Petroleum, Pipelines and Paranoia in the Caucasus
by, Marshall I. Goldman, Associate Director,
Russian Research Center, Harvard University
[International Conference on
"International Law and the Chechen Republic", Cracow, Poland,
Dec.1995]
Disputes over petroleum deposits and pipelines have ruptured more than
one harmonious international alliance. As Daniel Yergin in his book, The
Prize, so clearly demonstrates, petroleum carries with it as many
hazards as windfals.*1
Petroleum discoveries have the potential to turn poor nations into rich
ones but along the way the discoverers may have to ward off other
claimants not only from the outsaide but as often as not from the insaide
as well.
While it would be a distortion of history to claim that the struggle
between Russia and Chechnya arises solely because of the of the jockeying
for control of the Chechen oil deposits, refineries as well as the crucial
pipeline which passes through Grozny, there is no doubt that petroleum has
played a central role in the dispute. Given the potential of what seem to
be vast untapped deposits in the Caspian Sea and the fact that the best if
not only pipeline route from the Caspian through Russia to the West runs
through Grozny, the odds are that tensions between Russia and Chechnya
will not soon disappear. That will be the case even if constitutional
matters dealing with regional rights and the integrity of the Russian
Republic can be resolved.
I
The Caucasus region and Chechnya were among the first known producers
of petroleum. The bible even contains references to petroleum products in
the Baku region. Even Marco Polo alluded to a small 13th centuery export
trade in oil soaked sand.*2
The Turks, Persian and Russian jockeyed with each other for control of the
region. Peter the Great actively sought to ship oil from the Caucasus
north to Russia.*3
subsequently however, Persia regained control and it was only after 1877
and the conclusion of the Russian Turkish war that Russia was able to
exert its hegemony over Persia and Turkey and the various mountain tribes
including in Chechanes.
Commercial exploitation of the region's oil occurred inthe early 1870s
after the first two commercial oil wells were drilled. By 1898, Russia
with oil from Baku and Grozny had become the world's output. It out
produced the United States for three or four years until 1902 when new oil
fields were discovered in Texas and the United States once again became
the largest producer.*4
Grozny began to extract oil from shallow wells in 1833 but its
commercial development occurred only in 1893.*5
At its pre-revolutionary high the Grozny region accounted for 18% of total
Russian oil output. In the Soviet Era, output peaked in 1932 at 154,000
barrels per day (b/d) and contributed not quite 1/3 of the country's total
production. Recognizing the importance of the region and its oil for his
army and industry, Hitler made the conquest of Grozny and Baku a major
priority. In the end he was unable to achieve his dream, but he came
close.*6
After the war, output in both Baku and Grozny continued to dimish so that
by 1990 Chechnya was able to produce only 84,000 b/d. After the break up
of The Soviet Union, there was a further drop so that by 1994, output
amounted to only 28,000 b/d.*7
Despite the drastic drop in output and shift of attention to new more
prolific oil fields, particulary those in West Siberia, the Caucasus
region nevertheless continued to play an important role. Output around
Baku also fell but because of the areas early importance, a pipeline
network was construced with Grozny at the hub with branches to Russia
heading west , to Kazakhstan in the northeast, and to Baku in Azerbaijan
from the south. The pipeline in turn led to the construction of an
important oil refinery which was the sole source of the USSR's paraffin
and a major producer of its high grade aviation fuel.*8
II.
With the growth of output in West Siberia, Moscow inevitably devoted
more and more of its attention to that part of its petroleum empire. But
with the break up of the Soviet Union in 1991 and the growing awareness by
foreigners particularly American and British oil companies that there were
major unexploited oil deposits in the Caspian Sea as well as in the nearby
Tengiz fields in Kazakhstan, the region suddenly became the center of
attention again. Russia, as well as the other newly independent republics
began to allow for the possibility that they might need foreign
technological help to exploit these potential deposits because existing
Soviet technology was inadequate. In additio leaders in both Kazakhstan
and Azerbaijan began to realize that the development of their oil
reesources could provide them with the economic wherewithal to finance
their independence from Russia. Moreover, all they were seeking to do was
keep the prceeds from exploiting resources on their own territory. For 70
years the benefits had been diverted to Moscow because none of these
regions had their own independence.
Similar arguments were made in Chechnya. The difference however, was
that at least initialy, the Russians acknowledged the independence of
Azerbaijan and Kazakhstan, but no such recognition was accorded to
Chechans. Indeed when the Chechans unilaterally declared their
independence in late 1991, Yeltsin sent in troops in an effort to squelch
the uprising. The initial efforg failed and the Russians troops were
called home. The Russians however continued to insisted that there could
be no such thing as independence for Chechnya, and ultimately on December
11, 1994, a full fledged war began. In the meantime however the Chechans
began to divert some of the oil output from their fields and the transit
pipeline for their own use as well as for axport. Much of the wealth that
accured to Chechnya came from the export of that oil. (In some cases oil
claimed by the Chechans was exchanged for oil shipped elsewhere from
Russia to the outside world.)
