.S. presence in the
region due to September 11, has facilitated some of the pressure to follow Russia’s lead by
some of the Caspian states and U.S. presence has been seen by some to provide an excuse to
side with it. Unfortunately, the U.S. policies against Iran have locked U.S. companies from
that market. An Iranian pipeline would only harm the companies even more, investments are
relatively low. Besides, If we look at the China’s perspective; It will increasingly be searching
for oil. Thus, the Asia-Pacific region as a whole is dependent on Middle East oil and more
than 90% of the region’s oil comes from the Middle East. Finally, the Oil Companies have
expressed interest in investing in the region. They are expected to invest the billions of dollars
to create and maintain the needed pipelines. However, divergence of the politics and
unintended consequences has added difficulties to the investment possibilities in the regions.
For example; U.S. oil companies are prohibited from investing with Iran but other companies
are not and political instability in the region makes companies hesitant to invest. What’s
more, the fear of Middle East, like problems compound the region’s image as unstable.
1
Ben Aris, Falling Out With the Neighbors; How tension and rivalrybetween the five central Asian states are holding back
further economic progress

Pipeline Security is also an important point which is a complex issue in the present and
future. The issue, who will protect the pipelines and who will pay for the security is an
unclear framework.
In the legal sense, the status of the Caspian Sea is the most prominent thing. Caspian Sea is
Lake or a Sea? If it is a sea then the three mile limit of the territorial water should be applied,
so granting of access permits to foreign vessels and boundary disputes are an issue between
many of the countries in the region. Thus, what can be done in order to cope with these rising
problems? Regional discussions and treaties are the best means of solving the boundary
disputes. Also, contracts between oil companies and the countries’ need to address issues of
infrastructure, pipeline security and pipeline transportation can be done in order to solve the
problems. They need to be guaranteed by regulations and laws. In the fact, the United States
needs to eliminate the barriers it has imposed on U.S. oil companies in order to prevent
investment in Iranian oil may lighten the problematic weight of the region.
To sum up, the Caspian Sea is filled with possibilities but two big problems stand in its way
to becoming the savior to US dependence on Middle East’ oil. To achieving this, pipelines
need to be built and politics affect everything in the region and at this time prevent a
productive solution to the pipeline problem. The former U.S. Assistant Secretary of State
Marc Grossman was quoted as underlying, “Bringing Caspian energy online could be one of
the most significant developments of this decade.” Besides, the U.S. and China seem to the
key outside players in that they have the money to invest in pipelines and the desire to have
the oil. If the oil flows West then China’s dependence which is far greater than the U.S.’s, on
the Middle East would remain the same and If the oil flows East then there would be more oil
for the U.S. but the dependence on that region has at the least remained the same and at the
worst grown.
The facts and important figures, which indicated the above, the case of Turkmenistan
viewed in this paper. The geopolitics of natural gas in Turkmenistan, in the Caspian Region,
is rapidly gaining importance while indicating historical case studies and advanced economic
modeling to examine the interaction between economic and political factors in the
development of natural gas. Increasingly, natural gas is the fuel of choice for consumers
seeking its relatively low environmental impact, especially for electric power generation,
surpassing coal as the world’s number two energy source and potentially overtaking oil’s

share in many large industrialized economies. Hence, the topic is really important since
world’s gas consumption is expected to be doubled over the next three decades. Moreover,
this paper will analyze the reasons why Turkmenistan is facing with a number of difficulties
to sell its gas to the international market. As a result, the case of Turkmenistan shaped around
the relative roles played by geopolitical factors, the economics of transportation and sale of
gas, and how these are affected by the routes.
Today, Turkmenistan is important to world energy markets because it contains the world's
fourth largest reserves of natural gas within a singular national boundary, with estimates of
the country's total gas resource is 265 tcf or %4.2 However, five years after independence
from the Soviet Union, Turkmenistan's economic and political situation remains constrained.
Economic reform has made almost no headway, with the state continuing to dominate and
interfere nearly all sectors. Foreign investment in the country remains minimal. Meanwhile,
hopes for riches from natural gas exports have not been realized, and the country remains
dependent on Russia for almost of its trade. In the case of inflation; there is the highest rate, in
the former Soviet Union (FSU), while Turkmenistan's currency sank in value. The sudden
death of Turkmenistan’s political leader Saparmurat Niyazov, in December 2006, who had
ruled the country as its Soviet Community Party, first elected president, that closed the
chapter in Turkmenistan’s long history and opened the possibility of change in the most
isolated and unreformed former Soviet republic. Gurbanguly Berdymukhammedov, Deputy
Prime Minister since 2001, was quickly named acting president and easily won a February
2007 presidential election severely criticized by foreign observers as neither free nor fair. The
new president has already announced several moderate policies, but he has also called for
continuity in domestic and foreign policy and a gradualist approach to change. He has also
reassured Russia, Turkmenistan’s most important economic partner, that existing contracts to
supply natural gas will be honored, decreasing fears of a disruption in energy supplies to
Russia and Europe. In order to provide a legal regime that, Turkmen government would
attract foreign investment (FDI) in its oil and gas sector, in both the development and
expanded exploitation of fields, and the transportation sector. Though the government
promulgated many laws, it provided no real protection for investments.
Throughout the Soviet period, Turkmenistan's economy was based on exploitation of its
natural gas, oil, and cotton. Its resources seemed more limited, and the challenges more
2 The World FactBook 1 Jan 2009 est. (after Russia, Iran and Qatar), and International Energy Outlook 2010.

daunting, than in other Caspian countries. Eighty percent of Turkmenistan is desert, and as
primarily a raw material supplier for the former Soviet Union (FSU), the country was the least
developed of all of the new states. Today, the government is focusing its attention of
expanding its export markets for its natural resources and increasing the value of its exports.
The government has placed a priority on investment in light industry, transportation and
communication networks, and processing facilities. In addition, the government has invested
heavily in infrastructure improvements designed to attract foreign businesses to invest in
Turkmenistan. The government has now turned its attention to reforming its economy and
legal system to support these priorities.
Turkmenistan is not only a gas producer but also the fourth largest producer of oil ‘197.700
bbl/day’, in the former Soviet Union after Russia, Kazakhstan and Azerbaijan.3 While home
to vast reserves of oil and gas, Turkmenistan’s export of these reserves to foreign markets has
been complicated by the geopolitics of pipeline construction. To tap its export potential,
Turkmenistan has focused on development of the energy industry. At the same time other
sectors of the economy have lagged. Growing poverty, declining living standards, the
expansion of organized crime and narcotics trafficking, and ethnic and tribal divisions are all
potential sources of instability. The Niyazov government has responded to these problems
with a variety of reform measures, but inconsistent policies, arbitrary regulations, and the
absence of legal mechanisms for the enforcement of contracts have discouraged foreign
investment and slowed economic growth. In this atmosphere, expected energy revenues could
lead to turmoil and conflict, rather than providing broad benefits to the population.
Turkmenistan has about 2.1 trillion cubic meters in reserves, amounting to 1.2 percent of the
world’s reserves, and making it the state with the 13th largest natural gas reserves. With large
reserves and a small population–just under 5 million–Turkmenistan’s citizens and enterprises
require only a fraction of the state’s natural gas. In 2002, for example, Turkmengas and
Turkmenneft, the only relevant players in the state, produced 71 billion cubic meters of gas;
of those total, Turkmen citizens and industries used only 15 billion cubic meters, or 21
percent, leaving nearly 80 percent for export.4
Niyazov has failed to develop alternative export routes for Turkmen gas. Russian firms such
as Gazprom control the pipeline network and force Turkmenistan to sell its gas to customers
3 The World FactBook 2009 est.
4 Sergei Rudnitsky, “Turkmenistan’s E&P Projects Achieve Good Pace,” World Oil Magazine 224, 1; Burren Energy,
“Operations: Turkmenistan,” <www.burren.co.uk/turkmenistan.htm> (March 2006).

