#13
Asia Times
May 21, 2002
Russia draws fine line in Caspian
By John Helmer

MOSCOW - Over growing protests from Iran, Russia has decided to draw a fine line in the Caspian Sea to enable oil companies to drill for oil but avoid the legal problems of setting up national sectors in the sea. Russian policy is also aiming to settle the status of the northern Caspian oilfields without antagonizing Iran by pressuring for a similar deal in the southern sector of the sea.

An agreement signed last week in Moscow by President Vladimir Putin and President Nursultan Nazarbayev of Kazakhstan "solves the problem of the seabed oil deposits which were subject to disputes", according to Andrei Urnov. Urnov, who heads the Caspian working group at the Foreign Affairs Ministry in Moscow, told Asia Times Online, "The [newly signed] protocol divides not the Caspian Sea, but the natural resources of the seabed. By signing the bilateral protocol we try to solve the dispute, unfreeze the development of the deposits in the northern Caspian, and calm down and reassure investors. Before the protocol was signed, the deposits located in the north of the Caspian Sea were not properly assigned to either Russia and Kazakhstan."

Iranian officials reacted swiftly, officially informing the Russian ambassador in Tehran that the document was "legally invalid" and "unacceptable".

Industry sources say that Putin has seesawed between trying to accommodate Iran's demand for a consensus of all Caspian states before seabed exploitation can begin - a position originally favored by the Russian Foreign Ministry - and giving Russian oil companies the green light to start drilling.

According to Urnov, the agreement between Russia and Kazakhstan draws a line that "takes into account the historical investments made by the two sides in the development of the three existing geological structures [oil deposits] in this part of the Caspian. Based on the historical investment of LUKoil, Russia was given jurisdiction over Hvalynskoye and Centralnoye, while Kazakhstan got Kurmangazy. A modified median line was drawn in such a way as to fix this."

LUKoil, Russia's largest oil producer, claims to have invested about US$800 million in Kazakhstan and the offshore Caspian fields since 1996. It estimates it is currently producing about a million tonnes of crude annually from Kazakh territory, with a target of increasing this to 4 million tonnes.

LUKoil officials say they "hope to get partial compensation for the expenses of exploration so far. Currently, Hvalynskoye is the only structure in the Northern Caspian with proven resources of oil. We regret that we have to give away part of the deposit, but we are certain that we will find a compromise with the Kazakh side."

They estimate that exploration of Kurmangazy, the deposit allocated to Kazakhstan in the new agreement, will take five years and $500 million in new investment. Russian interests have been allocated a 25 percent stake in the new project, while the Kazakh share in the Hvalynskoye field has been fixed at up to 50 percent.

Responding to the Iranian attack, Urnov told Asia Times Online that dividing up rights to seabed oil projects "doesn't violate the Soviet-Iranian agreements [which did not regulate seabed use]. Russia and Kazakhstan do not try to divide what doesn't belong to them."

Urnov said Russian negotiators will try to reach a similar agreement with Azerbaijan in talks next month. "At this point," he cautioned, "it is not yet clear whether it will be possible to sign an agreement similar to that with Kazakhstan at once. Azerbaijan will have to find agreement on division of the resources of the seabed with Iran and Turkmenistan."

According to Urnov, Russia and Azerbaijan may settle on an agreement in principle, and leave to later the problem of drawing the lines necessary to allocate development rights to the oil on the seabed.

Iran has warned Azerbaijan that it was ready to use its naval forces to prevent exploration of the Caspian territory that remained to be demarcated. Putin has also ordered the buildup and exercise of Russian military forces in the northern Caspian.

Russian officials say they want to reassure Tehran that the deal in the northern sector of the Caspian does not mean that the Kremlin will acquiesce in Azerbaijan's claims on southern territory claimed also by Iran or Turkmenistan.

"Bilateral agreements," said Urnov, "decrease the pressure in the region, and provide at least partial legal ground for reaching consensus on the status of the Caspian Sea, and the division of the resources. There is still no full agreement with Iran on the principles of division of the seabed. But [Azeri President Haidar] Aliyev will go to Iran in July, and hopefully, there will be some positive results of this visit."

At their meeting in Moscow several weeks ago, Putin and Aliyev agreed to modify the median line demarcation of the Caspian Sea frontier that Baku has been insisting on. According to Aliyev, "we agreed to begin work on drawing a median line between Russia and Azerbaijan", but he cautioned that "it's difficult to say how long it will take".

The ambiguous statement by Aliyev was the first signal that Azerbaijan, which has laid claim to more than 20 percent of the Caspian seabed, is willing to compromise with both Russia and Iran. However, a meeting of presidents of all five Caspian states in Turkmenistan last month failed to indicate any progress between Azerbaijan, Iran and Turkmenistan.

Russian policy makers are divided among themselves over how to deal with the Caspian conflict, with the Foreign and Defense ministries leaning more toward an accommodation with Iran. The special presidential negotiator Victor Kalyuzhny, a former oil minister and advocate of the domestic oil industry, has been openly hostile toward Iran, while LUKoil's chief executive Vagit Alekperov is considered by the Kremlin to be too close to Aliyev.

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