III.
At first Russian authorities seem to accept this new reality. Even the
unauthorized Chechan oil diversions from the pipeeline did not seem too
upsetting. Gradually however the official attitude began to harden. This
was the consequence of several developments. After the initial euphoria
following the breakup of the Soviet Union and the delight that Moscow
would no longer have to underwrite or finance the economies of its
lackadaisical if not parasitic former colonies, some more calculating
voices came to realize that a few of the republics were sitting on very
valuable resources. Why it was asked should the exploitation of those of
those resources benefit only the break away republics? Given that at least
the preliminary geological exploration was made under Soviet auspices, not
to mention expense, this seemed particularly unjust. As a minimum the
Russians were entitled to a "finders fee". Finally Russians
officials also came to relize, especially those who began to long for the
reconstitution of the old USSR, that the more income the former Republics
were able to generate, the more resistant they would be to rejoining the
Soviet Union. It was probably no coincidence therefore, that the Russians
began to restrict the access of several republics to outside export
markets. Limiting Chevron's shipments of Kazakh oil through its pipeline
to the west was one of the most blatant examples. Not surprisingly the
view is very different in the former republics. To them the Russian
efforts smack of neoimperialism. Without the revenue anticipated from
Chevron's development of the Tengiz oil, Kazakhstan has had some severe
financial problems. They are particularly concerned that because Chevron
has been unable to sell what it already can produce, Chevron has been
forced to cut back its investment in Kazakhstan. Similarly, Turkmenistan
has been badly hurt because the Russians have been delinquent in paying
for Turkmen gas used within Russia. This also explains why the Uzbeks are
seeking markets to their south and east, that is non-Russian territory,
and in this way seeking to escape Russian control. Finally the Russians
have fought a prolonged battle to retain control of petroleum reserves in
non-Russian territory such as Tataristan and Chechnya. Grudgingly they
have come to allow it in Tataristan which makes the Chechans feel that
they too should be allowed to keep the proceeds from the sale of petroleum
produced within their territory.
IV
The renewed Russian determination to assert control over the use of
what they consider to be their resources has been complicated by the
turmoil within the region, particularly i Chechnya. Relative to Russia's
total production of oil, the amount of oil Chechans may be able to siphon
off from deposits within Chechnya are not that large. At its post World
War II pesk, Chechan oil amounted to no more than 10% of the national
total. Today it is closer to 5%. But Chechnya's importance in Russian oil
poitics and economics is no longer a matter of production alone. Much more
important in today's world is the fact that that Grozny is at the hub of
Russia's pipeline network from the Caucasus' and most important to the
vast deposits in the Caspian sea off Azarbajian. According to some
estimates the newest geological survey indicate that the azeri, Guneshli
and Chirag offshore fields may turn fourth largest producing field in the
world.*9
[As of now, the trunk line from the Tengiz fields also traverses
Chechnya. There are plans however to build a spur that would allow the
Tengiz oil to skirt Chechnya on its way to Novorossiisk on the Black Sea.
Even this diversion however would be vulnerable to sabotage since it will
pase close to the Chechan border not far from Budennovsk, where a group of
Chechans seized 150 Russian hostages in June 1995.]
If Russia's only concern was the Chechan rebellion, Russia would not be
so anxious about the development of mineral reserves in the Caspian.
However, in the aftermath of the breakup of the USSR, and the emergence of
a newly assertive "independent" Azerbaijan, Russian oil policy
has suddenly taken on a new importance. This is due to the fact that there
is a real possibility that russia may find itself looking on from the
outside as Azerbaijan, not Russia, becomes the recipient of billions of
dollars worth of royalties from the sale of Caspian oil. Given the growing
likelihood of such a development, the Caucasus, the Caspian Sea and the
Chechan pipeline have suddenly become matters of international power
politics, not only in the Kremlin, but because of the intense interest in
the area by American oil companies, by the Washington White House.
Under the old regime, foreigners would probably not have been allowed
an equity share or a participation role in the development in of the
Caspian deposits. The Soviets never did that and as mentioned earlier even
now there is great resistance to such an approach by the Russian owners of
the newly privatized oil companies. This is true even when they lack the
technology needed to develop deeper off shore deposits. Instead their
practice is to do the work for them. The foreigners then have no equity
share in the operation and this allows the Russians to retain their
control.