in Russia and the Commonwealth of Independent States (CIS) at well below international
market value. With their domestic and regional markets satisfied at relatively low cost,
Russian firms then sell Russian gas to lucrative markets in Europe.5 Ukraine is the second
largest importer of Turkmen gas; it pays for half of its gas through construction work in
Turkmenistan and is obligated to pay for the other half of its gas in cash. In addition, the
accumulated gas debts of the former Soviet Republics, gas contraction in demand and, the
difficulties in the transition routes of Russia's gas and higher wages results in Turkmenistan to
rely on existing pipelines.
Mysteriously, in April 2009, gas pipeline explosion occurred which cut Turkmenistan's
natural gas exports to Gazprom. The government blamed Russia for the explosion, which
Gazprom denied; However, Gazprom afterwards sought a price reduction from Turkmenistan
and did not resume importing gas until January 2010, when it began accepting significantly
less gas at a reduced price exported from Turkmenistan. This event, which resulted in a large
income loss for Turkmenistan, worsened relations with Russia.
Under these conditions, Turkmenistan must find the most politically viable and
economically feasible route for exporting its natural gas to global markets. Its choices are
wide ranging and have their both costs and benefits. The government of Turkmenistan is
looking for foreign investment to explore and develop its gas industry and export routes to
hard-currency markets. Resource areas have been made available for joint-venture projects
and production sharing arrangements but the legal regime remains incomplete. For all the
idiosyncrasies of its ruler, Turkmenistan was and still is eager to attract foreign investment in
its oil and gas sectors.6 Beside this, President Berdymukhammedov has forsaken at least some
of his predecessor’s inward focus, in favor of a “multi-vector” natural resource strategy means
based on its own politico-diplomatic capabilities and economic power also completing with it
by ‘political interference, financial leverage, blackmailing, and strategic communications’,
which is underlining the multiple hydrocarbon export routes, and the various gas importers
each have a route in mind.
Two new routes offered the potential for good return on capital
invested, with little need for technological innovation. The first would
5 Martha Brill Olcott, Central Asia’s Second Chance (Washington, D.C.: Carnegie Endowment for International Peace,
2005), 38, 100.
6 Turkmenistan has 2.86 tcm of proven gas reserves and 1.4 billion barrels of proven oil reserves.
EIA. International Energy Outlook, April 2004.

take Turkmen gas across Iran and then on through Turkey to markets in
Europe. The second would send Turkmen gas through Afghanistan to markets in
Pakistan and India (the TAPI and IPI pipelines). A third possibility, which
offered long-term potential as new technology came on line, was to send
Turkmen gas across Central Asia to the ports of eastern China and then
possibly on to Japan (the Central Asia-China pipeline). There was also strong
U.S. government support for Turkmen gas to be shipped via a Baku-Tbilisi-
Erzurum pipeline across the Caspian Sea (South Caucasus Pipeline or Shah-Deniz
Pipeline), parallel to the Baku-Tbilisi-Ceyhan oil pipeline. The Trans-Caspian Gas and
Nabucco Pipeline are the other options.
120-mile Korpeje-Kordkuy pipeline would take Turkmen gas across from Korpeje field
north of Okarem in western Turkmenistan to Kordkuy in Iran and then through Turkey to
markets in Europe. The 1996 agreement between the two countries provides for 8 tcf of gas
within the next 22 years. Iran financed 90% of construction costs, which was later paid back
by gas deliveries. Although, the plans are quite big, some imports were stopped due to
“quality issues,” but were probably related to decreased demand in Turkey. On the other hand,
At the beginning of 2002, a second pipeline was opened between the two countries with the
goal of expanding Turkmenistan’s exports to 20 bcm/y.
Plans for the Trans-Caspian Gas Pipeline (a proposed gas pipeline through the Caspian Sea,
Azerbaijan and Georgia to Europe), which has been in various stages of discussion and
negotiation since 1999, have also turn out no concrete results. It was aimed to bypass Russia
and deliver Turkmen gas to Europe are unlikely to materialize before the end of this decade,
considering the various challenges such as high costs and technical difficulties. This is the
case despite the European Union’s (EU) and US State Department’s concerted efforts to
convince the Turkmenistan government that a pipeline across the Caspian Sea, which would
exclude both Russia and Iran, is the best route for natural gas export to the west. Following
the death of President Niyazov, the EU and United States redoubled efforts to secure energy
deals with Turkmenistan. The United States has sponsored training assembles in
Turkmenistan through the US Trade and Development Agency. Assembles focused on the
issues necessary to manage oil and gas licensing and negotiation production sharing
agreements. Besides Nabucco and Trans- Caspian Pipelines are interlinked, in order to

construct Nabucco, Trans- Caspian Pipeline need to be finished first. The under-sea pipeline
from Turkmenistan could link up with the Europe’s ‘great pipe hope’ Nabucco, to aid its own
diversification from Russian energy dependency. However, Russia and Iran opposed the
Trans Caspian Gas Pipeline so that Nabucco for the same reason; building the pipeline would
divert Turkmenistan from using their pipelines systems, thus the dependence will be
decreased. The US opposition to IPI is revealed the Russian antagonism toward Nabucco.
According to the Russian Natural Resources Ministry, any gas or oil pipelines across the
floor of the Caspian Sea would be environmentally unacceptable Russian Deputy Prime
Minister Igor Sechin: ‘depressed regional demand, over-supply, as well as asserting the EU-
backed Nabucco simply has no future’. On the other hand, Turkey favored this pipeline just as
much as any other pipeline that could be built sooner and could start transmission of gas to its
market. This opposition, as well as a host of other factors, could well put the project on
standby.
According to some accounts, the project could be killed by current plans on the part of
Gazprom and the Italian company ENI to pursue the Blue Stream Pipeline Project to construct
a 400 km gas pipeline, with an annual capacity of 16 billion cubic meters, from Russia’s
Black Sea coast under the Black Sea to the Turkish port of Samsun, and then on to Ankara,
Turkey.7 It will increase Turkey’s dependence on Russian gas from 66% to around 80%. The
sea link is technically difficult, but both parts have forcible financial interests in the project
and are positioned to capture an important part of the Turkish market. The route is shorter and
the source gas is intensely low-cost. The project is finished and gas flow started in February
2003 although Turkey does not seem to be able to take the agreed volumes in the short run as
the country has contracted for more gas than the domestic demand, which has fallen even
further behind the contracted volumes due to the economic crisis in Turkey since 2001.
Natural gas supplies from Shah Deniz field in Azerbaijan are quite promising as well. In
2001, Turkey signed an agreement with Azerbaijan to import 3.1 tcf of gas over 15 years. The
natural gas supply will be done through Baku-Erzurum pipeline which will be laid alongside
the main oil export pipeline of Baku-Tbilisi-Ceyhan. British Petroleum company became the
technical operator of the Baku-Tbilisi-Erzurum gas project and it is also in charge of building
the Baku-Ceyhan oil pipeline.
7 For some of the public debates, see “Rival Gas Suppliers Race for Turkish Market,” Caspian Investor Newsletter, February
1999; “Black Sea Gas Pipe Start Seen in Autumn,” Reuters, March 24, 1999

The Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline continues to be discussed,
although no significant progress has been made to date. Negotiations that were to have taken
place in October 2008 no significant results, as Turkmenistan failed to provide gas
certification, which was requested by Pakistan and India.8 Instability in Afghanistan continues
to be a major stumbling block to the realization of the project. The proposed pipeline would
cross 1,680 kilometers and cost an estimated $7.6 billion.9 The Asian Development Bank is
reportedly considering a comprehensive review of the feasibility study conducted for the
project.10 Also there is an option of the $7.5 billion, 1,700-mile Peace Pipeline (IPI) project
which is approximately cost as the same, would bring gas from the South Pars Gas Fields
through Baluchistan (in western Pakistan) into India. However, this project faced with strong
opposition of US. The reason is that, US wanted to isolate Iran form the world community.
What’s more, US intended to diminish Russia’s weight in Central Asia and Afghanistan’s
importance must be taken in to consideration. Because, Afghanistan is a strategic piece of real
state “energy bridge” in the geopolitical struggle for power and dominance in the region.
Thus, the 2006 U.S.-India nuclear agreement puts pressure upon India to cooperate with
American foreign policy purposes, and damaging the Iranian economy through oil imports.
On December 2010, Representatives from Turkmenistan, Afghanistan, Pakistan and India
signed the Turkmenistan- Afghanistan-Pakistan-India (TAPI) Natural Gas Pipeline
Framework Agreement between the Government, as well as a government agreement on
measures to implement the gas pipeline project. According to the Turkmenistan
Governments’ estimates, after the pipeline is built up, Turkmenistan will transport about 33
billion cubic meters of natural gas. The whole project would cost 4 billion U.S. dollars.
In May 2008, The EU and Turkmenistan signed an agreement on energy cooperation, which
Europe hopes will reduce its dependence on Russia.11 Another significant aspect of the
Turkmen gas, that European Union is tired of relying on Russia; it is again looking for
alternatives. According to the International Energy Agency (IEA), 80 percent of primary
energy supplies in Turkmenistan are dependent on natural gas, and only 55 percent of the
power generated in the country goes to various industrial usages.12 The EU is aware of the
8
Khalid Mustafa, “TAPI Gas Project Hits Snags,” October 31, 2008, The News, http://the
news.com.pk/print1.asp?id=144078, accessed November 20, 2008.
9“Turkmenistan’s Pipeline Prospects: China, Russia, India, or Europe?” August 11,
http://www.bicusa.org/en/Article.3870.aspx2008, accessed November 20, 2008.
10
Khalid Mustafa, “TAPI Gas Project Hits Snags,” October 31, 2008, The News, http://the
news.com.pk/print1.asp?id=144078, accessed November 20, 2008.
11
http://www.iht.com/articles/ap/2008/05/27/business/AS-FIN-Turkmenistan-EU-Energy.php, accessed November 19, 2008.
12 EIU Turkmenistan Country Profile, 2003 and IMF Staff Country Report, no. 99/140, December 1999.

