NARRATOR: Caspian Sea oil -- the largest addition to the world's oil reserves in the last decade. But exploitation of this precious resource faces considerable obstacles: ethnic conflicts, unpredictable neighbors, and the sheer distance to markets. Welcome to the last oil quest of the 20th Century.

ADM EUGENE CARROLL (USN, Ret.): Hello. I'm Admiral Eugene Carroll, for America's Defense Monitor."

Important events are happening today in the troubled region around the Caspian Sea. US commercial and political interests are leading America into significant involvement in regional affairs there, often in ways challenging to Russia. Most of our actions appear to be driven by a US desire to ensure access to oil by American corporations. Our program today takes a thoughtful look at what growing US commitments in this region could mean to American citizens in the future.

NARRATOR: Many people think of caviar when they think about the Caspian Sea. Today, the Caspian region is in the news for this -- "black gold" -- oil. The collapse of the Soviet Union in 1991 opened the way for US and other Western businessmen to prospect for Caspian oil in Azerbaijan and other former Soviet republics.

INTERVIEWER: What can you tell me about Azerbaijan?

WOMAN-in-the-Street: Just that there's a lot of fighting and war there.

MAN-in-the-Street: I think it's -- was part of Russia or something.

MAN-in-the-Street: Azerbaijan. The only thing I know really about it is that it's one of these countries that's oil-rich.

NARRATOR: Yet for European and US companies it is a return rather than a discovery. The West drilled for oil in the Caspian even before the Soviet forces occupied the region. The industrialist Alfred Nobel, founder of the Nobel Prize, made his fortunes there almost a century ago. Since the collapse of the Soviet Union, billions of dollars have been committed on paper and the first barrels of oil have left the ground for refineries in Western Europe and elsewhere.

AMB. RICHARD L. MORNINGSTAR: What the Caspian will do will increase the overall world supply and it will be a significant portion of the new oil that will be developed in the world over the next several years.

NARRATOR: Ambassador Richard Morningstar is the Special Adviser to the President and to the Secretary of State for Caspian oil issues.

AMB. MORNINGSTAR And so, by increasing the world's supply, that's going to enhance the overall energy security of the United States as well as other nations.

NARRATOR: But there are significant challenges. The oil lies between Russia in the north, Iran in the south, and a patchwork of intense ethnic conflicts in the Caucasus region to the west. Before the local countries will see an oil boom, the crude must make its way to market.

Russia would like the oil to continue flowing from Baku to Novorossiysk. But this pipeline goes through the unstable Chechnya, the site of a recent two-year war for independence. Also, the former Soviet republics do not want Russia to have control over the oil flow.

Azerbaijan and the United States would like to build a pipeline to Turkey, a NATO ally. The shortest route to Turkey leads through Armenia. But Azerbaijan and Armenia broke off all relations after a brutal war over the disputed Nagorno Karabakh region. The pipeline would have to take a detour through the nation of Georgia, but this adds costs to an already expensive project -- about $500 million more than the other options.

If US-Iranian relations improved, the shortest route to export oil from Baku would be to Iranian ports in the Persian Gulf. But until that happens, most of Azerbaijani oil will flow via a short pipeline from Baku to the Georgia port of Supsa.

The Caspian oil is truly locked in some of the most unstable areas of the world. How America pursues a solution in the region may be the difference between war and the peaceful development of an important resource.

This is the Nagorno Karabakh region, populated by ethnic Armenians. Under the Soviet Union, Nagorno Karabakh traded hands several times between the countries of Azerbaijan and Armenia until Joseph Stalin finally declared it a part of Azerbaijan in 1921. But in the 1990s, the Armenians in Nagorno Karabakh rose up to secede from Azerbaijan. Despite larger Azerbaijani forces, the Armenians won. When the guns stopped blazing in 1994, the Armenian forces controlled not only Nagorno Karabakh, but also large parts of surrounding Azerbaijan. Over a million people were made homeless and today 12 percent of Azerbaijanis live in exile, many in camps for displaced people.