Lacking the wherewithal to underwrite their own off shore development
the azeris have adopted traditional world practices and opened up their
fields to tender offers. Conscious of the sensitivities involved, they
have sought a very broad mix of partners, the better to withstand Russian
pressures. As the accompanying table indicates, the lead partners are the
Azeris (SOCAR) with a 20% share and British Petroleum (Great Britain) and
Amoco (American) each with a 17% interest. In addition four other American
firms, one British, one Russian, one Norwegian, one Turkish and one Saudi
Arabian company also have shares. The Iranians also sought a role and the
Azeris agreed to transfer to them a 5% share from the Azeri holdings.
However even though Iran shares the Caspian sea coast, the United States
government insisted thar Iran be kept out and the Azeris ultimately backed
down.
There was no such protest when the Azeris decided to offer an even
larger share to the Russian company, LUKoil. Attempting to temper Russian
hostility, the Azeris turned over a 10% interest in the project to LUKoil
out of their own stake, thereby reducing their equity from 30 to 20%. As
Russia's awareness of what was happening began to grow, however such
gestures were considered to be inadequate. Adopting the new logic, Russian
critics were quick to point out that LUKoil was a private business while
the Caspian sea deposits were a matter of concern to the Russian
government.
Not were Russians any happier when the state oil company of Azerbajian
(SOCAR) entered into a subsequent agreement with LUKoil to exploit the
Karabakh oil field located 120 km east of Baku in the Caspian sea.*10
LUKoil's share was 32.5% and it was joined by the Italian firm Agip and
the American Pennzoil which each took another 30%. This left SOCAR with
7.5%. with or without LUKoil, the Russians continue to insist that the
Azeri authorities have no legal right to conclude such agreements.
It is easy to understand the Russian concerns. Oil from Caspian Sea
deposits were first developed in the days of the czars and expanded in the
Soviet era. Why should other governments now become the beneficiary of
this initial work. To emphasize its point, the Russian government is now
insisting that the Caspian Sea is really a lake and therefore Azerbijan
can only claim underwater rights up to 10 km of shore rather than the much
larger territory that it could claim if the Caspian were truly an
international sea. Beyond that 10 km, Russia claims that it can drill for
oil and that anyone else who does must receive Russian permission.*11
Moreover The Russians insist that the governing code for the exploitation
of the Caspian reserves, is the USSR-Iranian Traty of 1940 as well as
earlier bilateral treaties of 1921 and 1935. The Russians claim to be the
recipients of the former Soviet Union's prerogatives. This treaty then,
can only be amended by a vote of both parliaments which in this case means
Russia and Iran. The fact that Iran is not now a partner in the consortium
means thet the original parties to the treaty have been excluded and
therefore it is only natural that they are opposed to any such agreements.
Such an interpretation invalidates unilateral acts by the Azeris which as
the Russians see it, have all been illegal.*12
This hardening of attitudes is part of the growing suspicion by the
Russians of western intentions. As an example of his growing xenophobia
Russian writers have gone so far as to assert that "almost all
Russian oil deposits are "under the thumb" of leading foreign
companies."*13
Quoting Russian intelligence sources, these writers have accused Mobil oil
of covertly gaining access to secret geological surveys of oil fields in
Tyumin in West Siberia.
It is not just that oil companies from Russia's former enemies have
been gathering data and control over what was once the Soviet Union's most
valuable resources, but that their efforts seem to be part of a strategy
to cut Russia off completly from the Trans Caucasus.*14
How else can the United States support of Chechnya and "The
Confederation of Mountain Peoples" be explained. This also fits
innicely with newly intesified Russian attaks on NATO which is viewed as
soliciting new members in eastern Europe and even the former republics of
the Soviet Union all in an effort to push the border between east and west
to Russia's front door. In a pincher movement, the United States seems to
be moving up from the south.
As if all this were not threatening enough, the United States and its
obedient oil companies have also begun to insist on the opening of a
second pipeline route from the Caspian Sea. They argue such a second route
is necessarry because pumping Caspian oil through Grozny would be too
risky. Their solution is to construct a pipeline through Georgia and then
on to Turkey. Even though this is a more expensive alternative than using
the Grozny pipeline, a second pipeline would bring Turkey more prominently
into the arrangement and allow the passage of oil by pipeline on to the
Mediterranean Coast rather than neccesitate the shipment of more oil
through the dardanelles Straits are already overcrowded.
In reply the Russians insist that they can pacify the Chechans and
guarantee the security of the pipeline. As for the Dardanelles, the
Russians have offered to build yet another pipeline from the Black Sea
coast port of Burgas in Bulgaria to Alexandropulos in Greece also on the
Mediterranean. As the Russians see it, Georgia with its various civil wars
is not much more secure for a pipeline than Chechnya. The real reason the
American oil companies want to ship through Georgia they insist is to
deprive the Russians of the transit fees and insure that the Russians will
lose monopoly control over the pumping and shipping of Caspian Oil.