situation that Turkmenistan has the potential to rival Russia’s influence and power in natural
gas and provide an alternative for the EU. It has made clear that human rights concerns take a
back seat to energy questions with its refusal to sanction Turkmenistan for its human rights
violations in spite of calls from international human rights activists to use its leverage to push
for improvements in this sphere.13
China has made more progress in securing a greater presence in Turkmenistan’s Energy
market than the Europeans or Americans. A new gas pipeline is under construction—the only
new pipeline to break ground—with plans for the first natural gas to flow to China in 2009
and an estimated annual capacity of thirty billion cubic meters.14 The pipeline is estimated to
cost $30 billion and will traverse 1,818 kilometers to export natural gas from Turkmenistan
through Uzbekistan and Kazakhstan, delivering it to Xinjiang, China, where it will connect to
the West-to-East natural gas pipeline to Shanghai. According to the Bank Information Center,
“The China National Petroleum Corporation (CPNC) is requesting a $2.5 billion loan from
the China Development Bank to fund construction for the segment in Uzbekistan.”15
The struggle for control over pipelines is as much about geopolitics as it is about energy.
Steve Levine, author of The Oil and the Glory, The Pursuit of Empire and Fortune on the
Caspian Sea, stated in an interview with Radio Free Europe/Radio Liberty in September
2008, “the United States fears that Gazprom’s growing hold (on those supplies) is translating
into political power and influence in the European theater, and the United States seeks to
assert its own leverage into the equation.”16
However, this paper argues, even in the absence of these geopolitical factors,
Turkmenistan's new pipeline projects may still have had difficulty moving forward, given the
number of political and economic risks associated with doing business in Turkmenistan as
well as in the transit countries. Moreover, the country faces several difficulties and constraints
such as project financing, limited technical capabilities in development of gas fields, and a
lack of adequate gas infrastructure. These factors are expected to limit the gas export
availability from Turkmenistan in the next 5 to 10 years. This is especially the case for new
gas buyers, such as Europe, who will have less of a chance to receive Turkmen gas in this
13
See Human Rights Watch’s specific recommendations regarding the Energy Trade Agreement at:
http://www.hrw.org/en/news/2008/07/06/human-rights-watch-concerns-andrecommendations- Turkmenistan accessed
November 20, 2008.
14
http://www.iht.com/articles/ap/2008/05/27/business/AS-FIN-Turkmenistan-EU-Energy.php, accessed November 19, 2008.
15 Ibid
16 Lindsey Alexander, “Seeking a Way forward on Trans-Caspian Pipeline,” Radio Free Europe/Radio Liberty, September 2,
2008, http://www.rferl.org/articleprintview/1195765.html, accessed November 20, 2008.

decade. Lack of accountability, in the sense of Turkmenistan’s authoritarian regime
particularly able to rely on resource rents, which burden risks, both economically and
politically. Also there is an arising question which implies that, pipelines reveal significant
risks to the environment and local communities; the challenges in both South Caucasus and
Baku-Tbilisi-Ceyhan (BTC) pipelines. The big doubt on the natural gas commitments based
on these pipeline plans may unravel if Turkmenistan’s gas reserves prove less than expected;
Turkmenistan would have to double its exports.

Azerbaijan has huge significance of the world energy market. The proven and potential
resources in that sector of the Caspian Sea are inevitable to diversify, secure, and stabilize
world energy supplies. However, the land-locked energy resources in the Caspian field over
challenges to the transport of oil and gas resources, especially to the European energy
markets. Recently, long-distance transnational pipelines have grown rising central in efforts to
guarantee energy security, in huge part so they obtain an alternative to a number of vulnerable
maritime chokepoints. As a result, a broadened understanding of energy security is imperative
not only to understand the new challenges of Azerbaijan’s foreign policy but also to cope with
any potential instability or geopolitical rivalries in the Caspian region. This issue emphasizes
Azerbaijan’s foreign policy using the oil-led development process and the country’s relations
with multinational oil companies as a framework for analysis and focus on challenges for
energy security in the Caspian. The certain war between Russia and Georgia and the ongoing
Karabakh discrepancy between Azerbaijan and Armenia not only updated deliberateness of
geopolitical competition, but also further multiplied the nodes of vulnerability along the
energy configuration and cross-border pipelines in the world energy market. Eventhough
there was no certain attack on, or threat to, the oil and gas pipelines bypassing Russia through
the Caucasus region and reaching the Mediterranean in Turkey (the Baku-Tbilisi-Ceyhan
pipeline), Russia openly imply itself as a regional power by not allowing any changes in the
status quo of the region or any individual attempts to find a solution “frozen conflicts” in the
Caucasus.
Azerbaijan which had the oldest oil fields in the world was one of the most significant
mineral resource bases of the USSR during the early Soviet era. Moreover, they resumed a
near monopoly in manufacturing oil and gas equipment within the USSR, and remained a
significant refining centre for Siberian oil. With the collapsed of the Soviet Union,
Azerbaijan’s economic lifelines with the rest of the USSR were severed. Political problems
and economic conditions were escalated by ethnic unrest among the Armenian population in
the Nagorno-Karabakh zone, causing in a three year war.

Azerbaijan encountered bad position when its largest trading partner Russia, closed all rail
and road borders among the two countries in September 1994, citing the conflict in Chechnya.
Since 1995, several factors have contributed to a gradual return to political and economic
stability. Haidar Aliyev, has consolidated his position sincerely, an armistice in Nagorno-
Kharabak has been adhered to since 1994; and foreign oil and gas companies have confirmed
huge offshore reserves under the section of the Caspian Sea request by Azerbaijan. Azerbaijan
foreign policy especially focuses on two aims: attracting foreign investment in the oil sector
from a wide cycle of countries, and guaranteeing a variety of oil export routes in order to get
out becoming dependent upon any one transit country.
ORGANISATION OF THE OIL AND GAS SECTOR
At the beginning of 1998, there was no arrangement body for energy issues; the President’s
office made policies and energy sub-sectors were managed by the state-owned companies.
The State Oil Corporation of the Republic of Azerbaijan (Socar) was established in 1992 by
combining the onshore upstream execution of Azneft and the offshore activities of
KhezerDenizNeft, inheritor organizations to the former Soviet Ministry of Oil and Gas
managing in Azerbaijan. Oil and gas produced in Azerbaijan and negotiates contracts with
foreign enterpriser in this field. Azerigaz is responsible for the transportation, storage and
sales of natural gas while Socar concerned about production and processing. It was found in
1992 with the strengthening of the national gas transmission firm and the natural gas
distribution sector of the State Fuel Committee. The government declared in 1997 that it
intended to set up a ministry to regulate energy policy, though by the beginning of 1998, such
a ministry had not been created. The functions of the new ministry are to contain improving
energy policy, preparing legislation, setting tariffs, and guaranteeing the state’s energy
security.
However, it is not clear how much of a role such a ministry would have in the oil and gas
sector. Even though the divergence of Socar’s policy making and licensing role from its
commercial functions has been negotiable, the new ministry might focus on the internal
provision of electricity and gas. Moreover, most significant policy decisions affecting the oil
and gas sector will might continue to be occurred by the President’s office.