Azerbaijan may have lost the war, but it won the battle for investment dollars. Since 1991, foreign oil companies, including many from the United States, have been prospecting and drilling in Azerbaijan. The oil being pumped out of the ground will need to be exported via large pipelines. But the shortest route for the large pipeline to Western Europe leads right through neighboring Armenia. And Azerbaijan and Armenia broke off all relations after the Nagorno Karabakh war. Where these two countries have a problem, US officials see an opportunity.

AMB. MORNINGSTAR I think we have to be patient. This isn't an overnight process. But I do believe that with economic growth, there will be incentive to settle some of these conflicts. And to participate in the fruits of the development of the region, countries are going to have to put aside their differences and work together to grow.

NARRATOR: But Western efforts to bring Armenia and Azerbaijan together so far have failed. Diplomats from the main European security organization, the Organization for Security and Cooperation in Europe, have tried for years to find a solution to the conflict in Nagorno Karabakh and to reestablish relations between Azerbaijan and Armenia. The prospects of oil revenue may not be enough to bring peace to the Caucasus.

CHARLES FAIRBANKS: I think it will play a somewhat negative role, at least if there is no imaginative Western diplomacy.

NARRATOR: Professor Charles Fairbanks is the distinguished directed of the Central Asia Institute at Johns Hopkins University's School of Advanced International Studies in Washington, D.C.

FAIRBANKS: The more one raises the oil issue and the more one suggests to Armenians that, oh, you could have a pipeline, too, if you would just see reason on this, the more it makes them feel that the whole world is against them and activated by the worst motives.

NARRATOR: US officials say that stability in Nagorno Karabakh will come with time.

AMB. MORNINGSTAR To date, there has been no direct relationship between the economic development of the region and settlement of the conflicts. But you also have to understand that the countries have yet to reap the benefits of that development.

NARRATOR: The construction of large pipelines will take years to complete. The governments of exporting countries such as Azerbaijan will only reap benefits after the pipelines are built and the foreign investment repaid. Countries in the region are years away from receiving substantial income from oil, but some experts say that time may be working against peace in the Caucasus.

PATRICK CLAWSON: It's clear that the oil revenue would change the balance of forces in the area in favor of those governments that receive the oil revenue and against the insurgents fighting those governments.

NARRATOR: Patrick Clawson is the respected Director for Research of the Washington Institute for Near East Policy and an author of several studies on energy security.

CLAWSON: That provides us with a window of opportunity to settle these disputes; to say to these insurgents 'You may now have the upper hand, but you won't necessarily have that for a long time.'

NARRATOR: Armenians, who are now on the winning side of the Nagorno Karabakh conflict, fear that they will lose their advantage. Once Azerbaijan benefits from oil exports, they say, it will rebuild its army and take back Nagorno Karabakh by force.

FAIRBANKS: I don't think Azerbaijan has any real desire to renew the war or to contest the decision militarily. But, you know, if you're beginning to have oil money, who can resist?

AMB. ROBERT HUNTER: To begin with, there really isn't any threat to the oil supplies out there at the moment --

NARRATOR: Ambassador Robert Hunter is the distinguished former US Representative to NATO and currently a senior advisor to the RAND Corporation.

AMB. HUNTER: -- except if there were a resurgence of the fighting between Azerbaijan and Armenia. And there is an interest there on humanitarian, political and every kind of ground to try to keep that war from restarting and to try to resolve the conflict over Nagorno Karabakh.

NARRATOR: Some of the pipelines go through the Republic of Georgia, another potential flashpoint in the Caucasus. The government there fought twice in the 1990s to prevent South Ossetia and Abkhazia from seceding. Two other provinces may be tempted to separate in the future. Analysts fear that if conflicts are not resolved before the pipelines are built, the rebels will start targeting the pipelines.