V
The increasingly shrill tone of Russian declarations about the
development of the Caspian oil shelf reflects the growing awareness by the
Russians that the breakup of the Soviet Union has proven to be more costly
than it was initialy realized. The losses include not only the almost $8
billion that will be invested in developing Caspian oil but the royalties
and transit payments that the newly produced oil might bring particularly
if the oil is routed north through Grozny must be pacified so that the
Russian pipeline, which under normal circumstances would be the cheapest
route from the Caspian to the West, will obviate the need for a Georgian
alternative. Of course if the unrest in Georgia Flares again there will no
longer be any advantage to using the southern route.
Many Russians have traditionally looked to theories of conspiracy to
explain their history as well as current developments. It is not hard to
see how they might fall back on such notions in explaining current
developments on their doorstep in the Caucasus. First there is the breakup
of the Soviet Union into fifteen independent countries and if that were
not enough, the further effort to fragment even Russia. Than American
petroleum firms rushed into claim shares of the mineral wealth of the
Caspian, a body of water that has traditionally been treated as its own by
the Soviet Union. To top it off senior officials from the American
government have intervened to orchestrate the actions of the American
petroleum firms and have forced them to exclude the Iranians from all such
efforts. They than urged them to insist on the construction of a more
expensive and in some sense redundant southern pipeline through Georgia
that is designed to weaken Russia's bargaining role even more. As some of
my more paranoid Russian associates have put it, "You could not
defeat us in the Cold War so you sent in Gorbachev and Yeltsin with their
ideas of Glasnost, Perestroika and shock Therapy to destroy us
economically and break us up politically".
Short of precipitating the overthrow of the existing Azeri leadership
(there has already been several attempts) the Russians will have a hard
time reclaiming control of the Caspian reserves. Yet Russia could still
salvage something from all this, if only it could guarantee a secure
pipeline through Chechnya. As the Russians insist on maintaining an
occupation army in the region this will not be an easy thing to do. This
means that the Russians have an incentive to seek a peace accord.
Alternatively defense minister Pavel Grachev's could prevail and the army
could attempt to secure the pipeline by means of forceful repression.
Grachev's way is hardly the solution for the long run.
Table 1. SHARES IN THE DEVELOPMENT OF
CASPIAN OIL PROJECT |
SOCAR (Azerbaijan) |
20% |
British Petroleum (Great Britain) |
17% |
Amoco (United States) |
17% |
LUKoil (Russia) |
10% |
Pennzoil (United States) |
9% |
UNOCAL (United States) |
9% |
Staatoil (Norwegian) |
9% |
McDermott (United States) |
2% |
Aramco (Great Britain) |
2% |
DNKL (Saudi Arabia) |
2% |
Turkish Petroleum (Turkey) |
2% |
*1
Yergi, Daniel the Prize. New York: Simon and Schuster, 1991. pgs: 334,
336, 337
*2
Tolf, Robert W. The Russian Rockefelleres, Stanford California,
Hoover Institution Press, 1976, p. 41-42; Marshall I. Goldman, The Enigma
of Soviet Petroleum: Half Empty or Half Full?, Boston, George Allen and
Unwin, 1980, p. 13.
*3
Tolf, p. 42
*4
Goldman, Marshall I. p. 15
*5
Ebel, Robert E. "The History and Politics of Chechan Oil",
Post-Soviet prospects, Washington D.C., The Center for Strategic and
International Studies, Vol. 3, no. 1 January, 1995, p. 1
*6
yergin, pgs. 336,337
*7
Ebel, p.2
*8
Ebel, p.4
*9
Kirkorian, Van Z. Sisyphus' Oil: Pipeline Politics in the Caspian
Basin, New York, Patterson, Belknap, Webb & Tyler, CIS Lawnotes,
December, 1995, p.1; Financial Times, May 8, 1993, p.4: New York Times.
September 9, 1995, p.3
*10
OMRI Radio Liberty, Radio Free Europe, November 16,1995
*11
Monitor, The Jamestown Foundation, November 22, 1995: Sovetskaia Rossiia,
October 26, 1995 p.3; Van Z. Krikorian, Pp. 2,4,5
*12
Monitor, The Jamestown Foundation, November 22, 1995
*13
Nezavisimaia gazeta, October 20, 1995, p.6; Prism. The Jamestown
Foundation, November 19, 1995, p.6
*14
Sovetskaia Rossiia, October 26, 1995, p.3
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