OIL RESERVES AND PRODUCTION
Oil reserves: According to Socar, Azerbaijan’s oil reserves are nearly total some 17.5 billion
barrels, while most outside prediction place obtainable oil reserves at 3 - 11 billion barrels. It
is thought that over 90% of Azerbaijan’s total oil reserves are offshore. Extensive
investigation is to precede not only deep but also shoal side of the Caspian Sea offshore
Azerbaijan, mostly near the Apsheron Peninsula. Onshore investigation during the next few
years is to focus on the central and western parts of the country. Similarly, the situation in
most OECD countries, the State keeps down monopoly title to the subsoil, containing
offshore, and the latent resources within it. Oil production: Oil production fell from 12.5 Mt
in 1990, to 9.02 Mt in 1997, owning to continuing depletion of existing areas, poor furthering
because of lack of funds, and limits managed by backward technology. One of the first oil
was perforated in Azerbaijan’s Apsheron peninsula in 1848. At beginning of the 20th century,
Azerbaijan considered nearly one half of world raw oil production. Output peaked at around
23 Mt in 1940, when Azerbaijan accounted for some 70% of total USSR crude oil
production.17
Distribution of oil products: Azerbaijan has more than 670 petrol stations in operation yet,
over one-third of which have been privatized. All stations were already run by the State Fuels
Committee (Goskomtoplivo), which was defeated in 1994. Lukoil has construct three filling
stations in Baku and project to build three others in recent times, containing two outside the
capital.
Rail and road are produced movements within Azerbaijan but there are no significant
product pipelines.
The northern route
The northern route, which established in December 1997, consists mainly of upgraded
basically sections of pipeline from Baku to Novorossiysk via Grozny (in Chechnya) and
Tikhoretsk. The section within Azerbaijan was actually used to import Russian oil for
processing in Azeri refineries and had to be reciprocated. The cultivate and substitution of the
17 Caspian oil gas , Page: 157

1,411-km section within Russia was the responsibility of Russia’s Transneft, which also
financed the work. Transneft is to send a transit fee of US$15.67 per tone.18
The western route
The 920-km western route from Baku to the Georgian Black Sea port of Supsa is scheduled
for completion by early 1999. Similar to the northern route, it combines both existing
stretches of pipeline with new sections. AIOC, which is financing the western route, has
allocated US$315 million for the project, of which US$60 million will be used to build a
terminal and storage facilities for 240 kt of oil in Supsa. The Supsa terminal will have an
annual capacity of 10 Mt, with the possibility to upgrade eventually to 50 - 70 Mt. A tanker
loading platform is to be built 2.5 km offshore. Five pumping stations are also to be
constructed along the route.19
Ceyhan route
In July 1997 the AIOC declared that it had restricted the routes for the basic oil pipeline to
three routes: the two used for early oil and a third route to the Turkish Mediterranean port of
Ceyhan. Costs for a basic oil pipeline to Ceyhan are approximately between US$2.5 - 3.4
billion, depending on the route and the use of appearing facilities, involving pipelines and the
terminal at
Ceyhan. bypassing the environmentally vulnerable Turkish Straits is one of the main gain of
a pipeline to Ceyhan .Turkey, Azerbaijan and the United States had received strong approval
for that routes but its cost competitiveness against other routes may related to the offering of
significant fiscal and other trigger by the Turkey.
Oil Strategy of Azerbaijan
Although no formal government institution adopted formal document in Azerbaijan, two
basic principles emphasizing the Azerbaijani foreign attitude regarding the oil issue. They
were inclusion and participation or the initiation of alternative regional co-operative
arrangements.
18
Caspian oil gas, Page: 163
19
Caspian oil gas, Page: 164

The first strategy is overcome all the regional powers in the Caspian oil business to intensify
the recognition of the Azeri national sector in the Caspian. That principle was applied mainly
with respect to the states in the region, which held a negative behavior towards the oil activity
in the Caspian which is Russia and Iran. The second principle focus on managing and
institutionalizing the relations of Azerbaijan with the friendly states in order to have a security
balance against the mentioned two states, such as the foundation of a regional alliance, called
GUUAM (Georgia Ukraine, Uzbekistan, Azerbaijan and Moldova), and previous activation of
the Georgia-Ukraine-Azerbaijan trio within the CIS and the Georgia-Turkey-Azerbaijan trio
in the Caucasus.
The inclusion policy had a certain success to get out the tenseness of bring into Russia and
Iran, the Russian public-private company LukOil was contained in the “Contract of the
Century” with a serious 10% share of participation. Oil projects in the Caspian also involved
the Russian oil firms Transneft and Rosneft Azeri.
In spite of the initial refusal, the Iranians confirmed it later on. Later, the Iranian company
called Oil Industries’ Engineering & Construction (OIEC) is attending in Shahdeniz project.
The OIEC attended in two oil and gas projects in Azerbaijan. All foreign companies attending
in Azeri oil projects as signing a standard contract which involves the following statement in
its preamble: ‘ownership of all petroleum existing in its natural state in underground or
subsurface strata in the
Azerbaijan Republic, including the portion of the Caspian within its jurisdiction, is vested in
the Azerbaijan Republic. After having their public-private companies sign such a treaty with
the government of Azerbaijan, it would be quite difficult for Russia and Iran to maintain a
legal argument that they never recognized the Azeri sector in the Caspian Sea.20
However, despite of the fact that participation of the Russian and the Iranian oil companies
into the oil projects in Azerbaijan, it could not ensure for the full security of the oil business in
Azerbaijan. Also, two states have shown an extraordinary sense to alter their attitude on the
status of the Caspian and other topics relevant the security of oil business in the Caspian.
20
Azerbaijan’s Foreign Policy and Challenges for Energy Security: Pinar Ipek, Page: 233

The role of oil in Azerbaijan’s Western-Oriented Foreign Policy
Security threats in the early years of Azerbaijan’s independence were critical obstacle the
route of the country’s foreign policy, which has been largely driven by the economic and
political preferences toward Azerbaijan’s initiative relations with multinational oil companies
and make profit an oil-led development process. Azerbaijan’s economy encountered several
crises after end of the central economic system of the prior Soviet Union. Foreign direct
investment in the oil and gas sectors was certain rising the country’s economic recovery. With
collapsing Soviet system, Azerbaijan’s economy was interested in extraction and production
of raw materials. The experience of Azerbaijan was different from those of other previous
Soviet republics owning to its geographic location and cultural content. Turkish Muslim
population lives Azerbaijan, also they located between powerful neighbors Iran and Russia.
As a result, some regional conflicts, which occurred after Azerbaijan gain its independency,
emphasized the significance of economic revival for its national security. That is why;
Azerbaijan had to secure its political independence and economic development among
disorder geopolitics that reflected the conflicting interests of variety side, while ending its oil
and gas projects, especially for pipeline routes. These parts included multinational oil
companies, Azerbaijan’s neighbors (including Iran, Russia, and Georgia), and Turkey and the
United States.
GAS RESERVES AND PRODUCTION
At the beginning of 1990s, natural gas accounted for nearly 60% of Azerbaijan’s primary
energy supply. This phase decreased in the mid 1990's, basically because of reducing in the
amount of gas imported from Azerbaijan’s suppliers due to non-payment problems. In spite of
the fact that, gas continues to play a dominant role in the Azeri economy. According to Socar,
Azerbaijan’s proven gas reserves are about 800 Bcm, while most outside sources place them
between 300 - 800 Bcm. US Government report estimates recoverable gas reserves at around
300 Bcm, with another 1,000 Bcm classified as possible. The three offshore fields being
developed by the AIOC consortium alone are estimated to contain 70.8 Bcm of natural gas,
while the Nakhichevan and Kyapaz fields may contain an additional 280 Bcm.21
21
Report to Congress on Caspian Region Energy Development, 1997, Page: 166

Onshore reserves appear almost discharge. Also, the main gas producer is Socar. Most of
Azerbaijan's gas production is connected with offshore oil production. The extensive base for
offshore natural gas is relatively well developed for the basic producing regions and is
expected to be expanded as certain offshore oil fields are brought on-stream by the AIOC and
other consortiums. According to most contracts signed with international investors, associated
gas belongs to Socar, though the responsibility to improve and gather it seems as different
kinds by project.
Gas production in Azerbaijan reached a high of 14 Bcm in the mid-1980s, though declined
to 6.4 Bcm by 1994, at which time only 0.2 Bcm came from onshore fields. Production
increased slightly to 6.6 Bcm in 1995, due to the one-off effect of a project to capture gas
previously vented at the Guneshli and Neft Dashlari offshore fields.
The declining trend continued again in 1996 when total production decreased to 6.3 Bcm in
1996 and 5.7 Bcm in 1997. Azerbaijan’s largest single domestic source of gas in 1998 was the
offshore Bakhar field, which produces large amounts of gas condensate. In 1991 Bakhar
accounted for 51% of Azerbaijan’s gas production.22
However, since the mid-1980s, production at Bakhar and most other large fields has
decreased. Guneshli production has only remained relatively constant. Five new wells being
drilled at the Bakhar, Bulla-Deniz and Apsheron fields could reportedly raise gas production
by 2 Bcm per year and should be on-line in 1998. Revision of the Bakhar eras and the shallow
portion of the Guneshli reportedly could supply another 6 Bcm per year, doubling current
production. Since most gas produced in Azerbaijan is associated, declines in shoal gas
production have mirrored falls in oil output. Gas production is only likely to rise significantly
when some of the huge offshore oil and gas projects being developed with international
consortia begin to come on stream. Azerigaz forecasts production to reach 18 Bcm in 2010,
while the IEA scenarios call for 15 - 24 Bcm.
22
Caspian oil gas, The definition of production apparently includes gas flared and vented, while delivery includes only gas
delivered to the transmission/distribution system, whether processed or not, Page: 168