CLAWSON: It's quite, quite possible that the oil facilities and the oil pipelines in this part of the world would be attacked by various armed insurgents. So, what's new about that?

NARRATOR: How do countries defend against such attacks. Today, the governments exporting oil are responsible for safety of lives and property of foreign companies on their territory. But countries in the Caspian may not be up to this task.

FAIRBANKS: Countries like Azerbaijan, Georgia, to say nothing of unrecognized half-states like Abkhazia and Nagorno Karabakh, they have a real struggle just to put together a state apparatus that enforces the law and pays people's wages and stuff.

NARRATOR: If the countries in the region cannot defend the pipelines, US personnel may come under attack and projects financed by US companies would be jeopardized. Amoco, Chevron and other US and foreign companies have already spent over a billion dollars on developing the Caspian oil resources.

Is it possible that US troops stationed in Europe could be drawn in to protect oil bound for our allies in the West?

MAN-in-the-Street: As an ex-serviceman, I'm all for defending Americans where they are, but I have trouble with defending the interests of American oil companies with military servicemen. I'd have a lot of trouble sending my children over there to do that.

WOMAN-in-the-Street: I'd definitely pay a couple of more cents a gallon.

WOMAN-in-the-Street: The oil is the gold of today, I think. And it's in high demand and, of course, with our troubles that we are going through now, I think it's worth fighting for what we have because without it, we would be in dire straits.

NARRATOR: The US military is already helping the local countries prepare to defend the pipelines.

FAIRBANKS: We are giving military assistance to these countries and the Pentagon has been laudably active in developing these possibilities.

NARRATOR: Currently, the US military helps train soldiers from three independent countries in the Caucasus and sells American equipment at a cut rate to the Republic of Georgia. Military assistance, such as training for these Georgian soldiers on US bases, will help the Caucasus countries to strengthen their armed forces. But it is a slow process and the states of the Caucasus are not yet ready to take on the full military guardianship of their precious oil resources. Governments in the region could ask the United States to send in troops if the pipelines come under attack.

Paul Goble publishes a daily magazine for Radio Free Europe, a US agency, on developments in Central and Eastern Europe, Caucasus, and Central Asia. He thinks it is unlikely that the US will send troops to the region.

PAUL GOBLE: I don't see any kind of projection of American military power in the region in the offing in the foreseeable future. I suspect that the United States and Western countries will consider giving military aid and assistance, in terms of advice, and possibly equipment, but I don't expect to see American personnel on the ground, nor do I think that we would do anything close to what we did with the Kuwaitis.

NARRATOR: The United States has used military force before when its oil supplies were threatened. In 1986, when Iran threatened Kuwaiti oil shipments out of the Persian Gulf with anti-ship missiles, the United States responded by allowing Kuwaiti tankers to fly the US flag. US Navy ships and helicopters escorted Kuwaiti fleet tankers through the Gulf.

The Gulf War in 1991 was fought in part to keep Saddam Hussein from controlling a crucial portion of the world's oil reserves. Because Caspian oil is the most significant addition to the world's supply in the last decade, will it also enjoy the protection of America's armed forces?

Julia Nanay is the director of the Petroleum Finance Company, a leading consulting firm for oil and gas industries.

JULIA NANAY: My impression is that for the US to bring troops into Georgia or Azerbaijan, I see that as being extremely farfetched.

CLAWSON: For the United States to become involved in a new part of the world for security guarantees is a very serious matter. We should not do this lightly because that would call into question just how deeply we're committed to our existing security guarantees.

NARRATOR: There is also the possibility that US military involvement could backfire by making the pipelines an even more attractive target for terrorist attacks.

CLAWSON: It would not help the pipeline companies and the oil-producing companies if the US got involved, because that would just make the likelihood of attacks all the greater.

NANAY: I think that oil companies have to look at all of this. And like I say, I think they'd like to see stability because pipelines don't bring peace.