GAS PROCESSING, TRANSMISSION AND DISTRIBUTION
Socar is accountable for gas processing. Azerbaijan’s main gas processing facility is the
Karadag plant, most of which was built in 1961. Its six gas processing trains and one intensify
train have a organize capacity for processing 6.5 Bcm per year of gas and 675 kt of
condensate.
Main capacity in 1997 was about 4.5 Bcm. Karadag obtains gas from two main pipelines.
The Guneshli line brings gas from offshore fields east of Baku, while the Narimov-Bulla
Deniz line transports gas from onshore and offshore parts south of Baku. Although Karadag is
in poor situation, a more serious problem is probably the lack of region compression and
pipelines to transport offshore gas to the processing amenity. Many pipelines lead squarely
into the transmission system, intensification depreciation problems for the network and end-
use equipment. Also, with increasing the amount of gas available for distribution, the 1994
project to recover gas from the Guneshli and Neft Dashlary offshore fields increased the
amount of gas sent for processing from 2.9 Bcm in 1993 to some 4.3 Bcm in 1995. Azerbaijan
reportedly processed 5 Bcm per year in both 1996 and 1997, although some sources suggest
considerably lower amounts. The World Bank has financed a suitability study to replace the
Karadag plant.
Gas Transmission and distribution
State-owned Azerigaz is in charge for transportation, transit, storage and diffusion of natural
gas. The company was established in 1992 with the coalition of the national gas transmission
company and the natural gas distribution offshoot of the State Fuel Committee. Azerigaz’s
charter forbids it to engage in gas-extraction, which remains the prerogative of Socar. As part
of conditions relating to a World Bank loan for the rehabilitation of the country's gas industry,
a Presidential prescript of May 1997 corporative Azerigaz and relayed its shares to the State
Property Committee to be sold at a later date.

Iran has an important position according to international energy security and its large oil and
natural gas resources in the world economy.
Oil has importance that country’s determination of the last hundred years of history. Also,
the modernization and industrialization was always based on oil. Almost all of the operated
oil effects from Huzistan region and the strip between the Zagros Mountains and the Arabian
Gulf coast. Oil deposits in interior areas are relatively weak or difficult to operate but they are
rich in natural gas.
Before the Iran – Iraq War, oil production was up to 300 million tons a year, in the war
period it was decreased 50 – 60 million tons, today in 2010 is still below 200 million tons.
The country's most important industrial sector depends on oil, petro-chemical industry.
Besides the refineries, oil and gas pipelines are important for processing and transmitting of
oil. In addition, the possibility of many infrastructure including rail and road was developed
by oil revenues in 1970s.
Iran is the second country of the world in terms of its natural gas reserves, and third for the
oil reserves. In 2005, it was spent $ 4 billion for Iranian oil import because of insufficient
domestic use and trafficking. In 2005, oil industry has reached an average of 4 million barrels
of production per day. In case, it was produced about 6 million barrels per day in 1974. In the
early 2000s industry infrastructure was weakened because of technological insufficient.
In 2004, a large portion of Iranian natural gas reserves were unopened condition. Iran’s
energy capacity has increased to 33.000 megawatts with the addition of new hydroelectric
stations and conventional coal and oil powered stations’ lines connecting. 75% of this amount
is natural gas, 18% of it oil and 7% is based on hydroelectric energy. In 2004, Iran opened its
first wind energy and geothermal power plants. The first thermal solar power plant opened in
2009.
Growth of population and heavy industrialization has caused electricity demand to increase
by 8% per year. The government plans to build nuclear power plants, including hydroelectric
power stations and making the new gas-fired power plants to reach 53.000 megawatt capacity
by 2010.
Iran, one of the OPEC’s founding members, holds the world’s third – largest proven oil
reserves and the world’s second – largest natural gas reserves. (Iran Energy Data 2010)

Iran produced 4.2 million barrels of oil per day (bbl/d) of total liquids in 2008.
Approximately 3.9 million bbl/d of it was crude oil. This rate equals nearly 5 percent of
global production. Also, production capacity of crude oil in 2009 was same.
Development plan of the Iran’s energy sector’s key part is ongoing production and
exploration of the South Pars natural gas field in the Persian Gulf.
Oil
“Iran has an estimated 137.6 billion barrels of proven oil reserves, or roughly 10 percent
of the world’s total reserves. Iran has 40 producing fields – 27 onshore and 13 offshore, with
the majority of crude oil reserves located in the southwestern Khuzestan region near the Iraqi
border. In 2008, Iran exported about 2.4 million bbl./d of oil, making it the fourth largest
exporter in the world.” (Iran Energy Data 2010) Oil production capacity of Iran is planning to
increase to 5.1 million bbl./d by 2015 due to five year development plan which submitted to
the Majles in 2010.
Iran has the largest oil tanker fleet in the Middle East. The National Iranian Tanker
Company holds twenty nine ships. (Iran Energy Data 2010)
The state - owned National Iranian Oil Company (NIOC) is responsible for oil and natural
gas production and exploration. NISOC – National Iranian South Oil Company accounts for

80 percent of oil production covering the provinces of Khuzestan, Bushehr, Fars, and
Kohkiluyed and BoyerAhamd. (Iran Energy Data 2010)
In 1978, over 5 million bbl./d oil was produced in Iran. But after the 1979 revolution
production levels have increased because of sanctions, limited investment and over rate of
national decline. Due to this decline in mature oil fields of Iran, crude oil production is lost
nearly 400.000 – 700.000 bbl./d annually. Oil fields of Iran need structural upgrades
(including) oil recovery efforts such as natural gas injection.
The Azadegan field contains 26 billion barrels of proven crude oil reserves. (Iran Energy
Data, 2010) But because of field’s geologic complexity (extraction) is difficult. Production
from the southern part of the field has been nearly 20.000 bbl./d since 2008. In 2009, 35.000
bbl/d was produced and is expected to reach 45.000 bbl./d in 2010. In January 2009, China
National Petroleum Corporation signed a buyback contract with NIOC to develop northern
Azadegan in two phases. Phase one, expected to be completed in 48 months, will add
approximately 30.000 bbl/d of production. Phase two is expected to take 42 months to
complete upon phase one’s completion, and will add 75.000 bbl./d, bringing Azadegan’s total
production to 150.000 bbl./d. (Iran Energy Data 2010)
The largest gas – reinjection project of the world began on Iran’s Agha – Jari oil field in
2009. It is planned to be injected 3.6 billion cubic feet (Bfc) of gas into Agha – Jari. But due
to technical obstacles 3 Bfc was injected. When the full injection amount is realized, in
operation for 70 years, Agha – Jari production is planned to increase from 140.000 bbl./d to
200.000 bbl/d. The gas is supplied by Iran’s South Pars phases 6, 7, and 8 via the IGAT-5
Pipeline. (Iran Energy Data 2010)
In 2008, the oil consumption of Iran was 1.7 million bbl/d. Iran’s refinery capacity is limited
for the production of light fuels. So, it imports most of its gasoline supply. Domestic oil
demand of Iran is mostly for diesel and gasoline. In accordance with the FACTS Global
Energy, in 2008 diesel consumption was 570.000 bbl/d and 90 percent of it was produced
domestically. The Iranian government sponsors the refined oil products’ price. But in January
2010 Iran’s Guardian Council approved measures with the aim of eliminating energy
subsidies by 2015.
In 2008, Iran exported 2.6 million bbl/d and its net oil export revenues were $73 billion.
Half of the government revenues is provided from oil exports.

Kharg Island, the site of the vast majority of Iran’s exports, has a crude storage capacity of
20.2 million barrels of oil and a loading capacity of 5 million bbl/d, followed by Lavan Island
with capacity to store 5 million barrels and loading capacity 200.000 bbl/d. “Besides, Kish
Island, Abadan, Bandar Mahshar, and Neka are important terminals provide imports from
Caspian Region. Also, The Straits of Hormuz on the southeastern of Iran, is an important
route for oil exports from Iran and other Persian Gulf countries.” (Iran Energy Data 2010)
In 2009, total refinery capacity of Iran was approximately 1.5 million bbl./d. Iran refineries
are not enough for domestic demand. But Iran is planning to rise its refining capacity to 3
million bbl./d down to 2013 by expansions at existing refineries. This provides no need for
imports by 2013. Besides, Iran has discussed joint ventures in Asia, China, Indonesia,
Malaysia, and Singapore to expand refining capacity. (Iran Energy Data 2010)
Gasoline
In 2007 and 2008, Iran gasoline consumption was 400.000 bbl./d. In reference to FACTS
Global Energy, government aims domestic gasoline refinery projects to make Iran a gasoline
exporter. 2% demand growth in 2010 will remain to 3% by 2015. Iran imported nearly
130.000 bbl./d in 2009.
Domestic oil network of Iran is extensive including five pipelines and many international
pipeline projects under consideration. Iran has invested in its import capacity at the Caspian
port on behalf of providing crude swaps with Turkmenistan and Kazakhstan and to overcome
increased product shipments from Russia and Azerbaijan. In the case of crude swaps, the oil
from the Caspian is consumed domestically in Iran, and an equivalent amount of oil is
produced for export through the Persian Gulf with a Swiss – trading arm of NIOC for a swap
fee. (Iran Energy Data 2010)

Natural Gas
In accordance to Oil and Gas Journal, Iran’s calculated proven natural gas reserves nearly
1.045 trillion cubic feet (Tfc) in January 2010. According to this calculation Iran is second
after Russia. Most of natural gas reserves of Iran are attended in non – associated fields. So,
these reserves - approximately 62% are not developed. South and North Pars, Kish, and
Kangan – Nar are the main natural gas fields.
In the year of 2008, Iran produced 4.1 Tcf natural gas but consumed about 4.2 Tcf. The
majority was provided by imports from Turkmenistan.
Natural gas consumption is expected to grow around seven percent annually for the next
decade. Last twenty years both production and consumption of Iran have increased quickly.
Even though a great extent South Pars project’s expansion and production in the future, in
reference to FACTS Global Energy, Iran’s natural gas exports will be less because of the high
domestic demand.
The European Union has an energy supply security about Iranian oil and gas. Because
importing these products is necessary for the EU. So, it must provide a plan for the security of
supply at rational prices. This could only happen with the competition of different producers
in the European market. Iran is the greater supplier for the EU in the future.

Iran’s natural gas infrastructure, transportation, and distribution are provided by The
National Iranian Gas Company (NIGC). Certain international oil companies such as Repsol,
Shell, and Total have divested from natural gas sector of Iran by reason of poor investment
climate. As a response, Iran was interested in eastern firms including state – owned Indian Oil
Corporation, China Petroleum and Chemical Corporation, and Russia’s Gazprom. These firms
have an important role in natural gas upstream development of Iran. Under Iran’s buy – back
scheme, foreign firms hand over operations of fields to the National Iranian Oil Company
(NIOC), and after development they receive payment from natural gas production to cover
their investment. National Iranian Oil Company (NISOC), a subsidiary of NIOC, is
responsible for much of the southern natural gas production. (Iran Energy Data 2010)
Iran imports natural gas from Turkmenistan. Supply is not regular depending upon dissents
on pricing. In 2008, Iran was imported 0.8 Bcf per day (Bcf/d) natural gas from
Turkmenistan. Besides, this two country signed an agreement in 2009 to rise natural gas
imports up to 1.2 Bcf/d. Plus in 2010 a new pipeline is finishing.
“The most significant energy development project in Iran is the offshore South Pars field
(called the North Field in Qatar), which is estimated to have 450 Tcf of naural gas reserves, or
around forty seven percent of Iran’s total natural gas reserves.” (Iran Energy Data 2010)
Liquefied Natural Gas (LNG)
Upstream development of LNG is provided from Pars Oil and Gas Company (PAGC). And,
several companies such as National Iranian Gas Export Company (NIGEC) are responsible
from the downstream development. Iran requires international partners developing its LNG
potential.
Developments in the Iranian Gas Trunkline (IGAT) pipeline series, all fed by South Pars
development phases, are important to Iran’s natural gas transport. (Iran Energy Data 2010) It
is planning for 2011, between Assaluyeh and Iranshahr IGAT – 7 will transport more than 3
Bcf/d of gas.
The Nabucco pipeline project is important for the EU, the Middle East and Iran to make
stronger energy ties between them. The Nabucco pipeline will transport natural gas from
Caspian region, Iran, Iraq and Egypt via Turkey, Bulgaria, Romania and Hungary to Austria.
(Eva Patricia,2009) This project will decrease the EU dependency on Russian gas. Within the

frame of Nabucco project it is planning to build a 2050 miles pipeline and it has 3 Bcf/d
transportation capacity.
The 745 mile Iran-Turkey pipeline, completed in 2001, can transport up to 1.4 Bcf/d of
natural gas. (Iran Energy Data,2010)
The 87-mile long Iran-Armenia pipeline will transport 86 Mcf/d to Armenia in exchange for
3.3 billion kilowatt hours of electricity.
The Iran – Pakistan – India gas pipeline participation was made in 2006. This is not a quick
but a win – win project for these countries. It is 1724 miles and has 5.4 Bcf/d capacity.
The option included Iranian companies to own and operate the pipeline and deliver gas to
India at India–Pakistan border or a consortium of Iranian, Indian, and Pakistan and
international companies to own and operate the pipeline. Under the third option, it proposed
that India and Pakistan buy gas in Iran and transport through a pipeline owned by global
companies. (Verma 2007)
Electricity
Iran generated nearly 190 billion kilowalthours (Bkwh) and consumed 153 Bkwh in 2007.
The generation sources are conventional thermal electric power and hydroelectric power and
Iran has no nuclear electric power generation as from 2010.
Iran has focused on meeting higher demand mainly through expanding combined-cycle and
hydroelectric power. However, a severe drought during late 2007 and early 2008 adversely
affected Iran's hydroelectric production, leaving water reservoirs emptied during the summer
peak demand season, resulting in a drop of nearly 70 percent in hydroelectricity power
generation. This has brought into question Iran’s ability to fulfill its domestic power
obligations, let alone its export obligations. Consequently, as of late 2007 some 85 water
dams were under construction. (Iran Energy Data 2010)
Iran exports its electricity from Armenia, Pakistan, Turkey, Afghanistan and Iraq.

Energy Consumption
In households and commerce sectors, energy consumption of Iran is very high.
Transportation sector is lower but it has a main importance in Iran’s present and future energy
policy.
Energy consumption in Iran is heavily subsidized. Fuel required for the transportation
sector, gas and electricity for household's and commerce as well as for industry and
agriculture, in other words, the country’s entire energy consumption, is subsidized from top to
bottom. (Massarrat, 2004)
Energy Policy of Iran
Iran must follow the policy which is combined two phases. “Firstly, meeting the rising
demand for energy in every sector of consumption by raising the primary energy supply
whilst maintaining the lowest prices possible, and, secondly, upholding the country’s oil
exporting capacity at a certain level. The diversification of fossil based primary energy supply
and stepping up of natural gas production follow exactly these objectives.” (Massarrat 2004)
For the future generations Iran must apply these energy policies. As a first, using natural gas
in every sector instead of oil will give precedence to the transportation sector. Secondly,
amending and adjusting the subsidization policies are reforming the energy pricing structure.
There must be a changing from price subsidies to purposeful subsidies. Thirdly, the
configurations to provide oil, natural gas, and electricity must be renewed with competition. It
requires close relationships with the private sector. Fourth policy is founding new engineering
capacities for educational and research institutes. The fifth, Iran must take precautions for
applying modern technologies to energy usage. Also these will increase the energy efficiency.
China, India, and the EU are the significant economic partners for Iran. Iran supplies natural
gas for China and India. The EU can provide foreign direct investment and technology and
knowledge transfer; and China’s national oil and gas companies have signed several import
deals and will explore Iranian oil and gas fields to secure its growing oil and gas import

dependency. (Rakel 2009) In the past, China and Iran has not any conflicts or war. This is
useful for their cooperation.
With the economic liberalization policies’ execution in China in 1976, energy sources
demand of China has been rising. One form of cooperation between the China and the Iran is
the Shanghai Cooperation Organization (SCO), which has developed into an important global
political, economic, and security organisation. (Rakel 2009) It was established on 14 June
2001. Owing to SCO, Iran could expand its international political and economical facilities.
Plus, the country will develop in the technology, trade, investment, and infrastructure areas.
Also, US’s sanctions on Iran lose its influence by the Iran – SCO cooperation.
In 2006, Iran provided 11% of its oil imports.
Even though the prospects of the EU, China and Iran cooperation, there could be some
obstacles of it. Firstly, US can have the hostile attitude in economic and political relations. US
is afraid of shifts of mutual relations between from Iran – US to Iran – China or Iran – EU.
The second negative side is Iranian trade and investment ways or climates are insecure for the
governments and companies in Iran. The last obstacle is the nuclear subject. Today Iran is a
potential nuclear weapon state. This scares its neighbors including Iraq, Saudi Arabia, Egypt,
Syria and Turkey.
As a conclusion, assessing the reserves and resources in the hands of Iran, it needs
sustainable energy policy. Iran should determine its energy structure’s speed and direction.