NARRATOR: The ongoing regional conflicts make the situation very complicated and there is yet another source of great concern: Russia.

NANAY: The reason Russia gets involved in some of these conflicts is because Russia feels threatened by the sudden move of these Western companies and their governments into an area which was very much part of its own backyard.

NARRATOR: All of the countries in the Caucasus region were formerly part of the Soviet Union. Russia continues to maintain military bases in Georgia and Armenia, such as this base in the Georgian city of Vaziani. Moscow considers the former Soviet states to be in its sphere of influence and views American involvement with suspicion.

GOBLE: First, the Russians would like the oil to go through the Russian Federation, which would give them greater control. Second, the Russians are very concerned that if these countries gain economic resources, they'll be more independent of Russian influence. Third, if this oil revenue is not going to benefit all countries equally in the region and Russia's closest ally in the region, Armenia, would be one of the big losers.

NARRATOR: Russia has been weakened by a struggling economy, but it remains the dominant power in the region. Meanwhile, its relationship with the West is deteriorating. Russia feels threatened by plans to expand NATO to include Eastern Europe and the air strikes against Iraq in December 1998 prompted Moscow to withdraw its ambassador from Washington for the first time since the Cold War.

MAN-in-the-Street: Russia's going to be angry at most things we do and I think there's a calculated risk in making them angry, but those risks have to be balanced against the reward and we certainly need oil reserves. And hogs like we are with oil and cars and what we see driving around us, and that big bus, that means that our way of life is going to necessitate that we do that.

NARRATOR: American officials take Russian concerns seriously.

AMB. MORNINGSTAR: Let me make totally clear our strategy is not to preclude Russia from this process. Russia is a Caspian state. Russia obviously has a major interest in the region and it's going to be important that we have a cooperative relationship with them.

NARRATOR: Increased tensions with Moscow would imperil cooperation on other issues. For example, the reduction or elimination of nuclear arms. The United States has an interest in the Caspian oil and good ties with the Caucasus countries, but our relations with Russia must always remain a consideration.

FAIRBANKS: I think, in general, that this is an area where we have genuine concerns about Russian reaction, that Russia does really consider -- it has a kind of Monroe Doctrine towards the Caucasus and Central Asia and the rest of the CIF states. And while we don't want to acknowledge that doctrine, which Russia is not able to really enforce, we also don't want to blatantly contradict it.

WOMAN-in-the-Street: When I picture Russia coming over here and, say going into Mexico and Canada, even though their intentions might be to help countries that aren't quite on their feet, so to speak, I would still sort of perceive that as a little odd. It would kind of make me nervous.

NARRATOR: The importance of the Caspian oil also needs to be put into perspective. While the amounts of oil are substantial, it will not be an oil bonanza for the West.

CLAWSON: It's unlikely that the United States would import much if any oil directly from the Caspian. So, it's a question of what the Caspian adds to the world oil supplies. And there, the most optimistic forecasts for Caspian production in about 15 years from now would have the Caspian adding something like three to four percent to world oil supplies, which is nice but by no means essential.

NARRATOR: Recent dramatic drops in oil prices have also forced a shakeup of the oil industry. Oil companies are cutting costs in every way they can. Lower profits mean that businesses may not be able to afford expensive new exploration and construction.

NANAY: They're all trying to figure out how they're going to survive in an industry where it's becoming increasingly difficult just to manage day to day, much less put three or four billion dollars into a major infrastructure project that just isn't needed right now.

NARRATOR: Early enthusiasm for Caspian oil has slowed down somewhat, but interest in the Caucasus is not decreasing. The US involvement with the countries in this region goes beyond oil. NATO officials advise the Caucasus states on military affairs and US military experts will soon be stationed at the Georgian Defense Ministry.

GOBLE: The United States has traditionally had three sets of interests in this region: An economic interest of access to oil. A geo-political interest in terms of recreating stability in the region. And a political interest in seeing the social and political transformation of these countries in the post-communist environment.