After the break-up of the Soviet Union in December 1991, the evolving process of
Kazakhstan as Azerbaijan, and Turkmenistan regarding legal status of Caspian region have
been shaped by three significant development. These are; three countries of Caspian region
that are Kazakhstan, Turkmenistan and Azerbaijan are believed to have more oil and gas
reserves in coastal region than the other countries; Russia and Iran because of that reason
private companies prefer these part of region in order to invest and get advantages. Second,
these countries possesses available capacity on hydrocarbon resources which is considered
necessarily to the economic survival of these newly independent states because the countries
have no more alternative for development on national economy. Thirdly, especially
Kazakhstan and Azerbaijan want to divide Caspian Sea. The reason of that desire; they are
encouraged by foreign investors in order to establish national energy sector.
Oil Reserves of Kazakhstan
Kazakhstan is near the North of Caspian region and known as main oil field in that region.
Kazakhstan has the largest recoverable crude oil reserves of Caspian region which also
possesses important oil and natural gas reserves. Because of that, Kazakhstan has significant
role in international energy market. Kazakhstan’s barrel number of oil reserves increases
annually. For example, Kazakhstan earlier assessment in the 1990s estimated reserves at
approximately 16 billion barrels, this proportion rise in 2004 Kazakhstan oil production grew
by about 15 percent every year, between 1999 and 2004.Kazakhistan oil production started to
increase especially in 2004 with foreign investments. The oil of Kazakhstan is exported with
pipeline through Russia and other neighboring countries
Kazakhstan hopes that most of its exports will come from the growing current fields of
Black Sea accordance with Russia, Persian Gulf via with Iran, and also with some additional
traffic from northward to Russia via pipeline and rail. Kazakhstan aim to develop
infrastructures of these pipelines in the purpose of gaining access to hard-currency markets.
Moreover, major oil reserves of this country are located in western part of Kazakhstan that are
Tengiz, Karachaganak, Aktobe, Mangistau, and Uzen, also the 5 largest onshore oil fields.
What’s more, estimated capacity of sector in Kazakhstan is at least 14 billion barrels. In
addition to this Kazakhstan is significant exporter country with its oil capacity which
pipelines to Mediterranean, China and rail to Batumi and Georgia. The current export
pipelines of Kazakhstan are Caspian Pipeline Consortium (CPC), Atyrau-Samara Pipeline
Kazakhstan-China Pipeline, Baku-Tbilisi-Ceyhan (BTC).

 Caspian Pipeline Consortium (CPC)
CPC is unique to the region, that means it is a shipper owned pipeline which is from Tengiz
field to the Novorossiysk and two marine terminal on Russia's Black Sea coast. What’s more,
it is financed and constructed on behalf of a group of share holders who have or expect to
have oil to transport. This is a radical difference from the existing regional pipeline systems.’
The Caspian Pipeline Consortium (CPC) oil pipeline was commissioned in 2001 In late 2008,
CPC members agreed on a plan to expand capacity on the pipeline to 1.34 million bbl/d by
2013, but a delay in the final investment decision to the fourth quarter of 2010 due to
technical complications moved the completion date to mid-2014’23
 Kazakhstan – China Pipeline
Kazakhstan-China pipeline is running from Atyrau port in northwestern Kazakhstan to
Alashankou in China's northwest Xinjiang region. Also span of this pipeline is 1,384 miles.
Kazakhstan has the Caspian Sea’s largest recoverable oil reserves. On the other hand , China
has to fill the gap between oil production and consumption. As a result of this, China wants to
secure importer countries an done of these countries is Kazakhstan. China is not only
interested in oil resources of Kazakhstan but also hyrocarbon resources. . Thus, in May 2004
the two nations signed a joint declaration of what was termed the ‘‘second section’’ of an oil
pipeline project. The aim of these countries is obvious. Kazakhstan intends to increase its oil
productionand ship it through multiple routes. Meanwhile,China needs to import large volume
of oil to maintain its impressive economic performance.’ The pipeline was built in segments,
the most recently completed segment, the 492-mile Kenkiyak-Kumkol (Phase 3) started
commercial operations on October 6, 2009, and connects the Kenkiyak-Atyrau pipeline
(Phase 1) to the Atasu-Alashankou pipeline (Phase 2), online since 2006.’24
 Atyrau-Samara Pipeline
One of the significant pipelines of Kazakhstan is Atrayu- Samara pipeline. Reason of this
pipeline’s importance is route of it which provide opportunity in order to connect World
market via Black Sea
23
U.S. Energy Information Administration; Breif Country Analysis, Kazakhstan, November, 2010
24
Ibid

Before the completion of the CPC pipeline, Kazakhstan exported almost all of its oil through
this system.
 Baku-Tbilisi-Ceyhan
Supply of this oil pipeline is Azeri-Chirag-Guneshli oil field of Azerbaijan. Also the routes
of this pipeline are from Baku to Ceyhan Turkey and passes through Tbilisi, Erzurum, Sarız.
However, Kazakhstan’s government announced that it would build a trans-Caspian oil
pipeline which is from the Kazakhstani port of Aktau to Baku. They had an agreement about
oil transportation with Azerbaijan because of the opposition to Russia and Iran. The BTC
Pipeline Company to supply up to 500,000 bbl/d of oil via the BTC pipeline. Oil supplies of
Kazakh were loaded into the BTC for re-export for the first time that is in October 2008.
However, disagreements are regarded in this region over the pipeline routes because there is
no major or specific rules on the agreement. What‘s more, states which are located in Caspian
region have not yet legal framework about their energy production or relationship between the
countries because of the lack of consensus, the private companies decided to not to wait for
that. Thus, a defacto regime is emerged and the companies started to develop all these
resource location. Because of that reasons economies of these countries in the region started
to develop. Most of this growth will come from three enormous fields of Kazakhstan: Tengiz,
Karachaganak, and Kashagan.
Tengiz is the second largest oil field in the World and currently largest field of Kazakhstan;
also, recoverable crude oil reserves estimated at approximately 6 to 9 billion barrels. Like
many other oil fields, the Tengiz also have large reserves of natural gas which is located
western Kazakhstan and discovered in 1979. What’s more, tengiz oil field is supported by
private sector in order to improve capacity.’ The Tengizchevroil (TCO) joint venture has
developed the Tengiz field since 1993. The major partners in Tengizchevroil are
ChevronTexaco with 50% ownership , ExxonMobil with 25% ownership, the Kazakhstani
government through KazMunaiGaz with 20% ownership and Russian LukArco with 5%
ownership. In January 2003, after negotiations with the government of Kazakhstan, the
Tengizchevroil consortium members initiated a $3 billion expansion project designed to boost
production to approximately 450,000 bbl/d by 2006. According to ChevronTexaco, pottential
of Tengiz should be different Tengiz could produce 700,000 bbl/d by the end of the decade.
There could be disagreement like that between companies about capacity od Tengiz oil field.

On the other hand, Karachaganak is one of the world's largest oil and gas condensate
reserves. It is located close to the Russian border. In addition, Kasgahan is another gas and
oil field of Kazakhstan which possess significant potential. Kashagan oil field has been
developing since 1997 which is also important for the future oil and gas output of Kazakhstan.
However, Kasgahan represents one of the most complicated oil field developments to date.
Because, state influence the each steps of development that means state-owned companies
started to involve the domestic energy sector and have important role with gas and oil
company; KazMunaiGaz. This field discovered step by step, first one was in 1999 which is
east part of Kasgahan
Chronology of Kasgahan
1993 Creation of the KazakhstanCaspiishelf (KCS) to carry out the seismic survey
of the Caspian with Eni, BG Group, BP/Statoil, Mobil, Shell, Total and a
Kazakh state company.
1997 KCS becomes the Offshore Kazakhstan International Operating Company
(OKIOC), governed by a Production Sharing Contract.
1998 KazakhstanCaspiiShelf, the state-owned company, sells its stake in OKIOC
to Phillips Petroleum (US) and Inpex (Japan) for $500 million.
2000 Discovery of Kashagan is officially announced in July.
2001 Eni becomes the operator and the project is re-named Agip Kazakhstan North
Caspian Operating Company (Agip KCO). BP and Statoil sell their stake in
the project with the remaining partners buying their share.
2003 BG Group (British Gas International) attempts to sell its stake to two Chinese
companies CNOOC and Sinopec. Other partners two Chinese companies
CNOOC and Sinopec. Other partners block the sale by exercising their pre-
emption privileges
2004 Legislation granting the government to claim pre-emptive purchase rights in
any energy project.
2005 KazMunaiGaz purchases 50% of BG shares (8,33%) while other IOC
participants share the rest.
2007 In August, the government of Kazakhstan at Kashagan for three months due
to environmental violations suspends work at In September, the Parliament
approves the law enabling government to alter or cancel contracts with

foreign oil companies if their actions threaten nations interests.
2008 On January 14 the consortium and the Kazakh authorities sign a
Memorandum of Understanding, which established that the Kashagan
partners will pay a $2.5-4.5 billion compensation to Kazakhstan for the
project’s continuous delays. At the same time, the stake of KazMunaiGaz in
the consortium is to be doubled to 16.8% for $1.78 billion.
Source: eia
Natural gas production of Kazakhstan has been remaining. However, domestic
consumption has also been increasing, although Kazakhstan consumed more natural gas than
produces especially in 2008. That means, the position of this country is shifting from being
natural gas importer to becoming a net expoter. Kazakhstan has two different natural gas
distribution network. One of them is in the West, another one is in the South. Because of the
lack of internal pipelines connectingnatural gas-producing areas of Kazakhstan, industrial
belt of this country has been effecting in a bad way between which are Almaty and Shymkent
this reason has prevented the development of the country's natural gas resources. Southern
Kazakhstan obtains much of its natural gas supplies from Uzbekistan via the Tashkent-
Shymkent-Bishkek-Almaty pipeline and the country exports gas from its northwestern region.
Moreover, gas pipeline transportation system is managed by KazTransGas. Moreover,
Kazakhstan is known as transit country for natural gas which exports from Uzbekistan and
Turkmenistan to Russia and China. However this portion changed in 2009 and import of
Kazakhstan started to be more higher than export.
 Central Asia Center Pipeline (CAC)
The Central Asia Center (CAC) gas pipeline has two branches which is controlled by
Gazprom, meet in the southwestern Beyneu that is one of the Kazakh city then crossing into
Russia at Alexandrov Gay and feeding into the Russian pipeline system. The eastern branch,
originates in the southeastern gas fields of Turkmenistan, on the other hand, The western
branch, originates on the Caspian seacoast of Turkmenistan. Turkmen and Uzbek gas is
mostly delivered via the eastern branch, western branch have periodic problems because of
repairing of the pipeline which is supported by Intergas Central Asia which is the operator of
the Kazakh pipeline sections and has been increasing its annual investment

‘In December 2007, Russia, Kazakhstan and Turkmenistan announced signing an
agreement to renovate and expand the western branch of the CAC pipeline and to construct a
new Caspian gas pipeline paralleling the western branch with a capacity of 706 Bcf. Upon this
new pipeline’s completion, originally slated for 2012, the route would have a total capacity of
2.8 Tcf, up from around 2.1 Tcf currently. However, construction of the new pipeline was put
on hold in 2009 as Turkmenistan seeks to diversify its gas export options and Russia reduces
its Turkmen gas imports due to lower European demand.’25
 Central Asia Gas Pipeline (CAGP)
Central Asia Gas Pipeline is known as Turkmenistan-China pipeline starts at Gedaim on
the border of Turkmenistan and Uzbekistan and across Kazakhstan east to the Chinese border.
This pipeline is invested for transportation from Turkmenistan to China.
CNPC, KMG and Uzbekneftegas are partners in this project.
 Tashkent-Shymkent-Bishkek-Almaty Pipeline
Tashkent-Shymkent-Bishkek-Almaty Pipeline is a significant import and transit gas
pipeline. It provides gas supplies from Uzbekistan to main southern population centers of
Kazakhstan, this pipeline has a capacity of 160 Bcf.
 Bukhara-Urals Pipeline
Bukhara-Urals Pipeline is a transit gas pipeline from Uzbekistan via Kazakhstan to Russia,
this pipeline has capacity of 706 Bcf
Besides, Kazakhstan requires neighbouring while exporting own natural gas the reasons
could explain with that sentences ; ‘Kazakhstan, is landlocked,it has to shiptheir oil and
natural gas by pipelines which cross multiple international boundaries.The issue of potential
routes through neighbouring countries became apriority for both regional and international
powers, as well as for oil companies. Pipeline construction provides the transit states with
several financial and political benefits, including access to oil or natural gas for their domestic
needs;foreign investment and jobs; substantial transit fees; and political leverage over the
25 http://www.intergas.kz/eng/index.php/ news

flow of oil and gas. Thus, the process of choosing and constructing pipeline routes is
complicated and requires delicate negotiations with many parties.’26
As regarding some articles about foreign policy making, the situation is understood that
Kazakhstan is also shape thier foreign policy according to economic interest.’ Foreign policy
making is influenced by numerous domestic and internationalfactors. In Kazakhstan, for
example, a wide range of determinants should be assessedin terms of their influence on
foreign policy. These include the nature of the regime in its post-Soviet state-building
process; questions of national identity; the influence of domestic groups, especially clans, on
government policy; Kazakhstan’s landlocked geography; the interests of neighbouring
powers; and the investment of multinational corporations (MNCs) in the rich oil and gas.
Above all however, it will be argued here, the questions of under what conditions and to what
extent Kazakhstan’s oil and gas resources are determinant in foreign policy making are crucial
to this study. The argument suggests that Kazakhstan has been following a multi-vector
foreign policy in strict relation to oil and gas contracts, given the determining influence of
geopolitics and the pragmatism of the Kazakh leadership in its foreign policy discourse’27
Following Kazakhstan’s dependence on Russia in the early years of its post-Soviet
independence, its geopolitical situation gradually changed so that the priority shifted
to a need to balance the interests of Russia, China, and the United States
When it became clear that Russia did not have sufficient financial clout and
technology to develop the huge oil resources in Kazakhstan, Nazarbayev turned to the
major Western oil companies. His main strategy was to diversify sources of funding to
safeguard economic stability during the state-building process and consolidation of his
power. He noted that
‘The investment potential of Kazakhstan is so large that it would require resources
which arenot available even to the highly developed countries. Thus, the requirement for a
diversified set of investors that represents dozens of countries from Europe and Asia in
addition to the US is an imperative in Kazakhstan’s policy.’
A senior government officer in the state oil company Kazakhoil explained the
26
CENTRAL ASIA AND ENERGY SECURITY,Gawdat BAHGAT , March 2006
27
The Role of Oil and Gas in Kazakhstan’s Foreign Policy: Looking East or West? , Pınar IPEK , January 2007

preferences of the Kazakhstan government as follows:
‘The government first wanted Tengiz and Karachaganak to be finalised. These fields
haveproven reserves. So, we could start production and exporting as early as possible. That
was a priority for the contracts. The Kazakh economy needed its oil and gas sector to be
developed... There were large companies from large Western countries. These countries
would not allow the change of the political situation in Kazakhstan. So it was good for the
Kazakh government. All companies from Russia and China were also invited in all tenders. In
1997 the CNOC (Chinese National Oil Company) for example won the tender for
Aktobe.Lukoil was in Kazakhstan before for Caspian Pipeline Consortium (CPC) and
Karachaganak oil field.’
In berief, petrol and gas have significant role on foreign policy of Kazakhstan which shape
their policy according to interest on petrol and gas.
On the other hand, great powers also have policy in central asia. In 1991, with the collapse
of the Soviet Union, a number of powers – China, the European Union, Iran, Turkey, and the
Untied States (U.S.) – made inroads into a newly opened Central Asia. For example,
‘Throughout the 1990s, Central Asian hydrocarbon reserves, concentrated mostly in
Kazakhstan and Turkmenistan, sparked a greatdeal of initial interest among the U.S. business
and policy making circles. As significant as these reserves may be, their impact on the global
energy stage was projected to be marginal at over three percent of the world’s oil reserves.’28
Moreover, Kazakhstan has problem on deutch disease and recently some journal article
prove that kind of problems.’ The Kazakh government can battle the Dutch disease by
stimulating non-energy business development and job creation, by simplifying registration for
new business and reducing corporate taxes and employment payments for these newly created
entities. As USAID and a number of NGOs repeatedly demonstrated around the world, micro-
lending to boost entrepreneurship is yet another way to decrease unemployment and
poverty.’29
28
ALTERNATIVES, Turkish Journal of International Relations, Fall 2009 – Ezeli Azarkan
29
http://www.cacianalyst.org/?q=node/1007- Confronting Kazakhstan’s ‘Deutch Disease’

In conclusion, Kazakstan is significant country for international issues with their resources
and it obtain lots of foreign investments from great powers and the other countries.

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