NARRATOR: One of the goals of US policy in the Caspian Sea area is helping the states of the former Soviet Union to strengthen their independence.

AMB. MORNINGSTAR There are six former -- at least six former Soviet states within that region whose independence will be enhanced tremendously by the economic development resulting from the resources within that region, and we have to work very hard to see that that occurs.

NATO Summit OFFICIAL: (1994) "The heads of state and government have approved the Partnership for Peace..."

NARRATOR: The countries of the Caucasus hope to secure their independence from Russia by someday joining NATO. They are edging their way into NATO through the Partnership for Peace, NATO's program for aspiring members.

Because of oil, the West took a new interest in the Caucasus countries and now NATO officials, like Secretary General Javier Solana, visit the region regularly, and the allies have held military exercises in Central Asia. But offers of NATO membership are not yet on the table.

AMB. HUNTER: To have countries from the Trans-Caucasus join NATO, I think is going to be in the very distant future, if at all. None of them have asked to join and, frankly, the reach of the alliance as a whole doesn't go that far, certainly not for membership. There really is virtually no support for an active NATO role in providing security as far east as the Trans-Caucasus.

NARRATOR: For now the states along the future pipeline route focus on seeking support from NATO in case of a threat to the oil facilities. The government of Azerbaijan has requested NATO help to defend the pipelines in case of a conflict.

AMB. HUNTER: I was, as ambassador to NATO, in Azerbaijan when the request was made that NATO actually take an active role in protecting pipelines. This is not something that the alliance as a whole is likely to do, except in terms of providing advice.

NARRATOR: The lure of Caspian oil has long figured prominently in the affairs of nations. The monumental World War II battle of Stalingrad was fought to stop German forces from capturing Caspian oil. Now internal and external pressure to secure the region's resources ignores the people of the region and their basic human desire for peace and prosperity.

Oil can be both a blessing or a curse to them. Oil brought instability and poverty to Nigeria and the sudden inflow of oil money touched off a revolution in Iran. If there is a lesson in the past for us, it is that oil money doesn't guarantee stability or happiness.

AMB. MORNINGSTAR: By the cooperation among the countries in the region, by the economic development of the region, we think that can have a very positive effect on ultimately settling some of the conflicts. And by settling the conflicts, I should add, countries within the region will be able to reap the fruits much more advantageously of the resources.

AMB. HUNTER: My own judgment is that we should be striving for an end to conflict there, to a reconciliation of the three neighbor countries, and also of other regional countries rather than focussing on what exploitation might be made, let's say of oil revenues.

NANAY: I think peace has to come first and then you can build these pipelines. And one of the issues in terms of militarily securing these pipelines -- I think it's very difficult to secure these pipelines militarily. I think you're going to have to have stable conditions, stable governments in these areas. And as a result, if they're going to build a pipeline right now, I think you're going to see some very serious problems.

NARRATOR: The rush for Caspian oil can make the Caucasus flourish or it can plunge it back to war. It will take more than business sense to make the region peaceful and prosperous for the people there, as well as for US companies. Common sense, sound policies and foresight are needed to bring about lasting stability in the region.

ADM. CARROLL: The potential riches of oil in the Caucasus are producing increased US involvement in the region politically and economically, and this is accompanied by an implied US military commitment to protect future access to the oil. We must proceed cautiously in order to prevent the same situation there which exists in the Persian Gulf today.

We now maintain a large, permanent and costly presence in the Gulf, augmented frequently to restrain Saddam Hussein and ensure a continuing supply of oil. The cost of these forces is at least $15 billion each year. Comparable military actions to protect oil supplies and pipelines in the Caucasus would be even more expensive and entail greater danger of conflict. America should not create this danger without first thinking through all aspects of our quest for oil and of our willingness to fight to protect that oil in the 21st Century.

Until the next time, for America's Defense Monitor, I'm Eugene Carroll.